Unlisted Shares Explained: Risks, Rewards & Real Opportunities

The world of investing is full of opportunities, and one space that has garnered attention in recent years is unlisted shares. 

Companies that are not listed on any stock exchange have become the talk of the investment community, especially as major firms like Reliance Retail, PharmEasy, and Tata Technologies have made headlines long before their IPOs. While these investments promise high rewards, they also come with unique risks.

If you're considering venturing into unlisted shares, it's important to understand how this market works, the potential rewards, and the risks involved. This guide will help you navigate the world of unlisted stocks, including what to check before making an investment.

📜 How Did the Unlisted Shares Market Begin?

The unlisted shares market isn't a recent phenomenon, but it has certainly gained traction in the past decade, especially with the rise of tech startups and the increasing number of companies staying private for longer periods. Historically, this space was reserved for private equity firms, angel investors, and high-net-worth individuals (HNIs) who had the means and connections to access these shares.

However, with the growing demand for early-stage investments and the boom in startups, retail investors have begun exploring this market. By providing platforms that connect buyers and sellers, the unlisted space has opened up, allowing individuals to invest before companies hit the public markets through an IPO.

⚙️ How Does the Unlisted Shares Market Work?

Unlike publicly listed shares, the unlisted shares market operates on a less structured, more private basis. Here's a breakdown of the process:-

Finding the Deal: Unlisted shares are often bought and sold via specialized platforms, brokers, or wealth managers. Unlike the convenience of stock exchanges, these platforms connect investors directly to private company owners, employees (selling their ESOPs), or others looking to offload their stakes.

Price Discovery: The price of unlisted shares is not publicly available. It is generally determined through negotiations and private transactions. Investors rely on last funding round valuations, financial performance, and supply-demand dynamics to gauge the right price.

Due Diligence & Documentation: Before investing, it is crucial to perform due diligence. The company may not publish audited financials as listed companies do, so rely on available data such as:

Investor presentations

Funding history

Financial projections

You will also need to complete KYC (Know Your Customer) requirements to verify your identity:-

Share Transfer: Once the deal is made, the shares are transferred to your demat account via the company's Registrar & Transfer Agent (RTA). This process can take a few days or even weeks, depending on the company and transaction.

Exit Strategy: Exiting unlisted shares isn
’t as straightforward as selling listed ones. You can sell your holdings in the following ways:

IPO: If the company goes public, you can sell your shares in the open market.

Buyback: Some companies may buy back shares from existing investors.

Private Sale: You can sell your shares privately to another investor, although finding a buyer can be challenging.

✅ Why Invest in Unlisted Shares?

Here are some reasons why investors might consider adding unlisted shares to their portfolio:-

Early-Mover Advantage: Investing in unlisted companies gives you access to potential growth before the company goes public. If the company eventually lists its shares, you could benefit from significant price appreciation.

Higher Growth Potential: Many unlisted companies, especially startups, have high growth potential. Early-stage investors often stand to gain the most if the company expands rapidly or gets acquired.

Diversification: Unlisted shares provide a way to diversify your portfolio. These assets typically don’t correlate directly with the performance of the stock market, offering potential stability during market downturns.

Pre-IPO Opportunities: Many of the high-profile IPOs of the past decade, like Zomato, Nykaa, and Paytm, saw private investors reap large returns. Investing pre-IPO allows you to get in at a relatively low valuation.

⚠️ Risks of Investing in Unlisted Shares

Like any investment, the unlisted shares market comes with its own set of risks like Low Liquidity:-

The biggest disadvantage is the lack of liquidity. Unlike listed shares, where you can sell instantly through the stock exchange, unlisted shares may take years to sell, especially if there is no immediate exit route like an IPO.

Limited Information: Information about unlisted companies is often incomplete or unavailable to the public. Unlike listed companies, which must disclose quarterly financial reports and other regulatory filings, private companies aren't subject to the same transparency requirements.

Regulatory Risk: The unlisted space is less regulated compared to the public market. The absence of strong oversight increases the likelihood of fraud, misrepresentation, or unreported issues.

Valuation Ambiguity: Determining the value of unlisted shares is not as straightforward as it is for listed companies. The lack of a clear market price means you are depending on third-party valuations, which may not always reflect the true worth of the company.

Exit Uncertainty: The inability to easily exit your investment is a key risk. Even if the company has a solid business model, finding a buyer for your shares in the secondary market can be difficult.

🧠 What to Check Before You Invest in Unlisted Shares?

Before you make an investment, it's essential to conduct thorough research. Here's a checklist of things to consider:-

Company Fundamentals: Look at the company’s revenue, profitability, debt levels, and future growth potential. Ask for audited financials or any available investor presentations.

Leadership and Management: The success of a company often depends on the strength of its management team. Research the founders’ backgrounds, their past ventures, and their leadership capabilities.

Funding History: Who has invested in the company so far? If notable venture capital (VC) firms or angel investors are backing the business, it’s usually a positive sign.

Market Conditions: Research the industry the company operates in. Is it growing? Is there a strong demand for the company’s products or services?

Exit Strategy: Understand the company’s future plans for liquidity events such as an IPO, acquisition, or buyback option. Know when and how you might be able to sell your shares.

Platform Reputation: Ensure you are buying shares through a credible platform or broker. Avoid dealing with unknown third parties or online groups where the risks of fraud are high.

🧾 Taxation on Unlisted Shares

Unlisted shares are subject to capital gains tax, just like listed ones. However, the tax structure varies based on the holding period:

Short-Term Capital Gains (STCG): If you sell the shares within 24 months of purchase, your profits will be taxed at your income tax slab rate.

Long-Term Capital Gains (LTCG): If the shares are held for more than 24 months, you will be taxed at 20% with indexation benefits.

It’s important to factor in these taxes while calculating your potential returns from unlisted shares.

📌 Conclusion:

Investing in unlisted shares can offer exciting growth opportunities, especially if you get in early with high-potential companies. However, it comes with significant risks, such as low liquidity, limited information, and uncertain exit options. To succeed in this space, it’s crucial to conduct thorough due diligence, invest wisely, and always be prepared for the possibility that it may take years to realize any returns.

Before you make a move, ask yourself: Is this an investment I can afford to hold for the long term? And most importantly, make sure you are working with reputable brokers or platforms to mitigate risks.

While unlisted shares can bring substantial rewards, they require a clear understanding of the market and a disciplined, patient approach to investing. By following the guidelines above, you can better navigate the unlisted shares market and make informed decisions.

Disclaimer: The content provided in this blog post is for informational purposes only. The views, opinions, and recommendations expressed are solely those of the author and do not constitute financial advice. The investment in unlisted shares carries significant risks, and past performance is not indicative of future results.

Before making any investment decisions, you should consult with a licensed financial advisor or conduct thorough research. The author and the website do not assume any responsibility or liability for any financial loss or gains that may arise from decisions made based on the information shared here.

Investing in unlisted shares is subject to market risks, and you should carefully evaluate your risk tolerance, financial objectives, and personal circumstances before investing.