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Shares listed on the stock market come with a safety net through constant monitoring and regulations by the Securities and Exchange Board of India (SEBI). Unlisted stocks come with great opportunity for growth and risk but they also come with the risk of low regulations. If such high opportunities pique your interest, it will help you understand the benefits of investing in unlisted companies.
Definition of unlisted shares :
An unlisted stock is any security or financial instrument that is available for trading in over-the-counter markets and is also known as over-the-counter (OTC) securities.
Generally, unlisted companies do not trade on any formal stock exchange. This is because small or new firms do not choose or cannot comply with certain requirements such as listing fee, market capitalization, etc.
Types of Unlisted Financial Instruments
The most common type of unlisted financial instrument is common stock. Most of these unlisted stocks are traded on OTC markets. Other devices include:
1. Penny stocks
2. Corporate bonds
3. Government security
4. Derivative products like swaps, etc.
How can you trade in unlisted stocks?
You can invest in the shares of some of the top unlisted companies in India in a number of ways. The most popular methods include:
Investing in start-ups and intermediaries:
A pre-IPO company currently unlisted but intends to be listed in the future. You can invest in pre-IPO companies, as the shares are directly credited to your demat account despite being traded off-record, and there is no exchange involved. The only thing that you need to take into consideration in choosing a reliable intermediary, i.e., someone who can successfully help you close the transaction and avoid any counterparty risk.
Alternatively, you can also invest your money in unlisted start-ups which have the potential to grow manifold in future. Such companies may be off the radar at present, but they have the opportunity to bring profit and growth at a later stage. In most start-ups, the minimum investment amount to transfer the stock to your demat account is around Rs 50,000.
Buying ESOPs Directly from Employees :
Some brokers help you connect with employees of organizations who sell their shares at a set price after a predetermined period. It is a way to buy shares for top unlisted companies in India.
Buying stock directly from Promoters :
To invest a significant stake in a company, you can approach a trusted investment bank, wealth manager, or broker who can help you learn how to find the share price of an unlisted company. Also, they will help you connect directly with the promoters of the company and introduce you to the list of unlisted companies in India in 2021 and 2020. Such transactions are called private placements.
Invest in PMS and AIF schemes that carry Unlisted Stocks :
PMS or Portfolio Management System are professionally managed investment portfolios. In it, the portfolio manager dynamically changes the portfolio’s weight and constitution based on market trends to maximize investors’ net returns. You can take advantage of investing in unlisted stocks in India through PMS schemes that carry unlisted stocks as part of the investment strategy. It is safer than direct purchase because:
You can diversify risk across all components of the portfolio.
The portfolio manager dynamically removes and adds stocks based on their performance.
While investing in unlisted stocks can be quite rewarding, such investments also carry a lot of risk. The associated risks are:
Risk Factors of Investing in Unlisted Stocks
Investing in unlisted stocks comes with significant risks such as:
In the absence of frequent transactions and heavy minimum investment amounts, shares cannot be bought or sold whenever you wish. It invests heavily in unlisted stocks.
2. Capital loss
Investing in unlisted stocks also carries the risk of losing capital as these firms are not well regulated, and therefore may indulge in willful malpractices, which on scrutiny can cloud them and all your Capital investments can be wiped out.
In regulated markets, dividends are paid to investors if they hold shares of the company before the record date and on the ex-dividend date. Yet, surprisingly, there is no such concept of paying dividends in a structured manner in unlisted companies. Therefore, they may very well choose not to pay you dividends. Oops-a-daisy!
If you hold shares of an unlisted company thinking that the price will rise after listing, and unfortunately, things go awry, and the share price keeps falling. Will you be able to exit the investment?
not at all! As per the fact discussed earlier, you have to hold the shares for the next 6 months as per the regulatory norms. So yes, flex your flow!
Short Term Capital Gains: If the shares of an unlisted company are sold within 24 months, the gains from such investments are taxed as per the norms of short term capital gains. The benefits under this are added to your income, and then you are taxed collectively as per the tax slab you fall under.
Long Term Capital Gains: If the shares of an unlisted company are sold after 24 months, the gains from such investments will be taxed at 20% after indexation benefit. Under this, the purchase price of the shares is adjusted against the effect of the rate of inflation on it.
However, if the price of the unlisted shares falls below the Fair Market Value (FMV), which is the domestic concept for unlisted companies, the value considered for taxation will not be its trading value. This will be its fair market value as calculated by an authorized investment bank.
