Introduction on Unlisted Shares:
The shares/securities, that are not listed on any exchange fall under the segment, “Unlisted stocks”. In India, this segment started almost a decade back, and off late it is gaining ground with increasing activities in the primary market. Investors must note that Unlisted shares are riskier than listed shares as its liquidity is limited. Such securities are less transparent and carry risks of no dividend, capital loss, dilution etc. Currently this segment is not regulated and is taking place solely on trust factor.
In the unlisted markets, start-ups, unicorn stocks, IPL Team’s counters are the primary stocks while usual sectors like chemical, financial companies, IT, Infra as well as delisted, suspended shares from exchanges are in the fray. Some dealers also allow international companies’ unlisted shares on their platforms.
This segment is meant for well informed investors who are capable of keeping a track of their investments and monitor companies they have invested in. Trades are settled on an off market basis for this segment and bills are issued for the deals done. According to unlisted market operators, since these trades are done on off-market basis, bills does not reflect STT, GST, Brokerage etc but a stamp duty is levied on the cost of the deal.
Unlisted shares are traded only on OTC i.e. Over-the-counter markets. Common stocks, penny stocks, corporate bonds, government securities, and derivative products are examples of unlisted stocks.
Though buying of unlisted shares has become easy now a days, ticket size of investment, (which is always higher in most of the cases) and price varies on the basis of demand & supply. As such investments are normally of long term nature, it is not meant for traders or impatient investors who are looking for overnight gains. With the entry of Alternative Investment Funds (AIF) this segment is making small investors a scary lot.
Investors needs to be vigilant, patient, and must have surplus funds for investment in this market which is meant for long term. Investing in start-ups and intermediaries, purchasing ESOPs directly from employees or promoters, or investing in PMS and AIF schemes that pick up unlisted shares are all ways to invest in India’s top unlisted companies.
As there is a significant non-founder capital being put into businesses before they go public, an unlisted securities trading platform is considered to be very useful. It has potentially opened a new market segment. In many countries there are formal markets for unlisted securities.
Pros and Cons:
Typically, unlisted companies do not trade on any formal stock exchange. This is because smaller or newer firms do not choose to or cannot comply with certain requirements such as listing fees, market capitalization, etc. The most common type of unlisted financial instrument is the common stock.
SEBI is a statutory regulatory body established on the 12th of April, 1992. It monitors and regulates the Indian capital and securities market while ensuring to protect the interests of the investors, formulating regulations and guidelines.
All registered companies, both listed and unlisted, which raise public funds through sale of shares will be answerable to the Securities and Exchange Board of India (SEBI).
New companies Bill to ensure privately-held, unlisted companies can’t escape Sebi scrutiny. All registered companies, both listed and unlisted, which raise public funds through sale of shares will be answerable to the Securities and Exchange Board of India (SEBI). Under various clauses SEBI is covering unlisted security market.
Unlisted companies require huge capital, which they get from promoters, shareholders and as loans from banks & FIs. As far as capital market regulations are concerned; they are administered by the ministry of finance through the stock exchanges.
Unlisted shares are becoming more popular as many corporates are preferring to go public and informed investors want to grab such stocks before listing to reap rewards. Many aspirant corporates also prefer to offload some shares as pre-IPO placements and such shares include ESOPs (Employees Stock Options), exit by private equity investors, seed capital by start-ups etc.
Taxation on Unlisted shares:
Since unlisted shares are different from listed ones, the tax implications are different as well. Unlisted shares if sold within 24 months, attract short-term capital gain tax on the profits and thus are taxed at a 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 (Fair Market Value) 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 sell 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.
Unlisted Stocks get taxed as short term and long term capital gains and enjoy indexation benefits. LTCG on sale of Unlisted shares is taxable at 10% without indexation and 20% with indexation. STCG on Unlisted Stocks is taxable at applicable marginal tax rate.
As these stocks are not sold on the listed stock exchange, no STT (Securities Transactions Tax) is levied on these stocks. The tax implication of these shares is also different from other shares listed on the recognised stock exchange where STT is paid.
The applicability of capital gain tax would depend on whether the unlisted stocks are long term or short term. If the unlisted stocks are held for less than 24 months, then the gains earned are taxable as short term capital gains. Short-term capital gains are taxable according to the investor’s income tax slab.
Similarly, long-term gains arise if the unlisted stocks are held for more than 24 months before selling. Long term gain tax is levied at 20% with the benefit of Indexation. Indexation is the benefit allowed to increase the asset’s cost to give the effect of inflation.
Unlisted shares taxability
| Taxation Rate | With Indexation Benefit | |
| STCG | Applicable Tax Slab of Investor | NA |
| LTCG | 20% | 10% |
We can conclude that it is completely safe to buy unlisted shares if the investor has gone through the required process of due diligence. Unlisted trades are encouraging by registered as well as unregistered broking houses and all transactions are done on official payment basis and securities are transferred under demat mode only. Though some shares are also dealt in physical mode, but demat is the most accepted and safer mode for unlisted shares.
Interested investors must look for a comparative unlisted shares quotes flashed on concerned brokers/agents web site and place the order, follow KYC process and get shares in demat in your beneficiary account. Normally such deals are settled within two working days. Infact when there is no technical hitch or any other delays, it is also done within a day.