Investment in Unlisted Stocks | Listed and Unlisted company
Stock market listed shares are protected by the Securities and Exchange Board of India’s (SEBI) regular monitoring and rules. Unlisted private company shares provide enormous prospects for development and exposure, but they also carry the danger of less stringent rules. If such high-growth chances pique your attention, this article will explain more about Unlisted Shares.
In this article, we will discuss all unlisted stocks, what are unlisted stocks, their types, valuation, how you can invest in unlisted private company etc. Also, a detailed comparative analysis of Listed vs Unlisted companies is covered in the article.
What is Unlisted Company – Should I Invest in Unlisted Companies?
What are 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 the 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 shares include the companies that 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 can access 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 unregistered domain is the suitable space for you.
Different Types of Private Equity Financing Stages
Private Equity Financing Stages
- There are different types of private equity financing stages, as shown in the above diagram.
- There is also Series A, B, C and D funding. For Example, PayTM has raised a series of funding from multiple investors – Ant Financial, Mountain Capital, Alibaba Group, SoftBank.
- Flipkart, 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.
- Known Companies, which are subsidiaries of the known parent company. Example: HDB Financial Services, Reliance Retail, Reliance Jio etc.
- New-age 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 unlisted share 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 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, these companies value the company and can be used as a reference point.
How can you Invest in Private/ Unlisted companies?
This part explains in detail how to buy unlisted shares or how to invest in unlisted companies.
- Intermediaries and start-ups –
● Some start-ups can help you own private assets that offer stocks in demat account with a minimum investment amount of Rs.50,000 per company.
● These companies help look for a buyer, but they don’t guarantee that the sale will occur. Companies ask you to pay money upfront, and the delivery is done on a T+3 basis.
● Counterparty risk 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 allowing employees to buy a certain number of shares at a predefined price after a predetermined period.
● You can check with your broker for such transactions.
- Buy from Promoters Directly
● These are called Private Placements, and many investment banks and wealth managers facilitate the purchase of these private assets.
● Network drives this kind of purchase, and you should be looking at a 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. Make them understand that there is a risk of the prices falling after listing. Ride-hailing giant Uber, listed recently, is a prime example of a company losing money post listing.
- Equity crowdfunding platforms, Angel Funds
● Individuals invest in a new business venture in exchange for standard or preferred equity.
Comparative Analysis – Listed vs Unlisted Stocks
- Taxation (LTCG)
● For Listed Stocks, LTCG is taxed at 10% (where the holding period of the investment is more than one year).
● Whereas for Unlisted Stocks, LTCG is taxed at 20% with indexation benefit, i.e. you can add inflation cost. Here, the holding period is more than two 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 the early stage of the revolution, company’s due diligence is investors’ responsibility, there is also no transparency in 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 in 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 with 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 crucial role while choosing an investment in the space of unlisted shares.
- Due Diligence Process
● Listed Stocks: Less Stringent
● Unlisted Stocks: Rigorous
What Should a Retail Investor Do?
- A retail investor should invest only the surplus money in unlisted companies. If you are left with surplus funds after meeting your financial goals, then only go for investment in unlisted stocks. Even if you lose this money, it should not matter to you.
- It will help if you understand your risk profile. As the commission rates are very high, many intermediaries promote such private assets.
- To make informed decisions with thorough due diligence in discussion with your Investment advisor.