The equity share capital of a company is the way the company raises funds for establishment, growth and development. If the company lists itself on the stock exchange, it becomes a publicly-traded company.
Its equity share capital gets listed on the BSE and/or NSE from where it can be freely traded across retail and institutional investors. If you invest in the shares of a listed company, you would get listed shares.
There is another category of shares that also constitute the equity share capital of a company. Such shares are called unlisted shares.
Unlisted shares are also called pre IPO shares because they are issued by companies before the company launches its IPO and goes public. Common examples of unlisted shares include shares of Reliance OYO, Jio, One97 Communications, etc.
Unlike listed shares, unlisted shares are not listed on any stock exchange. You would have to invest in these shares through other non-conventional modes.
There are different ways in which you can buy unlisted shares of a company. However, before we delve into the ways of buying unlisted shares, let’s understand the different aspects of investing in them.
Why unlisted shares attract investors?
Unlisted shares are, usually, offered by those companies that are in the initial stages of development. Companies that use innovative ideas to generate revenue can grow up to become established players.
For example, Ola is a cab-aggregator platform that has revolutionized the concept of public travel. Within a short span of launching itself, Ola has become a known and preferred mode of public commute. Thus, to invest in companies that are innovatively revolutionizing their market, investors invest in unlisted shares.
Another reason for investing in unlisted shares is when the company offering the shares is a subsidiary of a large and reputed company or group. For example, Reliance Jio is a subsidiary of Reliance which is a reputed Indian conglomerate.
So, if investors trust the subsidiaries based on the parent company, and expect the subsidiaries to provide returns on investments, they would invest in unlisted shares.
So, for investing in innovative ideas or in businesses that have a lot of potentials, investors choose to invest in unlisted shares.
Things to know before investing in unlisted shares
Unlisted shares in India are greatly different from the listed shares. So, before you invest in them, here are a few things that you should know about –
The process of investment
While buying listed shares includes a quick purchase through the demat account within trading hours, investing in unlisted shares is a tad bit difficult. It takes some time and you might not be able to buy an unlisted share instantly.
Who owns the shares?
Unlisted shares are owned by employees, angel investors, venture capitalists or start-ups and intermediaries. Thus, you would have to use unconventional modes to invest in such shares.
Finding buyers of unlisted shares proves to be difficult since these shares are not publicly traded. Thus, when you invest in unlisted shares, you might find them illiquid when you want to redeem them.
Unlisted shares are risky compared to listed shares. This is primarily because the shares belong to companies that are in their growth stages. Such companies might suffer considerable losses in a bad phase making unlisted shares risky.
Valuation of the shares
Since the shares are not listed on the stock exchange, they do not carry a market value. Unlisted shares are valued using the concept of fair value which is calculated by the investors and promoters of the company. Such a value might not be very reliable and so, it might prove to be risky.
There is limited or no transparency in the company’s financial position that offers unlisted shares.
Tax treatment of unlisted shares is also different. If you stay invested in unlisted shares for two years and above, the returns earned would qualify for long term capital gains. You would be taxed @20% with indexation benefit on returns earned if you sell the shares after two years. If you are a Non-Resident Indian (NRI), you would be taxed @10% on long term capital gains without the benefit of indexation. If, however, you sell the shares earlier, i.e. within 24 months, short term capital gains would be applicable. The returns earned would, then, be taxed at your income tax slab rates.
Setting off of capital losses
If you sell unlisted shares within 24 months and you incur a loss, such a loss would be called a short term capital loss. This loss can be set off against short term capital gains and/or long term capital gains.
You can also carry forward this loss for 8 years to set it off against short term capital gains and/or long term capital gains.
If you sell unlisted shares after 24 months and incur a loss, the loss would be termed as long term capital loss. This loss can be set off against long term capital gains only. Moreover, you can carry forward this loss for the next 8 years and set it off against long term capital gains in those years.
You should, therefore, know these aspects of investing in unlisted shares before you invest in them.
How to buy unlisted shares?
Now let’s delve back into the different ways in which you can buy unlisted shares. These ways are discussed below –
Through intermediaries and start-ups
Specialized start-ups have been created to offer investments into unlisted shares. You can buy unlisted shares through these start-ups by opening a demat account with them.
Usually, a minimum investment of Rs.50, 000 is needed to invest in the unlisted share of each company. You have to make the investment upfront but the delivery of the shares is done on the basis of T+3, i.e., after three days of buying the shares.
Pro Tip: Since the delivery is done after a few days, there is a counterparty risk involved in buying unlisted shares through this mode.
You have to transfer the amount for buying the shares but the delivery of the same is not guaranteed. Keep this point in mind if you choose to invest in unlisted shares through start-ups or intermediaries.
From the employees of the company
Start-ups, when hiring employees, usually offer Employee Stock Ownership Plans (ESOPs). This allows employees to have equity ownership in the company that they join. ESOPs allow employees to buy shares of the company at a pre-determined price and after a predefined time.
