There is a lot of money to be made in pre-IPO investment, which was previously exclusively open to high-net-worth people since the typical investor could only participate in public limited firms that were listed on the stock market. However, times have changed, and the common investor may now buy shares in a growing company. Startups are risky, but they have the potential to deliver large gains not seen in the stock market. This is why investing in pre-IPO firms is a good idea.
Investing in stocks on the grey market — the unlisted market for unlisted shares — has risks, but it may also be rewarding, according to market experts.
Companies in the pre-IPO stage often have an established revenue model and are in the process of obtaining additional money from the market via a public listing. According to financial experts, investing in a firm that is ready to launch its IPO (initial public offering) may enable an investor participate in a company’s development, but such bets should only be done by aggressive traders since they include risk.
Meanwhile, analysts claim that stock values on the grey market are frequently less volatile than those in the main market. Furthermore, purchasing stocks on the grey market is no longer a luxury reserved for large corporations/investors. Individual investors now have access to the grey market.
In this article, we’ll go over the advantages of investing in unlisted shares and best unlisted shares in India that you should consider investing in. However, before we delve into that, let’s first understand what unlisted shares are and how they work.
What Are Unlisted Shares and How Does It Work?
A pre-IPO investment is one that is made in a private or public limited business before it becomes public via an Initial Public Offering (IPO). An initial public offering (IPO) is the first time a business trades on a public market. Pre-IPO shares are not available to everyone due to a lack of understanding or public awareness.
Unlisted shares were formerly exclusively accessible to banks, private equity firms, hedge funds, and a few other privileged groups. But it is no longer an issue. Everyone may invest in the pre-IPO stage if they choose the proper firm. There are currently procedures in place that enable a firm to dematerialize its shares, enabling anybody to buy them and simply transfer them from one Demat account to another.
Should You Invest In Pre-IPO Companies?
The potential profit is the most compelling argument to invest in a pre-IPO. It has the potential to provide the best possible return on investment. Most technology stocks have a lot of upward potential in the stock market. Despite the fact that it is obvious that early investors profit the most before the firm goes public. You may now join in on the fun as well.
Another benefit is the lack of stock market volatility. Depending on the industry, pre-IPO investment is less influenced by events such as the 2008 financial crisis or the 2020 pandemic. However, the accidents may have an impact on enterprises. This, in turn, will have an effect on your savings.
Investing in pre-IPOs, like investing in the stock market, is not without risk. Startup enterprises aren’t always successful. As a consequence, when an investment fails, there are no rewards. There are only setbacks. Businesses, on the other hand, are aware of the danger. In order to compensate, companies sell shares at a lower price. This not only attracts investors but also protects the company. If it goes public but the IPO stocks do not perform well, the firm will still get funding from private investors.
Benefits of Buying Unlisted Shares
While there are several reasons why a person would invest in unlisted shares, the following are some of the more popular benefits of doing so:
1. High-value investments: Because shares are not extremely liquid, they are often undervalued or overpriced for extended periods of time. As a result, if an investor can invest while the shares are inexpensive, he or she may profit handsomely.
2. Risk diversification: Because unlisted equity shares are a separate asset class, they provide some risk diversification for investors who are heavily engaged in listed stock markets.
3. High growth investments: Unlisted enterprises are often smaller in size and have yet to reach a stage where they may go public in order to get funding for their capital needs. As a consequence of the small base effect, investing while the firm is tiny and investing through its growth when it lists on public markets generally generates large returns.
4. Peace of mind: Unlike listed equity shares, the values of unlisted equity shares are typically constant, so the investor does not need to be concerned about price changes.
What Is a Good Way to Invest in Pre-IPO Stocks?
It’s tough to identify the proper company, and it’s much more difficult to find a means to invest in them. However, there are a variety of methods to invest in these thriving enterprises, including:
Consult with a firm that specialises in capital raising and pre-IPO stock. They will advise and guide you on how to invest in a pre-IPO firm.
Keep up with the latest news on which companies are doing well.
For information on firms seeking capital, contact your local lenders.
Expand your company network.
Become an angel investor to establish yourself in the angel community.
Moreover, according to LiveMint, A person who has unlisted shares must report them on his or her income tax return. In this circumstance, ITR-1 and ITR-4 cannot be utilised; only ITR-2 and ITR-3 may be used.
