Increasing number of Indians is exploring various investment avenues outside the conventional investment options like FD, RD etc. Amongst these “unconventional” investment options, equity investing is picking up like anything (a neat 4.2 million DMAT accounts opened only in December, 2023), and the specialists often refer to this phenomenon as FOMO (fear of missing out).
Within the equity investment space, a larger number of investors are hunting for growth stories which are away from public glare. These exceptional stories are often found in companies that are not listed on various stock exchanges regulated by the SEBI. They are called unlisted companies and their shares are referred to as “unlisted shares” or “unlisted stocks” or “off-market stocks”.
Is it safe to invest in unlisted shares?
This question is on every investor’s mind who wishes to catch an early ‘flight’ or wants to earn a bounty in his/her investment journey, and to be fair to them, the answer to the question has as many as possibilities as the investing in the shares of a listed company and expecting a decent return too! Hasn’t few listed companies been able to circumvent the system and took the hard earned money down the drain along with them? Remember Satyam or Kingfisher Airlines or Jet Airways?
Some would argue that the unlisted shares are not safe because they are not regulated by SEBI! True, that unlisted shares are unregulated, but are businesses of these companies not within the ambit of law of the land? The answer is each registered company in India is ‘regulated’. They are required to file at least annual return with registrar of companies and quarterly GST return with the Income Tax department. So, essentially the right question related to unlisted companies whose shares someone wishes to buy is – is that unlisted company genuine? Well, one can easily find the answer by searching the website of MCA – Ministry of Corporate Affairs, Government of India. To check that you must have company CIN or Corporate Identification Number of that particular company with you. It provides preliminary information about the company.
For example, if you’re a cricket lover and want to buy unlisted shares of holding company of Chennai Super Kings (Chennai Super Kings Cricket Limited), you can easily find their CIN (U74900TN2014PLC098517) by checking their website. Few shareholders of CSK may be in need of money and willing to sell their shares on platforms dealing in unlisted shares.
Similarly, you might be aware of a company which is not listed on stock exchange, but you are sure of its business potential and want to buy shares before it lists.
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Is investment in unlisted shares risky?
On various online platforms, including Quora, the discussion on unlisted shares being risky is quite interesting ones, with people having different opinions based on their experiences as well as heresy, but the answer to this question has various dimensions, including some similar to listed shares.
For the uninitiated, these shares are not traded daily on trading days like the listed shares where liquidity is generally high and you can sell shares after two days of buying it, but that might not be possible in the case of unlisted shares. In the case of unlisted shares, you might have to wait to exit/sale. But this scenario too is changing with time as dedicated platforms witnessing surge in listed investors looking to buy unlisted stocks. Additionally, gone are days when transfer of unlisted shares used to take anywhere between 3 to 6 months, now platforms process the transactions as early as 24 hours!
The only risk to invest in unlisted stocks (in comparison to listed ones) is the lack of publicly available information. Even MCA website does not have updated financial information. While the listed companies are required to disclose mandated information to exchange regularly and results quarterly (for SMEs half yearly), the same may not be easily available for unlisted companies. Yet, the scenario is changing fast. Many unlisted companies have started posting financial as well as relevant information publicly on their websites. So to be on safer side, you may like to invest in only those companies who are practicing transparency and willing to share additional information on being asked personally by prospective investors.
One of the crucial ways to minimize your risk is to buy and sell unlisted shares on credible platform. Many platforms provide updates related to dividend, splits, buyback and many more for the companies in your portfolio whose unlisted share you possess.
Are unlisted shares taxed differently than the listed ones?
Taxation being one of the most important aspects when it comes to investing, the unlisted shares are taxed at a higher rate than the listed shares, as Short term Capital Gains (STCG) period for unlisted shares is 24 months, in comparison to listed shares’ 12 months! The income tax slab depends on your income for that particular financial year as the STCG are added in your income. As for LTCG (Long term Capital Gains), shares sold after holding them for 24 months are taxed at the rate of 20% with indexation benefits.
Here, the important differentiator is STT, as STT is levied only on listed shares.
Overall, with influx of investors, the environment of unlisted shares is becoming more transparent with each passing day, and the investors with appetite for higher risk (in terms of volatility) can choose to invest in these shares. They may consider themselves early stage investors who are willing to take higher risk and consequently, may reap higher profits too!
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