6.Risk of dilution
If you had 50 shares out of a total of 100 shares of a company, you are said to have 50% of the company, but what if the company wants to raise more money by issuing 50 more shares! Issuing 50 more shares changes the total number of shares to 150, and since we are considering that you have not subscribed to these shares, your ownership percentage is reduced to 33.33 from the previously calculated 50% % It happens. Good God!
Therefore, you can think of dilution risk as the risk arising from the issue of excess stock in the market.
Should you buy ?
Even if you have the risk appetite required toIn invest in unlisted stocks, don’t allocate more than 10 percent of your equity portfolio to such opportunities. “You should ideally have 80 to 90 per cent of the equity investment in liquid instruments. Unlisted stocks, apart from carrying common equity asset risk, are also uncertain as to when their IPOs will take place. Also, they score low on liquidity,” says Vishal Dhawan, founder and chief financial planner, Plan Ahead Wealth Advisors.
While Dhawan recommends investing in a bouquet of unlisted stocks to spread the risk, Nagada prefers to own one or two stocks where the risk-reward is favourable.
The Securities Exchange Board of India prescribes a lock-in period of six months from the date of IPO allotment for non-promoter investors, if they are pre-IPO investors. If you buy and sell at the unlisted stage after holding for more than two years, the gains after indexation are taxed at 20 per cent. Gains earned on shares held for less than two years are added to the income of the investor and taxed at the slab rate.
“The increased valuations seen in equity markets across the world have pushed up the prices of already unlisted shares. If there is a correction in the secondary market, it will not only weaken the IPO sentiment, but will also impact the valuations of the unlisted stocks.
How do I sell shares of unlisted companies?
The Process of Sale
The process of selling unlisted shares is very much easy if you are able to find a genuine dealer. Get in touch with the concerned entity or its spokesperson. An Investor will need to share your details with proofs including DMAT account, Client Master Report (CMR).
The investor needs to transfer the unlisted share which he/she wants to sell with the quantities to the buyers or broker’s DEMAT account. The same day when the dealer receives the unlisted shares in his DEMAT Account, the payment is done by the latter via the preferred mode of transfer.
What is a Client Master Report (CMR)?
Client Master Report (CMR) copy is a paramount document, required to buy unlisted and Pre IPO shares. CMR contains Depository Participant Identity (DP ID), Client ID, PAN number, Bank Account Number, along with more details.
This can be easily obtained by sending an email to the broker and the same is delivered within a few hours. The dealer will require a PAN Card, Aadhar Card, and a copy of DIS Slip, which is used to transfer shares into the account.
How to transfer unlisted or Pre-IPO shares
It is possible to transfer shares from one Demat account to another using a simple procedure. Trading through a Demat account is just like making transactions through a bank account. The only difference is that you transfer shares through the Demat account instead of money.
With respect to shares held with NSDL or CDSL depositories, the offline procedure for transfer of shares through off-market transfer is possible. One needs to fill out a DIS (Delivery Instruction Slip).
ISIN number of the shares to be transferred, name of the company (security), Demat account, and DP ID of the account to which the shares are being transferred must be filled up in the form. The form needs to be submitted to the old broker’s office for further processing.
If shares are held with CDSL, there is an online facility for the transfer of shares using the ‘EASIEST’ platform. One needs to register on this platform using the link, EasiEasiest, and follow the below procedure.
Please Note : One can only transfers shares from CDSL Easiest to trusted demat account. So, before initiating the share transfer from CDSL easiest, please add the trusted demat account.
How to Add trusted demat account?
1. Login on the CDSL account (EasiEasiest) .
2. Go to “Miscellaneous” and Under that, click ” Edit Trusted Account”.
3. Enter the Demat ID of 16 numbers to whom you want to transfer shares.
4. An OTP will come on your mobile number to verify it.
5. The account will be approved by broker within 24 hrs and then you can transfer shares.
How to transfer shares via CDSL Easiest?
1. Login on the CDSL account (EasiEasiest)
2. Go to “Transaction Tab” and click “Setup”.
3. Click “Bulk Setup” after that.
4. Select ‘Transaction’ and enter the execution date and enter the Beneficiary owner ID(BOID), you need to transfer the shares to. In that page select ISIN. When you click on Account ISINs, you will see a list of all the ISINs in your holdings. Select the ISIN and enter the quantity and select the reason for trade from a list given.
5. Once you complete the above process, a verification will come. Verify it. Once you do that, a page will open, in that you needn’t fill the Exchange ID, Counter Party Exchange ID, Market Type, Counter Party Market Type, Settlement ID and Counter Settlement ID for off-market transactions.