Investing in initial public offerings (IPOs) is a common activity around the globe. There are individuals who are feasible and likely to succeed in the business sector firm shares. Many individuals rely on the purchase and sale of stocks to augment their income. However, an unpopular reality is that purchasing Pre-IPO shares from corporations might help you earn a lot of money. Investing in a company’s stock while it is still in its early phases of growth might result in a large profit. So, if you’re looking to invest in unlisted shares, contact us at Unlisted Deal today!
Unlisted share markets have grown in popularity in recent years. Investors with great knowledge, excellent financial health, and a long investing horizon purchase holdings in rising firms before their IPO and witness the true power of compounding.
This has enticed many young investors to enter the pre-IPO market without sufficient understanding or supervision and to invest large sums in the unlisted. In this article, we will attempt to explain how an unlisted market operates and the various types of unlisted shares that you can avail of. Essentially, we will concentrate on the many elements of unlisted shares and their characteristics so that you can decide whether or not this market is for you.
What Exactly Are Unlisted Shares?
Unlisted firms are privately held companies that have not yet gone through the IPO process. Companies such as HDB Financial Services, Reliance Retail Unlimited, Paytm, Hero FinCorp, and others. Investing in unlisted companies allows you to have access to cutting-edge, creative enterprises. Moreover, as more renowned and popular companies like Ola and OYO are joining the unlisted shares market, investors are attracting more investors with their eye-popping prices, according to the Economic Times.
Characteristics of Unlisted Shares
1. Untraded on Exchanges: Unlike their listed counterparts, shares of unlisted firms are not formally traded on any exchange. This category has its own market, where buyers and sellers transact via dealers.
2. Dematerialized: Unlisted equities, like listed stocks, are transferred to your Demat account. The status of unlisted shares purchased through a depository participant account, where they are available at face value, can be checked.
3. Price Mechanism: Unlisted markets are a pure supply and demand game that puts an investor’s judgment to the test. As exchanges are not involved in this system, fair price discovery is constantly scrutinized. The price of a share is determined by a mutual agreement between the dealer and the customer.
4. Growth factor: Unlisted markets allow investors to purchase interests in companies that are either technologically or operationally innovative. As a result, the cost is significantly lower than the listed space.
5. Liquidity concerns: In unlisted marketplaces, liquidity concerns are common. Investors, on the other hand, seldom liquidate their stake in an unlisted market.
Who Is Eligible To Invest In The Pre-IPO Market?
Previously, only a few individuals could purchase pre-IPO stock holdings, but the field is now open to everybody. However, nothing is that simple for smaller investors with low resources because an investment, even today, goes through numerous phases of fundraising, and retail players can only participate when a specific threshold is reached.
So, when a firm seeks investment in its early stages, it goes through seed capital funds, where worldwide funds support the company while endorsing its business model. There are several sorts of seed investment, such as series A, B, C, D, and so on. Seed investment investors include Ant Financial, Softbank, and Alibaba.
Following this, angel investors and venture capital firms acquire a stake in the company, which is only focused on profit. Then there’s a private equity, which allows individual investors to engage. When compared to early-stage investors in seed investment rounds, they purchase holdings at a higher valuation.
As a result, just because you are purchasing shares in an unlisted market does not indicate that your purchase cost will be particularly low. Though it is quite likely that you will find companies at very low values, conservative pricing is not a certainty. Following private equity, corporations often opt for primary markets, where the share is available to everybody.
Types of Unlisted Shares
Common Stock
A corporation’s common stock, also known as capital stock, is its normal ownership portion. In other terms, it is a method of dividing up a company’s ownership; one share of common stock indicates a percentage ownership share of a firm. For example, if a corporation has 100 outstanding shares, one share equates to one percent ownership of the company.
Penny Stocks
Penny stocks are those that trade at a very low price, has very little market capitalization, are mostly illiquid, and are often listed on a smaller exchange. The pricing of penny stocks in the Indian stock market is typically low. These companies are extremely speculative and regarded as dangerous due to the lack of liquidity, a smaller number of owners, significant bid-ask spreads, and restricted information availability.
Corporate Bonds
A corporate bond is a sort of financial securities that a company issues and sells to investors. The firm receives the cash it requires, and the investor receives a predetermined number of interest payments at either a fixed or variable interest rate. When the bond “reaches maturity,” or expires, the payments stop, and the initial investment is refunded.
