How to Buy Unlisted Shares

Unlisted shares have gained traction among investors seeking equity opportunities beyond public stock exchanges. These shares represent companies that are not listed on formal exchanges like NSE or BSE. Investors often consider them for early access to growth-oriented businesses or diversification.

Unlisted shares are equity securities of companies that are not traded on any recognized stock exchange such as the NSE or BSE. These shares are issued by privately held businesses, start-ups, or pre-IPO firms that raise capital through private placements, employee stock ownership plans (ESOPs), or funding rounds before going public.

Unlike listed shares, which are actively traded and have transparent market prices, unlisted shares are exchanged privately—often between investors, intermediaries, or company employees. This makes them less liquid and riskier, as finding buyers or sellers can be challenging and valuations may vary.

Types of Companies Offering Unlisted Shares

• Private Limited Companies: Issue shares to raise capital for expansion or strategic initiatives.
  

• Government Enterprises: Offer unlisted shares during disinvestment or partial privatization phases.
  

• Pre-IPO Companies: Sell shares before public listing to attract early-stage investors.
  

• Start-ups: Use unlisted shares to secure venture capital funding or reward early employees.
  

• ESOP-Driven Entities: Allow employees to sell vested shares through private transactions.

Investing in unlisted shares allows investors to access early-stage opportunities in potentially high-growth companies. However, these investments come with higher risks, limited liquidity, and valuation uncertainty, making them more suitable for experienced or long-term investors with a higher risk appetite.

Unlisted shares have several unique characteristics that distinguish them from listed stocks. Understanding these features is crucial for investors exploring opportunities in private equity or pre-IPO markets, where liquidity, valuation, and regulation differ significantly from public markets.

Lack of Market Listing

Unlisted shares are not traded on public stock exchanges like the NSE or BSE. Instead, they are bought and sold through over-the-counter (OTC) transactions, private placements, or intermediaries. This lack of centralized trading limits liquidity and may make it harder for investors to exit their positions quickly.

Valuation and Pricing

Unlike listed shares, whose prices are determined by market supply and demand, unlisted share valuations are based on negotiations, company fundamentals, or recent funding rounds. As a result, prices can vary widely, and there may be limited visibility into the company’s true market worth.

Role of Regulatory Oversight

Unlisted companies are not directly regulated by SEBI like listed entities, but their share transactions must comply with provisions of the Companies Act, SEBI’s private placement norms (where applicable), and RBI/FEMA rules. These rules ensure that private transactions remain legitimate, transparent, and in line with corporate governance standards.

Quick Summary of Key Points

• Traded privately or over-the-counter, not on stock exchanges.
  

• Valuation depends on internal assessments or funding round pricing.
  

• Governed by SEBI and Companies Act regulations.
  

• Typically less liquid than listed securities.
  

• Offer early-stage investment opportunities with higher risk.

While unlisted shares are less visible than publicly traded stocks, they attract investors who seek unique opportunities and the potential for higher long-term returns. These investments provide access to emerging businesses and pre-IPO firms that are yet to be listed on formal exchanges.

Early Exposure to Potential High-Growth Companies

Investing in unlisted shares offers early access to fast-growing private companies that may later go public. If the company performs well or lists at a higher valuation, investors can benefit from substantial capital appreciation. This early participation is one of the main appeals of the unlisted market.

Portfolio Diversification

Adding unlisted stocks to a portfolio helps reduce dependence on traditional listed equities. Because these investments respond differently to market cycles, they provide an effective way to diversify risk and balance exposure across asset classes.

ESOP Liquidity

Many start-ups and private companies use Employee Stock Ownership Plans (ESOPs) to reward staff. Unlisted share platforms allow employees and early shareholders to liquidate vested ESOPs, providing liquidity before a company’s IPO.

Investors consider unlisted shares for their growth potential, diversification benefits, and early-stage access. However, these advantages come with higher risk and limited liquidity, requiring careful research and a long-term investment outlook.

While unlisted shares offer early access to promising companies and potential high returns, they also come with certain risks that investors should carefully evaluate before investing. These risks relate to liquidity, transparency, valuation accuracy, and regulatory obligations — all of which can impact returns and exit options.

