Unlisted Equity Shares: Overview, Risks & How To Invest

The formal stock exchange market is known to everyone where a number of investors put money to earn profits. However, the stock exchange only allows buying listed equity shares.

The equity shares meaning on the stock exchange are the stocks of the companies that have become public and the shares are traded publicly. But there are a number of companies from different industries which are not listed on any stock exchange. The shares of such companies are known as unlisted equity shares.

You can earn substantial returns from unlisted equity shares.

Equity shares meaning is different for listed companies and unlisted companies. The process of buying and selling unlisted equity shares, risks associated, stability, future prospects, etc., in unlisted equity shares are very much different from the listed ones.

Let us learn all such crucial details that are necessary to understand unlisted equity shares meaning and their other aspects.

Unlisted Equity Shares Meaning

As said, the shares of the companies that are not listed formally on a stock exchange are known as unlisted equity shares. These companies are not yet in compliance with the rules to get listed on a stock exchange and become public. Some popular names in this regard are Jio, Ola, etc.

These shares/securities are available to trade over-the-counter markets, and hence, also known as over-the-counter or OTC securities.

Risks Associated with Unlisted Shares

The risks associated with trading/investing in unlisted equity shares are different from the listed shares. Since the market of unlisted equity shares is not regulated, there is a bit of lack of transparency and higher chances of manipulation by intermediaries.

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However, considering the fact that unlisted equity shares are generally traded only by big companies, institutional investors, big brokerage firms, etc., the risks associated with trading in such securities get minimized.

The real problem lies with the intermediaries who often manipulate investors and scam their money. But this hurdle too can be very well avoided, if one chooses a reputed and trusted intermediary to buy/sell unlisted equity shares.

Besides the risks related to the unlisted equity shares market being unregulated, the other and also the main risk is with the investment itself. Investments in unlisted equity shares are usually made with the hope that the company will get listed in the future and its shares’ prices will increase substantially.

But no one knows whether the company is going to get listed or it will succumb to nothing. And even if it is going to get public, the worry remains whether shares’ prices will increase or not. Hence, it is always necessary to do an in-depth analysis of the company’s business and a forecast of its performance in the coming years.

Only by doing proper research about the unlisted company, you can earn higher returns by investing in unlisted equity shares.

How Unlisted Equity Shares are Valued/Priced?

Unlike listed equity shares, the price of unlisted equity shares is not determined by demand and supply created by investors/traders. There is no such concept of market price in unlisted equity shares meaning as they are not tarded publicly on a stock exchange.

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These shares are valued on the basis of their Fair market value (FMV). FMV of the unlisted shares is determined by the investment bankers and underwriters.

Formula to Calculate FMV

FMV = (A – L) x PV/PE where,

A is the net value of the total assets of the company.

L is net liabilities of the company.

PV is the paid-up-value, and

PE is the paid-up equity share capital.

Taxation on Unlisted Equity Shares

The tax provisions of earnings made from unlisted equity shares are different from those listed shares. When it comes to short term capital gains equity shares meaning, the same is realized when the shares are sold within 24 months of their purchase.

On the other hand, long term capitals gains are made when the shares are sold after being held for 24 months from the date of their purchase.

Tax on Gains Made From Selling Unlisted Equity Shares

Short term capital gains made from the sale or transfer of unlisted equity shares are taxed at a marginal rate. However, the long term capital gains on unlisted equity shares are taxed at 20 percent. Also, unlike listed equity shares, you can avail the benefit of indexation on gains made from unlisted equity shares.

The short term capital loss made from selling unlisted equity shares can be set off against both short term and long term capital gains. However, the long term capital losses can only be set off against long term capital gains.

Hence, there is a fair bit of similarities as well as differences between listed and unlisted equity shares meaning when it comes to taxation.

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How to Buy Unlisted Equity Shares?

Investing in Pre-IPO Companies

You can buy equity shares of pre-IPO companies before they go public by getting listed on the stock exchange. However, you need to buy these shares from an intermediary, since they are not traded publicly. These intermediaries buy shares of unlisted companies through various sources.

Buying Shares of Unlisted Startups

You can buy shares of unlisted startups that have the potential for future growth. Many such startups are not popular. This gives a great opportunity to identify the ones that can grow substantially in the future but their shares prices have a very nominal price.

Some startups can prove to be multibaggers.

Buying ESOPs

Employee Stock Ownership Plan or ESOP is the way through which a company allots shares to its employees. You can also buy these shares directly from the employees who are also shareholders in the company. In this way, you can get the option to become a shareholder of some of the top companies that are not yet listed on the stock exchange.

Invest in PMS

The most hassle-free way to invest in unlisted companies is through portfolio management systems or PMS. You invest your money in the PMS schemes that have holdings in unlisted companies. This saves you from dealing with intermediaries and all complications that arise while buying unlisted equity shares.

So we have learned unlisted equity shares meaning, how profits made are taxed, and how one can buy these shares. Overall, it can be concluded that unlisted equity shares are another window of investment that gives a good opportunity to earn higher returns.

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However, one should be cautious while putting any amount of money in an unlisted company. Always do proper research and choose the right intermediary to buy any unlisted stock.