The bond is often backed by the company’s capacity to repay, which is determined by its future revenue and profitability projections. Physical assets of the corporation may be used as collateral in specific instances.
Government Securities
In the investing sector, the term “government security” refers to a variety of financial products issued by a government. The most popular forms of government securities for most readers are those issued by the treasury in the form of Treasury bonds, bills, and notes. Many governments, however, will issue these financial instruments to support vital continuing activities.
Government securities provide the guarantee that the money invested will be fully repaid when the asset matures. Some government securities may also pay out coupons or interest on a regular basis. Because they are backed by the government that issued them, these securities are considered conservative investments with minimal risk.
Products Derivatives
Derivative Product is defined as an over-the-counter financial contract whose value is designed to track or is derived from currencies, interest rates, securities, bonds, money market instruments, metals and other commodities, financial instruments, reference indices, or any other benchmark, and includes, but is not limited to, warrants, options, equity-linked notes, or other convertible securities.
Conclusion
Unlisted companies typically make headlines when the market is in a bull market. The shares of these unlisted firms are often purchased during a momentum by the majority of investors.
However, if done correctly, the unlisted shares market can be extremely lucrative. It is usually preferable to make an educated selection with the assistance of investment consultants. So, if you’re looking for more information on how to buy unlisted shares in India effectively, read our guide today!
In the words of Benjamin Franklin, there are only two things that are certain in life; death and taxes. If you earn money by means of wages, company or even renting a home, you need to pay income tax. So, what about the money you earn by investing in unlisted shares? Do you need to pay income tax on that as well?
Short answer: yes.
But, determining how much income tax you need to pay on unlisted shares is not easy. It is crucial for you to be informed of them in order to make informed financial decisions.
In this post, we shall understand how income tax is imposed on unlisted shares in India. But, before delivering into the tax on unlisted shares, let’s first understand what are unlisted shares.
What Are Unlisted Shares?
Unlisted shares are a financial instrument that is not listed on a formal market as it does not conform with the listing criteria. Unlisted shares are traded on the over-the-counter (OTC) market and are sometimes referred to as OTC securities. Retail investors or brokers promote the acquisition and sale of unlisted shares on the OTC market.
The most popular example of unlisted security is common shares, mostly exchanged on the NASDAQ. However, securities trading at the highest floor of the NASDAQ broker network structure, the National Business System, are usually not listed as OTC since NASDAQ is deemed to be a stock exchange. That being said, stock trading on the lower strata, like the OTC Bulletin Board (OTCBB) or even the pink sheets, falls under the OTC classification umbrella.
There are also several unlisted non-stock securities, like mutual funds, government securities, and some derivative products, like swaps, which are exchanged on the OTC exchange.
Capital Gain on Sale of Unlisted Shares
Unlisted shares are typically sold by smaller or emerging companies who are unable or unable to comply with listing conditions, such as market capitalization rates or ability to pay trading fees, on an official exchange basis. Besides that, since they are not exchanged, unlisted shares are also less liquid than listed securities. Unlisted inventory can be monitored via pink sheets or OTCBB (OTC Bulletin Board).
When it comes to determining the short and long term capital gains on unlisted shares, it’s important to note that these shares are not mentioned on any approved stock exchange. The Company does not, therefore, pay STT, i.e. The value of securities exchange tax on those shares. The retention time is 24 months.
Long Term Capital Gain (LTCG): If an owner sells unlisted shares owned for longer than 24 months, the gain or loss on those transactions is Long Term Capital Gain (LTCG) as well as Long Term Capital Loss (LTCL).
Short Term Capital Gain (STCG): If an owner sells unlisted shares held for close to 24 months, the short-term capital gains or losses is the short-term capital gain (STCG) and short-term capital loss (STCL).
Long Term Capital Gain (LTCG): If an owner sells unlisted shares owned for longer than 24 months, the gain or loss on those transactions is Long Term Capital Gain (LTCG) as well as Long Term Capital Loss (LTCL).
Short Term Capital Gain (STCG): If an owner sells unlisted shares held for close to 24 months, the short-term capital gains or losses is the short-term capital gain (STCG) and short-term capital loss (STCL).
Long Term Capital Gain (LTCG): If an owner sells unlisted shares owned for longer than 24 months, the gain or loss on those transactions is Long Term Capital Gain (LTCG) as well as Long Term Capital Loss (LTCL).
