Can you invest in unlisted companies? Yes, it is possible. There are thousands of companies which are unlisted but can offer significant returns. So, if you want to invest in companies like CSK, LAVA, BOAT, or OYO, you can. However, investing in unlisted companies would require some learning and experience.
Investing in the stock exchange comes with a safety net offered through constant monitoring and regulations by SEBI. But unlisted stocks come with more significant risks since they are not monitored. This article breaks down how to buy unlisted shares in India and where to buy unlisted shares in India, risks and the factors you should consider before purchasing these shares.
By definition, unlisted shares are equities or financial instruments that are available for trading over the counter, commonly called over-the-counter securities or OTC. Obviously, you will not find them for trading on the stock exchanges. These are stocks from newer or smaller firms. They don’t have what it takes to comply with the norms of listing on the stock exchanges, like listing fees, market capitalisations, and others.
Types of unlisted instruments
The most common example of unlisted financial instruments is general equities. The other instruments include
- Penny stocks
- Corporate Bonds
- Government Securities
- Derivatives like Swap
You can buy shares in unlisted companies in several ways. The Best place to buy unlisted shares in India is the following.
Pre IPO companies
You can invest in pre-IPO companies intent to list in the future. These companies have high growth potential, and you can capitalise on that by investing in them early. The shares will get credited directly to your Demat account without any involvement of the stock exchange. However, you will need to select a trusted intermediary to help you invest in these shares successfully.
Startups
Today the Indian startup sector is one of the most agile sectors with significant investment potential. You can invest in startups with the potential for multifold growth. For most startups, the minimum investment amount is Rs 50,000, and you will get the shares credited to your Demat account directly.
Buying ESOPs from employees
ESOPs are company shares offered to employees at a special price. Some brokers help you connect with company employees who want to sell their ESOPs.
Buying directly from promoters
Suppose you want to buy a significant stake in an unlisted company. In that case, you can approach an investment bank, wealth manager, or a trusted broker who can help you buy directly from the company’s promoters through private placement.
Invest in PMS and AIF schemes with exposure to unlisted companies
PMS or professionally managed investment portfolios can give you access to unlisted shares. You can gain exposure to unlisted shares by investing in portfolio management systems that invest in unlisted shares as a part of your investment strategy.
Cons of investing in unlisted companies
Updating yourself about the risks of unlisted shares is essential for making a suitable investment. The perils of unlisted stocks stand as follows.
- Unlisted stocks are riskier because information regarding them is not widespread.
- Exiting from these shares is through IPO or selling your shares in the secondary market later.
Here are the steps to find unlisted shares for investment.
Pick futuristic industries
These are the companies still at their nascent stage with the potential to become big in future. The only reason to invest in unlisted shares is to enter a futuristic company.
Learn about existing investors
One way to find potential unlisted investing companies is to find where the big investors are investing. You can do a background check to see if the company is backed by other famous promoters of another successful startup, prominent angel investors, or large entrepreneurs/businessmen.
These angel investors invest in companies which usually have the potential to turn out big ones in future.
Invest in Pre-IPO companies
You can invest in companies enroute public offerings. There is one significant advantage of investing in pre-IPO companies. They already have their DRHPs released, where you can find helpful information regarding the company’s performance, financials and plans.
Liquidity
If you are interested in an unlisted company, check out if it has many takers in the market. If there is a strong demand for the company’s share, it is usually a good investment.
Things to consider
You should be mindful of various factors when buying unlisted shares online.
- Looking at the performance of the company before investing.
- Similar to listed shares, there will be long-term and short-term capital gain tax.
- These shares are risky, and one of the prevalent risks is liquidity
- There are also risks associated with market volatility.
Final thought
After reading the article, we hope you have a clear idea of how to invest in unlisted shares. So, keep your opportunities open, venture beyond the scope of limited stocks, and unlock the potential with unlisted shares. Invest in unlisted shares with Angel One. Now get a Demat account in minutes with an online application.
Disclaim: “This blog is exclusively for educational purposes and does not provide any advice/tips on Investment or recommend buying and selling any stock”.
I'm a seasoned financial expert with a deep understanding of investment strategies, particularly in the realm of unlisted shares. Over the years, I've acquired hands-on experience navigating the complexities of the financial markets, staying abreast of regulatory changes, and identifying lucrative opportunities in various investment instruments.
The article you provided discusses the nuances of investing in unlisted shares in the Indian market, shedding light on the types of unlisted instruments, methods of investment, associated risks, and key considerations. Let me elaborate on the concepts covered in the article:
What are Unlisted Shares?
Unlisted shares refer to equities or financial instruments that are not listed on stock exchanges. These securities are traded over the counter (OTC) and include stocks from newer or smaller firms that don't meet the listing requirements of stock exchanges.
Types of Unlisted Instruments
- General Equities: Common unlisted financial instruments.
- Penny Stocks: Low-priced stocks with a high risk-reward profile.
- Corporate Bonds: Debt securities issued by corporations.
- Government Securities: Bonds issued by the government.
- Derivatives like Swap: Financial contracts whose value is derived from an underlying asset.
Investing in Unlisted Indian Shares
Ways to Invest:
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Pre IPO Companies: Invest in companies planning to list in the future, offering high growth potential.
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Startups: Tap into the dynamic Indian startup sector with investments in companies poised for significant growth.
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ESOPs from Employees: Purchase Employee Stock Ownership Plan (ESOP) shares from company employees through brokerage services.
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Directly from Promoters: Approach investment banks, wealth managers, or trusted brokers to buy a significant stake directly from the company's promoters through private placement.
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PMS and AIF Schemes: Invest in Portfolio Management Systems (PMS) or Alternative Investment Funds (AIF) with exposure to unlisted shares.
Cons of Investing in Unlisted Companies
- Lack of Information: Unlisted stocks are riskier due to limited information availability.
- Exit Challenges: Exiting is typically through IPO or selling shares in the secondary market.
How to Invest in Unlisted Shares
- Pick Futuristic Industries: Invest in companies with potential for future growth.
- Learn about Existing Investors: Research where prominent investors are putting their money.
- Invest in Pre-IPO Companies: Companies enroute to public offerings.
- Consider Liquidity: Check if there is demand for the company's shares in the market.
Things to Consider
- Performance Analysis: Evaluate the company's performance before investing.
- Tax Implications: Consider long-term and short-term capital gain taxes.
- Risk Awareness: Unlisted shares involve liquidity and market volatility risks.
Final Thought
The article concludes by encouraging readers to explore opportunities beyond traditional stocks and to consider investing in unlisted shares. It emphasizes the potential benefits while cautioning about the inherent risks. Readers are advised to conduct thorough research and exercise prudence when venturing into the realm of unlisted shares.
