There has been a significant increase in the curiosity of investors about buying unlisted shares. India has seen emergence of many unlisted companies which are doing well in terms of valuation. Success stories of startups commanding mind blowing valuation has drawn attention of many investors. There has been some news about of shares of IPL teams also changing hands. Unlisted companies unlock value of their shares post IPO and then it becomes available for retail investors. But there are many investors who want to acquire these shares well before listing to make money. While buying shares listed on recognized stock exchange is very easy, buying unlisted shares is challenging in many ways.
So, how does the process of buying unlisted shares work?
Off Market versus Market Transactions
As far transactions in shares are concerned, there are two types of transactions- Market and off market. Market transaction are executed on the platform of stock exchanges, while off market transactions are done between two parties. They are Over the Counter (OTC) in nature Depository system in India enables, “Off Market” transaction, in which shares can be transferred from one account to the other account and resulting in transfer of ownership. So, anybody, wanting to buy unlisted shares can buy and hold these shares in demat account.
How to buy unlisted shares
Buying unlisted shares is not easy. Companies, which look for investors when they are unlisted, chase investors who can bring in substantial amount of money. Asking multiple investors to invest in their shares in ineffective in terms of cost as well as process. That is why private equity and venture capital are their preferences. However, there are ways to buy unlisted shares for retail investors as well.
Many employees who get shares of their companies under Employee Stock Option Plan (ESOP) can be a potential target to acquire unlisted shares. However, finding such employees may be cumbersome process. Many online platforms have emerged recently which look for angel investors, who can fund businesses in their nascent stage. On such platforms, investments required may not be small amount and an investor may have to start with investment amount of atleast Rs. 10 lakhs. Also, these companies are in their nascent stage of growth and carry huge amount of risk.
There are online broking firms which also offer unlisted shares. Similarly, there are dealers in unlisted shares who offer shares in offline mode. Last but not the least, how well connected you are with market participants, will also help you buy unlisted shares.
Precautions while buying unlisted shares
Buying unlisted shares is not sure shot way to prosperity. Every companies which is unlisted today, need not be a wealth creator essentially. Additionally, finding fair value of shares of unlisted companies is a big challenge, as limited information is available. In fact, buying shares of unlisted company has some inherent risks. If an unlisted company does not get itself listed in immediate future, selling shares of such companies can also become challenging. In other words, there may be challenges related to liquidity. Taxation on shares of companies which are not traded on recognized stock exchanges, have higher rate of taxation. Also, holding these shares in demat account has its own cost.
Conclusion: Buying unlisted shares require a process of due diligence which needs to be done by the investors. Only risk savvy investors should invest in unlisted shares and for majority of the investors, it should be small part of their portfolio.