6. Finally click on “Commit” and type the 8 digit CDSL PIN which you have received on your email id when you have registered for CDSL Easiest.
7. The request will go the broker and he will verify it and transfer will be done.
How to transfer shares via Angel Broking Online Facility?
1. Login to Web Trading Platform | Angel Broking
2. Go to “More” and Select ” Online-DIS”.
3. Select “Off-Market” and select whether you want to transfer in NSDL account or CDSL Account.
4. Enter target DP ID , Client ID, Reason of transfer, and select the scrip you want to transfer along with quantity.
5. After that you will be taken to CDSL website to enter TPIN (alternate to POA). If you don’t have TPIN you can generate from the following link.– eDISWebGenerate TPIN Generates TPIN for E-DIS Transactions.https://edis.cdslindia.com/home/generatepin
6. Enter TPIN and the request will go to broker for transferring of shares.
Charges for transferring shares via CDSL Easiest:
1. Rs.25 or 0.03% whichever is higher is the DP charges.
2. If the reason of transferring of shares is not gift or self transfer, then stamp duty of Rs.15 on 1 lac value transaction need to pay to CDSL.
Calculator for Stamp duty – Central Depository Services (India) Limited
How to Pay Stamp duty – https://www.cdslindia.com/Downloads/Publications/Newsletter/2020/July%202020%20e-infoline.pdf
How do I sell shares of unlisted companies 2021? Step by Step Guide/Process :
Top 10 Unlisted Share Brokers – Best Unlisted Share Broker in India
Key Takeaways :
An unlisted share is a security or financial instrument belonging to a company that is not publicly traded on the stock exchange.
Types of unlisted stocks include common stock, penny stocks, corporate bonds, government securities and derivative products.
You can invest in top unlisted companies in India by investing in start-ups and intermediaries, buying ESOPs directly from employees or promoters, or investing in PMS and AIF schemes that take unlisted shares.
Risks include liquidity, capital loss, risk of non-delivery, dilution risk.
What types of taxes are associated with investments in unlisted companies?
The taxable percentage for long-term capital gains from investments in unlisted companies is 20%. You are subject to an indexation benefit, where you can add the cost of inflation to make taxation easier. The holding period is generally for at least 2 years.
What type of companies would you typically find in the unlisted category?
Most pre-IPO companies are usually companies in the early stages of their development. The investor needs to ensure that the due diligence done for such companies is rigorous and exhaustive. Such companies can often lack transparency or lack of information.
Why would you classify unlisted shares as illiquid instruments?
Unlisted companies can be high risk instruments as you can redeem them only if:
Your broker has another buyer for the stock.
The IPO happens, and you can sell your stock.
If neither of the two happens, your investment will be stuck.
Where can I view my unlisted shares after buying them?
Any unlisted shares or security purchased by you after the transaction is successful is reflected in your demat account.
Is it possible for NRIs to invest in unlisted stocks?
Yes. Like domestic investors, NRIs can also buy unlisted shares. The shares purchased will be non-repatriable in nature. However, if, as an NRI, you wish to buy repatriable shares, you will need to make your intentions clear by reporting the same to RBI.
How does the trade take place?
Since these shares are not traded in the public market, you do not have a ‘market price’. Instead, you get an indicative market price or selling quote. Some wealth management firms help investors buy unlisted shares. Portals such as Analah Capital and Unlistedkart also offer to arrange such shares for you. “If you are a large investor, then shares can be arranged for a fixed fee. In most cases, the selling quote includes the remuneration of the broker,” says Rupesh Nagda, Managing director & Founder, Family First Capital. A demat account is mandatory.
When you transact in a listed share, the order placement and payment mechanism are very much standard. There is no counterparty risk as the transactions are carried out on the stock exchange. The securities are credited to your demat account by your broker, following a T+2 cycle. However, when you deal in unlisted securities, you should be doubly careful since there is a counterparty risk. “We prefer to transact through NSE Clearing Limited. The stocks and money change hands through the clearing house in one day,” says Nagada.
Is trading in unliked shares, risky?
The biggest risk you take here is that of liquidity.
“Investments in stocks entail business risk. When you buy a listed share and if your opinion about the business changes, then you can sell it on the exchange quickly. But in the case of unlisted shares, the price discovery is a problem and liquidity is a bigger problem,” says a fund manager who wish not to be identified. If the company does not get listed, then you may get stuck and the prices too may correct. Shares of HDB Financial Services were accumulated by many investors in 2019, expecting an IPO soon. However, the company is yet to announce one. Factoring in the possibility of IPO getting delayed is important.