Investment in Unlisted Stocks | Listed vs Unlisted Stocks Comparison
In this article, we will discuss all about unlisted stocks, what are unlisted stocks, their types, valuation, how can you invest in unlisted companies etc. Also a detailed comparative analysis of Listed vs Unlisted companies is covered in the article.
All About Unlisted Stocks – Should I Invest in Unlisted Companies?
What Are Unlisted Stocks?
- Listed Stocks
- A company whose shares are traded on an official stock exchange is called a Listed company.
- For example, companies like Reliance Industries, HDFC Bank, Kotak Mahindra Bank are all listed companies that are listed on Bombay Stock Exchange or National Stock Exchange.
- You can buy and sell your shares on these stock exchanges through your broker/online brokerage account.
- Unlisted Stocks
- Whereas, Unlisted companies are privately owned companies that have not yet gone through the Initial Public offering (IPO) process. For Example, Reliance Jio, Ola, OYO etc.
- The main advantage of investing in this unlisted space is that you get access to new-age businesses that are high on innovation.
- If you wish to invest in new business ideas, and at different stages of their evolution, the unlisted domain is the right space for you.
Different Types of Private Equity Financing Stages
- There are different types of stages in private equity financing, which is shown in the above diagram.
- There is also a Series A, B, C and D funding. For Example, PayTM has raised series of funding from multiple investors – Ant Financial, Mountain Capital, AliBaba Group, SoftBank.
- Flipkart which was acquired by Walmart has raised funding in over 20+ rounds from multiple investors including Microsoft, SoftBank, Tiger Global, Morgan Stanley Investment Management (MSIM), and many more.
Types of Unlisted Companies
- Known Companies which are subsidiaries of known parent company. Example : HDB Financial Services, Reliance Retail, Reliance Jio etc.
- New age companies in Finance, e-commerce, medical technologies, gaming – ANI Technologies (OLA), One97 Communications (Paytm), OYO, Dream11 etc.
How are these Unlisted Companies Valued?
- Since shares of unlisted companies are not listed on the stock markets, there is no market price. Instead, a fair value of the share is arrived at by investors and the promoters.
- Unlisted shares enter trading circles when employees dilute their stock options or through private placements by promoters or general shareholders.
- No formal market exists for unlisted equities. Promoters, especially of startups, use this route to raise small amounts of working capital without higher levels of stock dilution, and get a valuation reference point for further fundraising.
- While raising equity from private equity/strategic investors, the company is valued by these companies and can be used as a reference point.
How can you Invest in Private/ Unlisted companies?
- Intermediaries and start-ups –
- There are start-ups that can help you in owning private assets that offer stocks in demat account with a minimum investment amount of Rs.50,000 per company.
- These company help in looking for a buyer but they don’t guarantee that the sale will take place. Companies ask you to pay money upfront and the delivery is done on T+3 basis.
- Counterparty risk – which means you may transfer the funds, but there is no guarantee that you may get the shares. Seek your investment advisor’s advice before investing in these stocks.
- Buy from existing employees with ESOPs
- Companies give stock ownership plans to employees by giving employees the opportunity to buy certain number of shares in the company at a predefined price after a predetermined period.
- You can check with you broker for such transactions.
- Buy from Promoters Directly
- These are called Private Placements and many investment banks and wealth managers facilitate purchase of these private assets.
- Network drives this kind of purchase and you should be looking at significant amount of stake.
- Buy PMS or AIFs which pick up unlisted shares
- Apart from retail investors, financial institutions running portfolio management services (PMS) and alternative investment funds (AIF) pick up unlisted shares.
- Many of these funds invest to “capture pre-IPO valuations” to take advantage of a rise in valuations following an initial public offering. do make them understand that there is a risk of the prices falling after listing. Ride hailing giant Uber, which was listed recently is a prime example of a company losing money post listing.
- Equity crowd funding platforms, Angel Funds
- Individuals make an investment in a new business venture in exchange for common or preferred equity
Comparative Analysis – Listed vs Unlisted Stocks
- Taxation (LTCG)
- For Listed Stocks, LTCG is taxed at 10% (where holding period of the investment is more than 1 year).
- Whereas, for Unlisted Stocks, LTCG is taxed at 20% with indexation benefit ie. you can add inflation cost. Here, holding period is more than 2 years.
- Listed Stocks : Investing process is easy and less paperwork is required.
- Unlisted Stocks : Investing process is cumbersome, more paperwork is required if stock is not available in Demat form. There can be a delay in delivery. Counterparty risk is also involved.
- Listed Stocks : Listed companies are well-established, in steady state, IPO due diligence is done, regulatory filings and investors presentations are available.
- Unlisted Stocks : Unlisted companies are in early stage of revolution, company’s due diligence is investors’ responsibility, there is also no transparency is the financials.
- Listed Stocks : Better Liquidity. Better for Large cap and Mid cap companies where large volumes are there than the Small cap companies.
- Unlisted Stocks : Poorer Liquidity, unless your broker has made buys available you can’t liquidate. Another risk of buying unlisted shares on the hope to cash out on IPO is that the IPO may not happen anytime soon. There is no guarantee about the IPO. Also, there is no assurance that you would get an exit before IPO comes
- Risk Associated
- Listed Stocks : Lower risk associated
- Unlisted Stocks : Higher risk associated
- Listed Stocks : Negotiation is not required for valuation as it is market-driven.
- Unlisted Stocks : Negotiation Required for future earnings growth, right buying price etc. Professionally managed companies or companies having non-promoter institutional holding are seen as less risky bets. Also, the promoter’s willingness to protect the interests of the minority shareholders play a key role while choosing an investment in the space of unlisted shares.
- Due Diligence Process
- Listed Stocks : Less Stringent
- Unlisted Stocks : Rigorous
What a Retail Investor Should Do?
- A retail investor should invest only the surplus money in unlisted companies. If you are left with surplus funds after meeting you financial goals, then only go for investment in unlisted stocks. Even if you lose this money it should not matter to you.
- You should understand your risk profile. As the commission rates are very high there are lot of intermediaries that are promoting such private assets.
- So make informed decisions with a thorough due diligence in discussion with your Investment advisor.