Limited Liquidity

Since unlisted shares are not traded on stock exchanges, buying or selling them can take considerable time. Investors may have to rely on private deals or intermediaries, which makes these shares less liquid compared to listed equities.

Lack of Transparency

Privately held companies are not required to share detailed financial or operational disclosures publicly. This limited access to information makes it challenging for investors to assess performance and governance, increasing the overall investment risk.

Price Volatility and Valuation Challenges

The absence of a daily market price means valuations are subjective, often based on negotiations, funding rounds, or internal estimates. This can lead to price discrepancies and potential overvaluation, particularly in early-stage companies.

Regulatory and Tax Implications

Investments in unlisted shares are subject to SEBI regulations, the Companies Act, and capital gains tax rules. Non-compliance or misunderstanding of these norms can affect post-tax returns and lead to regulatory challenges, especially in cross-border or secondary transactions.

In essence, while unlisted shares can enhance portfolio returns, investors must weigh these risks carefully and perform detailed due diligence before committing capital.

Investing in unlisted shares follows a different process compared to buying listed stocks on exchanges. These shares can be acquired through several regulated channels, each with its own requirements, risks, and eligibility criteria. Understanding these methods helps investors make well-informed and compliant investment decisions.

Through Online Platforms and Marketplaces

Several online financial platforms and private marketplaces facilitate the buying and selling of unlisted shares. Investors must complete KYC verification and onboarding before accessing these platforms. These portals often list shares of start-ups, pre-IPO companies, or private firms that are vetted for authenticity.

Through Promoters or Company Employees

Investors may acquire unlisted shares directly from company promoters or employees looking to sell their vested holdings. This is common in start-ups and pre-IPO firms where employees liquidate ESOPs (Employee Stock Ownership Plans) before listing. Such transactions usually occur under negotiated terms and require legal documentation for transfer.

Through Intermediaries or Dealers

Authorised intermediaries or share dealers act as connectors between private buyers and sellers. They help in verifying company details, managing paperwork, and ensuring compliance with regulatory standards. However, investors should engage only with registered or reputed intermediaries to avoid fraud or misrepresentation.

Via Portfolio Management Services (PMS)

Some Portfolio Management Services (PMS) providers offer curated exposure to unlisted equity portfolios. These professionally managed funds pool capital from accredited investors to buy stakes in promising private companies under SEBI’s regulatory framework. This approach is suitable for high-net-worth individuals seeking diversified access to private markets.

Investors can buy unlisted shares through multiple channels, from digital platforms to PMS-managed portfolios. The right method depends on your financial goals, risk tolerance, and access to private investment networks. Conducting proper due diligence and ensuring regulatory compliance are essential to safeguard your investment.

Buying unlisted shares in India involves a defined process to ensure proper documentation, regulatory compliance, and transparent transfer of ownership. The following step-by-step guide explains how a typical transaction takes place for investors interested in this segment.

Step 1: Research and Identify the Company

Begin by conducting thorough research on the company’s financials, business model, and valuation trends. Review recent funding rounds, investor participation, and potential for growth or IPO listing. Selecting the right company is the foundation of a successful unlisted investment.

Step 2: Approach a Registered Intermediary

Once you’ve chosen a company, contact a registered intermediary or dealer who is authorised to facilitate unlisted share transactions. Ensure they are reputable and follow SEBI and Companies Act guidelines to avoid counterparty risks or fraudulent dealings.

Step 3: Execute Agreement and Payment

After finalising the transaction details, both parties must sign a share transfer agreement. The payment is usually made through bank transfer or other traceable modes. The intermediary verifies documents such as PAN, Aadhaar, and Demat details to ensure compliance and authenticity.

Step 4: Demat Credit

Once the transaction is approved and verified, the shares are transferred electronically to your Demat account by the company’s depository participant (DP). You will receive a confirmation statement reflecting the new holdings under your name.

Following this structured process ensures a secure and compliant transfer of unlisted shares. Always perform detailed due diligence and work with authorised intermediaries to safeguard your investment and ensure smooth execution.

