Unlisted Shares: Buy your stocks Young

A.)What are unlisted shares?

Unlisted shares, as the name suggests are those shares that are not listed in the stock market.

Not regulated by the SEBI, market pricing and disclosures being non-transparent, the risk here is relatively higher as compared to the listed space.?

These are stocks from newer or smaller firms as they don’t have what it takes to comply with the norms of listing on the stock exchanges, like listing fees, market capitalisations & others.?With emerging start-ups & new-age companies, investment in Pre-IPO companies has become attractive amongst investors.

B.)How to invest in unlisted stocks?

Unlisted shares can be bought through intermediaries & platforms that specialise in sourcing & placement of unlisted shares & can facilitate the trade. Intermediaries & platforms buy shares from employees i.e., ESOPs, existing investors & offer new investors who are keen to invest.

In the last few years, the pre-IPO market has opened up & is now available to masses. Some investment firms like Analah Capital, TradeUnlisted & Unlistedkart - A Qapita Company have portals to help investors buy unlisted shares. Shares of these unlisted companies will be held in a demat account.?

According to Unlistedkart, depending on the unlisted share, the minimum amount can be between ? 25,000–? 50,000. Other investment platforms have not mentioned a threshold of minimum investment.?

As per India’s market regulator’s rules, all pre-IPO shares are locked in for 6 months from the date of listing. It means you cannot sell stocks before 6 months from the date of listing.

1)Pre IPO companies?: You can invest in pre-IPO companies intent to list in the future. These companies have high growth potential & you can capitalise on that by investing early. The shares will get credited directly to your Demat account without any involvement of stock exchange. However, you will need to select a trusted intermediary to help you invest in these shares successfully.?

2)Startups: Today the Indian startup sector is one of the most agile sectors with significant investment potential. You can invest in startups with the potential for multifold growth. For most startups, the min. investment amount is Rs 50,000, and you will get the shares credited to your Demat account directly.?

3)Buying ESOPs from employees?: ESOPs are company shares offered to employees at a special price. Some brokers help you connect with company employees who want to sell their ESOPs.??

4)Buying directly from promoters: Suppose you want to buy a significant stake in an unlisted company. In that case, you can approach an investment bank, wealth manager, or a trusted broker who can help you buy directly from the company’s promoters through private placement.

5)Through PMS & AIF schemes with exposure to unlisted companies?: PMSs can give you access to unlisted shares by investing in portfolio management services that invest in unlisted shares as a part of their investment strategy.?

Another option would be to invest in this segment through alternate investment funds (AIFs), which invest in venture capital, private equity, real estate & hedge funds. AIFs have competent professionals who can do due diligence & assess the prospects of the potential investment. This alternative is less risky & can be more rewarding compared to individual investors directly putting their money in unlisted securities.

6)Pre IPO Funds: Investors can get into the pre-IPO funds to get easy & early access to some of the good companies. There are various wealth management firms that offer funds that invest in pre-IPO companies. Edelweiss recently Listed IPO Fund, which invests in up to 100 recently listed companies & upcoming IPOs, has reportedly delivered a CAGR of 21.7% since inception.

C.)Risks:

-The risk of capital loss cannot be ruled out. If investment is made without due diligence of quality of promoters & financials of firm, investors may lose their entire capital.?

-There have been many instances where promoters gave inadequate information about a company’s fundamentals to raise money from gullible investors. Again, there is the risk of further equity dilution after the allotment has been made. If the company is not making profit and paying no dividend, there is the risk of no return on investment for some time. The opportunity cost of this can be huge, if the waiting period is long.

-A major risk in the unlisted space is the lack of liquidity. If the investor needs money, it would be difficult to find buyers and sell the securities.Therefore, only the money that investors don’t need for many years should be invested in unlisted shares.

- Risk of valuation: It is quite challenging to determine the fair value of a company's unlisted shares since limited financial information about the company is known to the investor. Usually, a company's valuation is based on growth plans, forecasted earnings and statements, etc., which could be absent or not readily available to an investor. A lot of negotiation could be involved to get the right unlisted share price.

- Risk of less transparency:Promoters or large institution buyers take key decisions of unlisted companies. Even if investors have a significant number of shares in an unlisted company, the company is not obligated to share its business plans or financial reports with them.

D.)Factors to consider before investing in Unlisted Shares

-Management aims for company's future;

-Company's revenue sources & revenue mix & risk to business cashflows;

-Company's competitive edge among industry peers;

-USP of company's products & offerings;

-Trading price of company's unlisted shares in grey market;

-See if the relative valuation is higher or lower than its peers;

-Company plans to expand & fund its expansion;

-Analyze future prospects and growth plans of company & execution strategy.

E.)Advantages:

Businesses that are in the pre-IPO stage frequently have a proven revenue model & may raise additional capital from the market by going public. Investing in a company that is about to launch its IPO may allow an investor to participate in a company's growth; however, as such bets include risk, they should only be made by aggressive investors.

Unlisted company stock values in the unlisted market are frequently less volatile than those in the main market. Furthermore, purchasing stocks on the unlisted market is no longer a luxury reserved for large institutions/investors. Individual investors now have access to the same.

1. High-return potential investments:?Shares are frequently overpriced or undervalued for lengthy periods of time as they are not very liquid. As a result, an investor may make a sizable return if they can purchase shares when they are cheap.

2. Risk diversification:?Unlisted equity shares are a distinct asset class, so for investors who are heavily invested in listed stock markets & mutual funds, unlisted shares as an asset class offer some risk diversification.

3. High growth potential companies’ investments:?Unlisted companies are often smaller in size & have yet to reach a scale where they may go public in order to get funding for their capital needs. As a consequence of the small base effect, investing while the firm is smaller in size & investing during its growth phase before it gets listed on public markets generally generates large returns.

4. Less Volatile Price Range:?The values of unlisted equity shares are typically less volatile, so the investor does not need to be concerned about price changes on a daily basis.

F.)Tax Implications:

Unlisted shares if sold within 24 months, then STCG is applicable on profits & thus taxed at marginal tax rate. However, if it is sold after 24 months, then LTCG will be applicable @ 20% along with indexation benefit.?

Once the unlisted shares you have purchased get listed on stock exchange & then if you sell your investment, the tax implication will be as listed equity shares.

Unlisted shares can turn out to be those hidden gems if you can pick the right one. It can provide exponential returns to the investors. The most important factor which needs to be considered while choosing unlisted stock is the companies’ fundamentals and the intermediary via which you will buy the shares.?