How to Invest In Unlisted Companies

Do you wish to invest in Unlisted Companies?

Then, you must understand what exactly is Unlisted Company.
Unlisted companies, do not need to obey the laws of any government body and often avail themselves of privately controlled operations. While some unlisted companies like OYO, Flipkart, and Byjus voluntarily choose to be unlisted, others are working to develop the track record and conditions they need to fulfill the SEBI criteria.

So, is investing in unlisted stock companies a good idea? If you have the above question or are wondering how to invest in unlisted companies in India, this article might help you. 

Before you jump in, here are some things you should know about unlisted stocks.

Things to know before Investing in Unlisted Companies

1. Unlisted companies are not traded on Stock Exchange and are available on the Over-the-counter market. The trade directly occurs between the seller and the buyer, and there is no supervision from any exchange.
2. Defining the fair price of an unlisted stock requires regular scrutiny and the fixed price results from an agreement between the two parties involved.
3. Unlisted stocks usually have long-term benefits and are less volatile. Using them strategically helps balance volatile stocks with non-volatile ones.
4. Reaching the IPO stage is the ultimate goal of any unlisted company, and this is the only stage where the investors can sell their unlisted stocks. Unlisted stocks can be sold through the secondary market or when the company gets listed on the stock exchange.
5. Investing through brokers or online platforms, you should study and compare the commission rates before investing.
6. The common risks while investing in unlisted stocks include- low liquidity, loss of entire capital, and no dividends.
7. Unlisted companies are not constantly monitored or regulated by the Security and Exchange Board of India(SEBI), and therefore investors need to be careful when investing in such stocks.

How to Invest in Unlisted Companies in India?

Investing in unlisted companies can be intricate as there is no form of protection or security given in any form. To overcome this intricacy, we have listed the precautions you can take and the process to identify unlisted companies with potential.  

• Investing in a company at the Pre-IPO stage:

In the reformation phase, a private company prepares to become publicly traded. Unlisted that have not yet reached the Initial Public Offering(IPO) stage is at the Pre-IPO stage. Unlisted stocks- can be traded online via investment platforms. The shares get delivered to your official account. Once the company reaches the IPO stage, an investor is allowed to sell the stocks after completing six months.

Unlisted companies in the earlier stages are looking for seed funding through established finance programs. These programs not only provide the capital required for growth but also help to reduce risks for the company and benefit from its quality network. These finance programs and companies offer Portfolio Management Services(PMS) that give small investors buy stocks in unlisted companies.

• Buying an Employee Stock Ownership Plan(ESOP):

Many unlisted companies provide ESOP shares to their employees with profit-sharing plans that let the employee buy stocks of the company. Certain companies provide only ESOP; hence, it is the only way to invest in them. 

• Equity Crowdfunding Platforms:

The equity crowdfunding model allows large groups of investors to invest in various startups and small businesses in exchange for stock ownership. If you plan to make larger investments in unlisted stocks, then crowdfunding through online trading platforms can be a good option.

To invest via equity crowdfunding, you need to meet the criteria defined by the trading platform. The requirements for registering as an investor vary widely between platforms. Some require very few checks, while others are more strict. So, search for the best option that suits your needs and lets you easily trade in early-stage unlisted companies.

Conclusion:

The first thing you should do after reading this article is invested some time in researching the unlisted company profiles and find out the recent investments that are taking place in this market. Studying the portfolio of angel investors and staying updated on the company news can help you decide on your unlisted investments. All unlisted companies have a high-risk factor, but some also possess a high potential factor. To summarize, it is crucial to identify companies with future potential to reap the benefits of unlisted investments.

Frequently Asked Questions on Unlisted Stock Companies

• How much investment is enough in unlisted stocks?
  Experts suggest that 10-12% of investments are optimal in the case of unlisted stocks as these are risky and offer less liquidity than listed stocks.

• What are some popular unlisted companies?
  Swiggy, Dream11, Serum Institute of India, Razorpay, National Stock Exchange(NSE), Parle products, and Chennai Super Kings are some of the popular unlisted companies in India.

• What are the income tax rates on unlisted shares?
  Taxation on unlisted shares is quite similar to the common taxation procedures. The Income tax rates on unlisted shares are different for Short Term Capital Gain(STCG) and Long Term Capital Gain(LTCG). LTCG – 20% with Indexation and STCG – taxed as per the income tax slab rates.

• How can I check my unlisted stocks online?
  Once you have bought the unlisted stocks, you must log into your Demat A/c and simply check your portfolio.

• Do I have to pay STT on unlisted stocks?
  Securities Transaction Tax(STT) is only applicable to listed stocks. Unlisted shares are subject to STT when they become publicly listed at the IPO stage.