In the world of investing, unlisted stocks provide a captivating opportunity for those looking to diversify their portfolios. These shares, which are not traded on major stock exchanges like NSE and BSE, offer both potential rewards and significant risks. As more investors explore these avenues, understanding how unlisted stocks work, the purchasing process, and the associated tax implications becomes essential.
This post will explore the mechanics of unlisted stocks, the purchasing process, tax liabilities, challenges of selling before an IPO, and the locking period that follows an IPO.
What Are Unlisted Stocks?
Unlisted stocks refer to shares of companies that are not listed on any recognized stock exchange like the National Stock Exchange (NSE) or Bombay Stock Exchange (BSE) in India. These stocks are traded over-the-counter (OTC) or through private deals.
However, it’s important to note that unlisted stocks come with less regulatory oversight and can be illiquid. These factors often make them riskier compared to publicly traded shares.
Characteristics of Unlisted Stocks
Not available for trading on public stock exchanges.
Transactions occur through private placements, intermediaries, or alternative trading platforms.
Less liquidity compared to listed stocks.
Prices are determined by demand and supply, rather than a formal exchange mechanism.
Ways to Invest in Unlisted Stocks
Pre-IPO Shares: Investing in shares of companies before they go public.
Private Placements: Direct investments in private companies.
Employee Stock Options (ESOPs): Acquiring shares through employee stock ownership plans.
Intermediaries & Brokers: Some firms specialise in facilitating unlisted stock transactions. PaisaNurture has ways to procure unlisted stocks from multiple channels. We will be able to provide wide variety of companies.
Risks and Challenges
Liquidity Risk: Difficult to sell quickly.
Valuation Challenges: No standardized pricing; valuation is based on negotiations.
Regulatory Compliance: Subject to SEBI and RBI norms but lack the transparency of listed entities.
Limited Information: Financials and performance data are not as publicly available as listed firms.
Taxation on Unlisted Shares
Holding Period:
Short-term: If held for less than 24 months, taxed as per the individual's income tax slab.
Long-term: If held for more than 24 months.
TDS (Tax Deducted at Source): Not applicable unless sold via specific transactions.
Capital Gains Tax: Gains from selling unlisted shares are subject to capital gains tax.
Exit Strategy for Unlisted Stocks
Company getting listed in an IPO.
Selling to private investors or institutions.
Mergers & Acquisitions where shareholders get an exit option.
Buyback offers from the company.
Liquidation Challenges for Unlisted Stocks
One significant challenge with unlisted stocks is liquidity. Unlike publicly traded stocks sold on the open market, unlisted stocks require finding buyers privately.
This poses several issues, such as:
Difficulty in accurately valuing unlisted stocks
Long holding periods before finding a buyer
Potential financial losses if sale conditions aren’t met
Hence, investors should have an exit strategy in place and be prepared for the possibility of a lengthy liquidation process.
Lock-in Period for Unlisted Stocks After IPO in India
When a company goes public through an Initial Public Offering (IPO), existing shareholders who held unlisted shares before the IPO are subject to a lock-in period as per SEBI (Securities and Exchange Board of India) regulations.
Lock-in Period for Different Categories of Investors
1. Retail & Individual Investors (Pre-IPO Investors)
If you bought unlisted shares before the IPO, your shares will be locked in for 6 months (180 days) from the IPO listing date.
This rule applies to:
High-net-worth individuals (HNIs)
Employees who acquired shares via ESOPs
Private investors who purchased shares from intermediaries before the IPO.
🔹 Example: If you bought shares of an unlisted company, say Ola, and it gets listed, you must hold your shares for 6 months before selling.
2. Promoters & Anchor Investors
Promoters: 18-month lock-in period after the IPO.
Anchor Investors: 30-day lock-in period after the IPO.
However, SEBI recently introduced a rule where 50% of anchor investors' shares will remain locked for 90 days in certain cases.
3. Qualified Institutional Buyers (QIBs) & Non-Promoter Pre-IPO Investors
Investors who held shares for at least 1 year before the IPO filing have a reduced lock-in period of 6 months instead of the earlier 1-year rule.
Why Does SEBI Impose a Lock-in Period?
Prevents excessive selling pressure right after listing.
Ensures market stability by restricting early investors from exiting immediately.
Builds investor confidence in newly listed companies.
Can You Sell Unlisted Shares Before IPO?
Yes, you can sell your unlisted shares before the IPO in the grey market.
Once the IPO is announced, prices of unlisted shares generally increase, providing a good exit opportunity.cash in on profits.
Final Thoughts
Investing in unlisted stocks can open doors to high-reward opportunities, but it also comes with risks. Understanding the fundamentals, purchasing processes, tax implications, and the dynamics of stock IPO transitions is crucial.
From navigating tax liabilities to managing the restrictions of lock-up periods, being informed allows investors to make better decisions in this complex space. This knowledge is key to unlocking the potential of unlisted stocks while effectively managing the risks involved.
Please Contact Us if you are looking for buying unlisted stocks. We can procure for best price.
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