Valuation depends on multiple parameters rather than just market forces:

Factors That Influence Price

• Recent funding round valuations
  

• Financial performance and earnings
  

• Comparable company analysis
  

• Liquidity and shareholding demand
  

Understanding how capital gains from unlisted equity are taxed in India:

Holding Period and Classification

• Short-term: Held for less than 24 months
  

• Long-term: Held for 24 months or more
  

Tax Rates

• Short-term Capital Gains: Taxed as per applicable income slab
  

• Long-term Capital Gains: Taxed at 20% with indexation benefit
  

Exiting unlisted shares requires thoughtful planning since these securities are not traded on public stock exchanges. Understanding the available exit options helps investors unlock returns and manage liquidity effectively. Depending on the company’s growth stage and market conditions, there are several potential ways to exit an unlisted investment.

Sale to Existing Investors or Private Buyers

One of the most common exit routes is selling shares to existing investors, promoters, or new private buyers through off-market transactions. Such deals are typically arranged via authorised intermediaries or private networks, ensuring compliance with share transfer regulations and verification procedures.

Liquidity Events

Investors can also exit during liquidity events such as buybacks, mergers, or acquisitions. In these scenarios, the company repurchases its own shares or is acquired by another firm, providing shareholders an opportunity to realise their investment at an agreed valuation. These events are often driven by corporate growth or restructuring.

IPO Listing

When a company decides to go public through an IPO (Initial Public Offering), its previously unlisted shares become listed and tradeable on stock exchanges. This transition offers investors a direct exit route, allowing them to sell shares in the open market after the mandatory lock-in period ends, typically six months post-listing.

The right exit strategy for unlisted shares depends on factors like market conditions, company performance, and investor objectives. Planning exits in advance and staying updated on company developments ensures smoother and efficient realisation of investment value, subject to market conditions and company performance.

The legal and compliance framework surrounding unlisted equity transactions:

SEBI Guidelines

All unlisted equity transfers must comply with investor protection regulations issued by SEBI.

RBI and FEMA Rules

Cross-border shareholding transactions must adhere to FEMA (Foreign Exchange Management Act) and RBI guidelines, particularly in cases involving NRIs.

While not a recommendation, unlisted shares may appeal to informed investors with higher risk appetite:

• Investors with long-term horizons
  

• Those who understand private markets
  

• Individuals capable of conducting due diligence independently

Before investing in unlisted shares, it’s essential to evaluate certain factors to ensure a safe and well-informed decision. Unlike publicly traded stocks, these investments involve limited transparency and liquidity, making due diligence a critical step in the process. The following points can help mitigate risks and enhance your investment experience.

Review the Company’s Financials and Shareholder Agreements

Examine the company’s financial statements, valuation reports, and ownership structure before investing. Reviewing shareholder agreements helps you understand your rights, voting power, and exit provisions as a minority investor.

Validate the Source and Authenticity of the Shares

Always verify that the shares are obtained through legitimate and verified sources, such as registered intermediaries or company-authorised platforms. This step helps prevent fraud and ensures the transaction complies with applicable laws.

Understand Lock-In Periods (If Any)

Investors should be aware of lock-in periods that may restrict the sale of unlisted shares for a certain duration, especially before an IPO or liquidity event. Knowing these restrictions allows improved planning for liquidity and returns.

Ensure Your Demat Account Can Hold Unlisted Securities

Confirm that your demat account is enabled to hold unlisted shares. Certain depository participants (DPs) require additional permissions or documentation for such holdings, so verify this before executing the transaction.

Careful evaluation of these factors ensures a secure, transparent, and compliant investment experience. Conducting due diligence and engaging only with authorised entities are key steps in making informed decisions when buying unlisted shares.

Unlisted shares provide an alternative avenue for investing in equity outside traditional markets. While they provide an early-stage entry into potentially high-growth companies, the risks are also higher due to liquidity constraints and limited data disclosures. Prospective investors should always conduct due diligence, understand valuation dynamics, and comply with regulatory norms before participating.

This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.