So, if the employees want to offer their unlisted shares for sale, you can buy the shares from them. To do so you need to contact your broker. Your broker knows which unlisted shares come up for sale and can help you buy the shares from employees offering their stake for sale.
From the promoters of the company
Many times the promoters place their stake in the company for sale. This is done through a process called Private Placement and the unlisted shares are placed with banks and wealth managers.
You can, then, invest in unlisted shares through Private Placements done by the company’s promoters.
Pro Tip: To invest through Private Placement you need a good network to find out when such placements are made. Moreover, if you are looking to own a considerable stake in the company, you can do so through this mode since promoters usually own a large stake in the company that they promote.
For doing so, however, you would need a considerable size of the investment.
By investing in PMS or AIF
If you are a large investor, looking to invest a considerable amount of money in PMS (Portfolio Management Services) or AIF (Alternative Investment Funds), you can get unlisted shares.
Financial institutions that manage a PMS or AIF scheme usually invest in unlisted shares. These institutions bank on the pre IPO share valuation to earn returns when the company lists itself and launches its IPO.
Since the pre IPO valuation is lower, PMS and AIF funds get a large number of shares and generate profits when the valuation rises due to a subsequent IPO.
Pro tip: PMS and AIF are niche investment categories for HNIs, NRIs and foreign investors since they involve a considerable amount of funds. This mode is suitable for you only if you are a large investor and don’t mind taking the risk of investing in unlisted shares.
Furthermore, though fund managers bank upon the increase in the valuation of shares after the IPO is launched, their speculation might not always work. In some cases, the company’s valuation might suffer after it becomes a publicly listed company and the unlisted shares prices might fall causing losses. So, keep the risks in mind when considering PMS and AIF and investing a large chunk of your money in unlisted shares.
Through equity crowdfunding platforms
There are various crowdfunding platforms that allow you to invest in the equity capital of unlisted companies. You can become an angel investor, invest in angel funds and buy unlisted shares of companies registered on such crowdfunding platforms.
Pro tip: When you invest in the business through crowdfunding, you are helping the business venture startup. It involves a considerable risk if the venture fails or is not able to establish itself. Thus, you should keep this investment risk in mind when investing through crowdfunding platforms.
Mistakes to avoid when investing in unlisted shares
If you are not careful, you might end up making mistakes when investing in unlisted shares. Such mistakes would be costly as you might block your capital, incur opportunity costs and even incur a loss if the shares are devalued.
So, here are some pitfalls that you should avoid –
- Don’t follow the herd mentality. Research the company before you invest in it. If the company is establishing itself in the market, has reputed promoters and strong financial fundamentals, you can invest in the unlisted shares of such companies
- If you are getting unlisted shares at a discount by existing investors, don’t jump on the chance. There is a reason investors are exiting from their investments. Research the shares and then invest
- Prices of unlisted shares fluctuate considerably. In case of major fluctuations, assess the fair value of the share based on the company’s prospects
- Do not invest in unlisted shares with a short-term investment horizon. Remember, unlisted shares prove their mettle with time when the company grows and establishes itself in the market. Have patience and a long term perspective if you want to invest in unlisted shares. If you believe in intra-day trading, steer away from unlisted shares as they are not relevant for your investment needs
- Do not invest in unlisted shares without a trusted advisor to guide you. If you need advisory services you can get in touch with Koppr’s experts who would help you buy suitable unlisted shares that have the most potential to yield returns.
Investing in unlisted shares through Koppr
Koppr also allows you to invest in unlisted shares of various companies. You can buy unlisted shares online in some simple steps through Koppr’s platform. Let’s have a look at the steps in details –
1) Visit https://www.koppr.in/ and click on ‘Sign In’ in the upper right-hand corner of the home page. If you are logging in to Koppr for the first time, you need to sign up with your credentials and create your own login ID and password.
2) On the next page, sign in to your Koppr account using your registered email ID and password which you had used to create your login ID.
3) If you are new to Koppr, you can choose ‘Sign Up’ on the home page and create your own account. Provide your first and last name, email ID and set a password to create a new account on Koppr.
4) There are 4 sections in your Koppr Account- Learn, Plan, Track, Act. The different sections are for different parts of your financial journey.
5) On your account’s dashboard, click on ‘Act’ on the left-hand side of the screen
6) You would be able to see a choice of unlisted shares of different companies that are currently active on the platform.
7) Click on ‘I AM Interested’ to check the details of the scheme in which you want to invest.
8) Click on ‘I Am Interested’ and someone from the Koppr team would get back to you with the details of how you can invest in the selected scheme.
You can, then, invest as per your needs and buy unlisted shares online.
Understand the meaning of unlisted shares, how they work, the aspects of investing in them and then choose the preferred avenue to invest in them.
You can also buy unlisted shares from Koppr in a hassle-free manner. However you invest, remember how unlisted shares are different from listed ones and invest in them with full knowledge of their risks and returns.