A Beginner’s Guide to Unlisted Shares in India by Wealth Wisdom India

Investing in stocks has become an increasingly popular way to grow wealth over time, and while most investors are familiar with listed shares on stock exchanges, unlisted shares are becoming increasingly popular areas of interest. Driven by multiple factors, including robust economic growth, a growing startup ecosystem, and evolving regulatory frameworks, unlisted shares are gaining increasing attention from both domestic and international investors. For example, NSE had set a record date of 2nd November 2024 for its recent bonus issue of 4:1 shares and was last traded at Rs 1900 a piece in the off market deals. This makes a staggering M-cap of more than $ 5.6 billion (Rs 4.75 lakh crore) making it among one of top 10 most valued companies of India.

What are Unlisted Shares?

Unlisted shares, also known as private equity or pre-IPO shares, refer to shares of a company that are not traded on a recognized stock exchange. Unlisted shares are typically issued by private companies, startups, or firms yet to go public. These companies are typically in their growth phase, seeking capital to expand their operations, research and development, or fund acquisitions. Unlike listed shares, which can be bought and sold on public exchanges, unlisted shares are traded privately through brokers or authorised online trading platforms like Wealth Wisdom India Pvt. Ltd.

Key Beneficial Features of Unlisted Shares

• High Growth Potential: Many unlisted companies, especially startups, have the potential for rapid growth as they scale and mature. Unlike established companies that are already priced high, unlisted shares may be undervalued due to their lack of visibility in the marketplace, offering investors the chance to secure shares at a lower price before the company gains traction.
• Diversification: Investing in unlisted shares can help in portfolio diversification, potentially mitigating risks associated with publicly traded stocks. By adding unlisted shares, investors can spread their risk across a wider array of industries and business models that may not be directly correlated with market trends impacting publicly traded companies. This diversification can help stabilize returns during market fluctuations.
• Exclusive Acquisition Opportunities: Investing in unlisted shares offers exposure to exclusive investment opportunities that are not available through the public markets. For example, Swiggy's unlisted shares were quite popular and successful in the market before the company opted for an IPO. By investing early, investors can potentially reap substantial rewards when these companies go public or are acquired.
• Less Market Manipulation: The prices of unlisted shares are not subject to the same level of market speculation as listed shares, which can sometimes lead to price manipulation. The limited competition in the unlisted marketspace also means that there is less volatility, as the shares are less susceptible to rapid price changes driven by market hype or panic.
• Tax Benefits: In unlisted shares, the taxation for long-term capital gains is calculated at 12.5% without indexation benefits. The tax slab is beneficial for investors depending on their holding period, and is less susceptible to risks and other market challenges.

How to Buy Unlisted Shares?

Krishna Patwari, Founder and Managing Director, Wealth Wisdom India Pvt. Ltd. shares a few easy steps for beginners to invest in unlisted shares.

1. Before investing, thoroughly research any unlisted company you're considering for investment. Look into their business model, financials, management team, and market positioning. You can access information through company websites, industry reports, and news articles.
2. Assess your risk tolerance before investing in unlisted shares. Understand that while the potential for higher returns exists, the risks, including lack of liquidity and market volatility, can also be significant. Evaluate the market opportunity and the potential for growth and scalability.
3. Select an authorised platform like WWIPL, specializing in unlisted shares buying and selling. WWIPL provides access to a curated selection of companies and facilitates easy and secure investment processes.
4. The next step is to carefully review the investment terms, including the share price, lock-in periods, and exit options as it is the fundamental proof for any investment. Ensure you have a clear understanding of the payment terms and any potential fees involved.
5. Make the payments with all the necessary legal documents and transfer the shares.

Key Regulations

A few regulations that legalise investment in unlisted shares include:

Companies Act, 2013: The Companies Act provides the legal framework for corporate governance in India. Under this Act, private companies can issue securities without having to list on an exchange.

SEBI (ICDR) Regulations: These regulations govern the issue of capital by unlisted companies, including private placements and rights issues.

Investment Agreements: Formal investment agreements include the terms of investment, including share price, valuation, investor rights, and exit options. Such agreements are crucial as they are legally binding and protect the interests of the investors.

Tips for Beginners

Krishna Patwari guides new investors with a few tips to start easy.

• Unlisted shares are typically illiquid and may require a longer investment horizon to realize potential returns. New investors must be patient to realise their profits.
• Assess the risk tolerance carefully before investing in unlisted shares, as they carry inherent risks.
• Align the investment in unlisted shares with overall financial goals and objectives to get maximum returns.
• Consider seeking professional advice from financial advisors specializing in unlisted shares investments.

Future Outlook for Unlisted Shares in India

By 2025, as more startups progress along their growth trajectories, unlisted shares will likely present attractive investment options. The regulatory landscape in India is also evolving to support the growth of unlisted companies. SEBI has been progressively refining regulations to ensure better transparency and investor protection for private placements and unlisted shares. Growing awareness about alternative investments, coupled with the diversification benefits they offer, will likely lead to an increased demand for unlisted shares.

As technology continues to disrupt traditional investment practices, it may also simplify the due diligence process, enabling investors to make informed decisions about unlisted shares. By 2025, the integration of technology in the investment ecosystem could lead to an increase in transactions involving unlisted shares, amplifying market activity.

As the landscape continues to evolve, the potential for unlisted shares to serve as a lucrative investment opportunity will likely attract a diverse array of investors, from retail to institutional. By staying informed and adopting a mindful investment approach, investors can position themselves to capitalize on the opportunities presented by unlisted shares in this dynamic and rapidly changing market.