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Tata Capital > Blog > Wealth Services > Unlisted Shares: Meaning, Risks, Taxation & How to Invest in India

Wealth Services

Unlisted Shares: Meaning, Risks, Taxation & How to Invest in India

Unlisted Shares: Meaning, Risks, Taxation & How to Invest in India

There is a huge stock market running every day behind the formal stock exchanges. This is the market for unlisted shares. Unlisted shares trade Over the Counter or OTC market and in this article, you will read all about Unlisted shares meaning, how to invest in them, and their benefits.

What are Unlisted Shares?

The shares which are not listed on the formal stock exchanges are referred to as unlisted shares/ stocks. For instance, JIO has unlisted shares, OLA has it as well. Similarly, many companies are yet to go public as they do not comply with the requirements for being listed on a formal stock exchange.

Unlisted shares are riskier than listed shares as their liquidity is limited since it is not listed. They are less transparent but with more stable valuations. So, if you can pick an unlisted share that has all the potential to get listed and the company has growth potential, your returns can be amplified enormously from that share.

Popular Examples of Unlisted Equity Shares

To understand unlisted shares’ meaning better, let’s look at some of the popular examples. 

  • SBI Mutual Fund Unlisted Shares
  • Oravel Stays Limited (OYO Unlisted Shares)
  • Big Basket Unlisted Shares
  • Boat Unlisted Shares
  • Bombay Gas Company Limited Unlisted Shares
  • Capgemini Technology Services India Unlisted Shares
  • CSK Unlisted Shares
  • Zepto Private Limited Unlisted Shares

Is it safe to buy unlisted shares?

What is unlisted equity shares’ safety guarantee? Unlisted shares trade over-the-counter (OTC) where buyer and seller of these shares directly trade the instruments and they get connected via some intermediaries. So, this market is not regulated nor organized, and thus trading in unlisted shares bears credit risk. However, unlisted shares are generally traded between companies, big brokerage houses, and HNIs or institutional clients. So, going by the reputation of the market participants of unlisted shares, the risks get minimized. The risk also decreases if you can choose the right intermediary for trading in unlisted shares.

However, the main risk lies in the investment choice itself, that whether the company, whose unlisted shares you are buying will go public or not, the price of shares will increase or it will wind up due to no business. The only option is to do an in-depth analysis of the company’s fundamentals and other factors before investing in any unlisted share.

Difference between Unlisted & Delisted Shares

Unlisted shares’ meaning shouldn’t be confused with Delisted shares. Both of these types of shares are completely different. 

While unlisted equity shares meaning is associated with stocks not listed on the stock exchanges yet, delisted shares are those which were once listed but dropped out from the listed shares category due to certain reasons.

You can trade and invest in unlisted shares on OTC markets but you cannot invest or trade any delisted shares. Delisted shares are not available on any platform whether it is formal stock exchanges or OTC.

Companies have unlisted shares when they may not have plans for issuing IPO or they do not meet the requirements of SEBI to list the shares on any stock exchange like NSE or BSE. On the other hand, companies have delisted shares when they either do not adhere to any disclosure guidelines provided by SEBI and stock exchanges and thus they get delisted from stock exchanges, or the management of the company wants to delist the company itself.

Unlisted Shares Valuation

The valuation of unlisted shares is done following the Fair market value (FMV) method. Since they are not on the stock exchange and thus no actual market price exists for unlisted shares, FMV is calculated by the underwriters or the investment bankers.

For calculating the fair market value, the book value of all the liabilities of the company (L) is deducted from the book value of all the assets the company (A) possesses. Then the amount derived is multiplied by the paid-up value (PV) of equity shares and then divided by the total amount of paid-up equity share capital (PE) as per the balance sheet of the company.

FMV = (A-L) * PV/PE

There is another way of calculating the value of unlisted shares and that is DCF or Discounted Cash Flow method. Here all the future cash flows are anticipated and then discounted at a particular rate to get the present value of the shares. However, this method is difficult as all the cash flows are not real but anticipated ones but this method is quite popular amongst the unlisted share investors.

Tax Implications

Since unlisted shares are different from listed ones, the tax implications are different as well. Unlisted shares if sold within 24 months, then short-term capital gain tax is applicable on the profits and thus taxed at marginal tax rate. However, if it is sold after 24 months, then long-term capital gain tax will be applicable @20% and you get the benefit of indexation as well. However, the profits are calculated as per FMV until the shares get listed on any formal stock exchange. Once and if the unlisted shares you have purchased get listed on the stock exchange and then you sold your investment, the tax implication will be as listed equity shares only, that is long-term capital gain tax @10% on profits above Rs. 1 lakh without the benefit of indexation.

What You Should Know Before Investing in Unlisted Shares

Before you choose to invest in unlisted shares, it’s important to understand what is unlisted equity shares meaning from a risk perspective:

  • Liquidity Issues: Unlike listed stocks that can be sold within seconds on exchanges, unlisted shares face significant liquidity challenges. Selling them can take days to months, with no guarantee of finding buyers. You may be stuck holding shares indefinitely.
  • No Price Transparency: There’s no regulated mechanism for price determination in unlisted shares. Prices vary wildly across platforms with no standardised valuation, making it impossible to know if you’re getting a fair deal.
  • Limited Disclosure: Unlisted companies aren’t required to release quarterly results or maintain the same disclosure standards as listed firms. Financial reports can be delayed by 15 months or more.
  • Post-IPO Lock-in: Even if the company successfully lists, you’ll face a mandatory 6-month lock-in period during which you cannot sell your shares on the exchange.

