Fundamentally, there are two types of financial securities and instruments: the listed and the unlisted.
Listed shares are company shares that may be bought and sold on an official stock market such as the Bombay Stock Exchange (BSE) or the National Stock Exchange (NSE). Stock markets list firms like ITC, Infosys, and HDFC, and their stocks can be exchanged through a broker or an online brokerage account. The market regulator, the Securities and Exchange Board of India, keeps a close eye on listed stocks (SEBI).
Unlisted equities, on the other hand, will not be allowed to be traded on stock exchanges since they do not meet specific listing standards. Because they are traded in over-the-counter (OTC) markets, they are also known as OTC securities. Unlisted shares are subject to fewer regulatory restrictions than listed firms, which are tightly controlled by the SEBI.
Unlisted firms are the issuers of unlisted stocks. Because they have not yet gone through the IPO process, such businesses are held privately.
New-age companies such as BYJU’S, Paytm, Ola, and OYO are instances of unlisted companies. While some investors have expressed an interest in maximising earnings by investing in pre-IPO tech-first, innovative firms, there is another group of unlisted companies. Subsidiaries of well-known publicly traded parent firms are among them. For example, Hero Corp is an unlisted subsidiary of HeroMotoCorp, and Reliance Retail is an unlisted retail effort of Reliance Group.
When employees or existing investors dissolve their stock options before a firm goes public, unlisted shares become accessible to trade. When these equities are privately placed with investors, the market’s float of unlisted shares grows.
Behind the conventional stock exchanges, a massive stock market operates every day. This is the unlisted stock market. Unlisted shares are traded on the Over-the-Counter (OTC) market, and you can learn all about them in this article.
What exactly are unlisted stocks?
Unlisted shares/stocks are those that are not listed on conventional stock exchanges. JIO, for example, has unlisted shares, as does OLA. Similarly, many businesses have yet to go public because they do not meet the standards for a formal stock exchange listing.
Unlisted shares are riskier than listed shares since their liquidity is restricted. They are less transparent, but their valuations are more solid. So, if you can find an unlisted share with all the potential to be listed and a firm with growth potential, your returns will be much increased.
Is it safe to invest in unlisted stocks?
Unlisted shares are traded over-the-counter (OTC), which means that buyers and sellers trade the instruments directly rather than through middlemen. As a result of the lack of regulation and organisation in this market, trading in unlisted shares carries a credit risk.
Unlisted shares, on the other hand, are typically exchanged between companies, large brokerage firms, and HNIs or institutional clients. As a result, the risks of unlisted shares are reduced based on the reputation of market participants. If you choose the correct intermediary for trading in unlisted shares, you reduce your risk.
The primary danger, however, is that whether the company whose unlisted shares you are buying goes public or not, the price of the shares will rise or the company will close due to lack of business. Before investing in any unlisted stock, you must conduct a thorough research of the company’s fundamentals and other aspects.
The main risk is that, whether or not the company whose unlisted shares you are purchasing goes public, the price of the shares will rise or the company will close owing to a lack of business. Before investing in an unlisted stock, you should investigate the company’s fundamentals and other features thoroughly.
The distinction between unlisted and delisted shares
Unlisted and delisted shares are not the same thing. These two sorts of shares are very distinct. Unlisted shares are those that have not yet been listed on stock exchanges, whereas delisted shares are those that were originally listed but have since been removed from the listed shares category for various reasons.
On OTC marketplaces, you can trade and invest in unlisted shares, but you cannot trade or invest in delisted shares. Delisted shares are not available on any platform, including conventional stock exchanges and over-the-counter markets.
The difference between unlisted and delisted securities
The terms “unlisted” and “delisted” are not interchangeable. These two types of shares are quite different. Unlisted shares are those that have not yet been listed on stock exchanges, whereas delisted shares were once listed but have since been withdrawn from the category of listed shares for various reasons.
Unlisted shares can be traded and invested in on OTC marketplaces, but delisted shares cannot be traded or invested in. Shares that have been delisted are no longer available on any platform, including stock exchanges and over-the-counter marketplaces.
Companies may have unlisted shares if they do not intend to do an initial public offering (IPO) or do not meet SEBI’s standards for listing the shares on any stock market, such as the NSE or BSE. Companies, on the other hand, have delisted shares when they either do not follow any SEBI or stock exchange disclosure standards and hence are delisted from stock exchanges, or the firm’s management wishes to delist the company itself.
Valuation of unlisted shares
Unlisted shares are valued using the Fair Market Value (FMV) approach. FMV is computed by underwriters or investment bankers because unlisted shares are not traded on a stock exchange and hence have no true market price.
The book value of all the company’s liabilities (L) is subtracted from the book value of all the company’s assets (A) to arrive at the fair market value. The result is then multiplied by the PV of equity shares and divided by the entire amount of paid-up equity share capital (PE) as shown on the company’s balance sheet.
(A-L) * PV/PE = FMV
The DCF or Discounted Cash Flow approach is another means of estimating the value of unlisted shares. To calculate the present value of the shares, all future cash flows are forecasted and then discounted at a specific rate.
This strategy is tough because all of the cash flows are expected rather than real, yet it is popular among unlisted share investors.
Implications for Taxation
Because unlisted shares differ from listed shares, the tax implications are also different. If unlisted shares are sold within 24 months, the proceeds are subject to short-term capital gain tax, which is taxed at the marginal rate. If it is sold after 24 months, however, long-term capital gain tax of 20% will apply, and you will also benefit from indexation. However, until the shares are listed on a professional stock exchange, earnings are calculated using the FMV.
If the unlisted shares you bought are listed on the stock exchange and you sell them, the tax implications will be the same as if you sold listed equity shares, which means long-term capital gain tax at 10% on gains over Rs. 1 lakh without the benefit of indexation.
Unlisted Business Types
Known Companies are subsidiaries of a well-known parent corporation. HDB Financial Services, Reliance Retail, Reliance Jio, and others are examples.
ANI Technology (Ola), One97 Communications (Paytm), OYO, Dream11, and others are involved in new-age finance, e-commerce, medical technologies, and gaming.
What is the value of these unlisted companies?
There is no market unlisted share price because shares of unlisted companies are not traded on stock exchanges. Investors and promoters, on the other hand, determine the share’s fair value.
When employees dilute their stock options or promoters or general shareholders make private placements, unlisted shares reach the market. Unlisted equities have no official market.
Promoters, particularly startups, utilize this technique to raise small amounts of working money without causing significant equity dilution and to establish a valuation baseline for future fundraising.
While raising equity from private equity/strategic investors, these companies value the company and can be used as a reference point.
Conclusion
If you pick the correct one, unlisted shares can turn out to be that hidden gem. It has the potential to give investors with exponential returns. The fundamentals of the companies and the intermediary through whom you will purchase the shares are the most significant factors to consider when buying unlisted stock.