Choosing the Right Platform for Unlisted Share Investments

If you decide to invest in unlisted share, carefully evaluate platforms using these criteria:

  • Trustworthiness and Credibility: Research the platform’s reputation thoroughly. Look for positive reviews from actual investors and independent experts. Verify their track record and check for any past complaints or fraud allegations.
  • Established Track Record: Platforms with longer operational histories tend to be more reliable, though they may charge higher commission fees. Balance the trade-off between credibility and cost. An established broker offers better security than a newer, cheaper alternative.
  • Transparent Order Flow: Understand how the platform handles your trades. Some brokers may route orders to third parties at marked-up prices. Ensure complete transparency in their order execution process and pricing structure.

Steps to Invest in Unlisted Equity Shares

There are several ways in which you can invest in unlisted equity shares:

  • Through Intermediaries and Brokers: Specialised platforms and unlisted equity brokers facilitate transactions between buyers and sellers. They help transfer shares directly to your Demat account, though trades happen off-exchange.
  • Direct from Employees (ESOPs): Some brokers connect you with company employees selling their Employee Stock Options after vesting periods.
  • Private Placements: For substantial investments, approach wealth managers who can arrange direct deals with company promoters for significant stakes.
  • From Promoters/Shareholders: Purchase shares directly from existing shareholders, promoters, or founders through over-the-counter (OTC) transactions via trusted intermediaries.
  • PMS/AIF Schemes: Invest through professionally managed Portfolio Management Services or Alternative Investment Funds that include unlisted shares, offering diversification and expert oversight.
  • Startup Investments: Invest directly in early-stage startups through angel networks or venture capital firms.

Why Unlisted Shares Can Be a Smart Investment

Unlisted shares can be a smart investment for informed investors because of the following reasons:

High Growth Potential: Early-stage and pre-IPO companies often demonstrate substantial growth trajectories that can deliver exceptional returns if they succeed.

Early Entry Advantage: Gaining access before public listing allows you to invest at ground-floor valuations. If the company grows and lists successfully, early investors can realise significant profits.

Portfolio Diversification: Unlisted shares provide exposure beyond traditional stock markets, adding a different asset class to your investment mix.

Attractive Valuations: These shares are typically priced lower than their potential post-listing valuations, offering a discount compared to what public market investors might pay later.

Strategic Influence: Larger investments in private companies may grant you voting rights or board representation, giving you direct influence over business decisions and strategy.

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FAQs

How to buy unlisted equity shares?

You can buy unlisted shares through brokers specialising in unlisted equities or by connecting with the company, its employees, or promoters.

Is it good to buy unlisted shares?

Buying unlisted shares can be rewarding if the company has strong growth potential. However, it comes with higher risk due to limited liquidity and a lack of regulatory oversight.

Can I sell unlisted shares after listing?

Yes, once unlisted shares are listed on a stock exchange, you can sell them through the exchange. However, in some cases, there is a lock-in period for pre-IPO investors.

What are the disadvantages of unlisted shares?

Unlisted shares have several disadvantages, such as: ● Limited liquidity and transparency ● Higher risks due to minimal regulatory oversight ● Potential delays in IPO or exit opportunities

Can I gift unlisted shares?

Yes, you can gift unlisted shares. However, transaction charges and GST will apply.

What is the unlisted shares’ meaning and how are they different from listed shares?

Unlisted equity shares meaning: Stocks of companies that are not traded on recognised stock exchanges like NSE or BSE. Unlike listed shares with transparent pricing, regulation, and instant liquidity, unlisted shares trade privately through brokers with no price transparency, limited liquidity, minimal regulatory oversight, and restricted investor protection mechanisms.

How can I buy unlisted equity shares in India?

You can buy unlisted shares through: specialised brokers/platforms, direct transactions with promoters or employees selling ESOPs, private placements via investment banks, PMS/AIF schemes investing in unlisted companies, or angel investor networks.

Are unlisted shares riskier than listed shares?

Yes, unlisted shares are significantly riskier. They lack liquidity (hard to sell), transparent pricing, and strict regulatory protection. They're also vulnerable to fraud, manipulation, and insider trading. Companies provide minimal financial disclosure and you also face post-IPO lock-in periods.

What are the tax rules for unlisted shares on sale or transfer?

Unlisted shares held over 24 months qualify as long-term capital gains, and are taxed at 12.5% without indexation. Short-term gains (under 24 months) are taxed at your applicable income tax slab rate. 

How are unlisted shares valued for capital gains tax in India?

Unlisted shares are valued using the fair market value (FMV) that’s decided as per Rule 11UA and Rule 11UAA of the Income Tax Rules. FMV is calculated by the underwriters or the investment bankers.

Are unlisted shares allowed in a Demat account?

Yes, unlisted shares can be held in a Demat account. When you purchase unlisted shares through intermediaries or private placements, they're transferred directly to your Demat account even though the transaction occurs off-exchange.

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