Short Term Capital Gain (STCG): If an owner sells unlisted shares held for close to 24 months, the short-term capital gains or losses is the short-term capital gain (STCG) and short-term capital loss (STCL).
Income Tax on Unlisted Shares
The Income Tax on Unlisted Shares is identical to the tax status on other financial properties. The above are the income tax thresholds for the selling of unlisted shares of the Domestic Company or the International Company.
Long Term Capital Benefit – 20% Indexed
Short Term Capital Benefit – charged at slab rates.
Note: In the case of non-residents, LTCG on non-listed shares is 10% without inflation.
Tax on IPO Shares
The shareholder trades the Unlisted Stock Shares of the Company that offers an IPO (Initial Public Offering) to the public. These shares are then listed on a well-known stock exchange and STT is therefore paid on the very same stock exchange. The tax status applied to the sale of those unlisted shares will be the same as in the case of the shares listed as follows:
Long Term Capital Gain-taxed under Section 112AA at 10% over INR 1 lac
Short term capital benefit, levied under Sec 111AA at 15%
For Unlisted Shares, ITR Form, Due Date and Tax Audit Applicability
ITR Form: Trader can register ITR 2 (ITR for Capital Gains Revenue) on the Income Tax Website, as income from the selling of unlisted shares is a capital gain.
Due Date
Up to 2019-20
31st July – for merchants who are not subject to a tax audit
30 September – for merchants to whom the tax audit applies
FY 2020-21 Ahead
31st July – for merchants who are not subject to a tax audit
October 31st – for merchants to whom the tax audit relates
Tax Audit
Although the revenue from the selling of unlisted shares is a tax benefit income, it is not appropriate to assess the validity of the tax audit under Section 44AB.
Carry Forward Loss on Sale of Unlisted Shares
The investor will offset Short Term Capital Loss (STCL) against other Short Term Capital Gain (STCG) as well as Long Term Capital Gain (LTCG). They will hold the residual loses for 8 years and head off against STCG and LTCG only.
The creditor can only cover Long Term Capital Loss (LTCL) against Long Term Capital Gain (LTCG). They will carry the residual loss for 8 years and head off against LTCG only.
How To Report Income From The Sale In The Income Tax Return?
You should register ITR-2 and declare profits from the selling of unlisted shares of a domestic or international corporation as capital gains. You can pay income tax on it at the rates below:
Long Term Capital Benefit – 20% indexation
Short Term Capital Benefit – Slab Levels
The assessee may set up LTCL with LTCG and STCL for both STCG and LTCG. The residual loss will be carried on for 8 years.
Will the STT be paid for unlisted shares?
STT i.e. Securities Transaction Tax is a tax on the acquisition and selling of securities listed on a registered Indian stock exchange. As a result, STT is not charged on Unlisted Shares. However, while a corporation is selling shares to the public under the IPO, i.e. Initial Public Offering, those shares are listed on the stock market at a later date. In such instances, the STT is paid to the Unlisted Shares.
Listed companies are the ones which are included and exchanged on a specific stock exchange, according to different sources. The stock exchanges have specific requirements which a corporation must achieve and continue to fulfil to be listed and continue to stay.
To sell their share to the public, a private corporation has to go public; if it goes public, they file with a stock exchange which becomes a listed share. The reason businesses want to go public is that, aside from bank loans, they can reduce their debt and have the means to finance themselves.
A public company does not necessarily need to be listed. An unlisted public corporation is one that is not listed on the stock exchange but can have an infinite number of shareholders collecting money for any business company. Their shares are known as unlisted shares.
In this blog, we’ll discuss the difference between listed and unlisted shares and why investing in unlisted shares is worth the effort.
The Key Differences Between Listed & Unlisted Shares
To better understand the difference between listed and unlisted shares, we first need to define the main differences between a listed company and an unlisted one.
Factors
Listed Company
Unlisted Company
Meaning
A listed company is a stock exchange-listed company wherein the shares are openly tradable.
An unlisted company is a company that is not listed on the stock market.
Ownership
Listed companies are acquired by several shareholders.
Unlisted companies are acquired by private investors like founders, founders’ family and peers.
Liquidity of shares
Shares are very liquid, as demand is readily open.
There is no openly available market for shares; therefore, they are illiquid.
Valuation
Business valuation can be conveniently calculated because it is simple to determine market value.
Because of the non-availability of a stock price, the company's valuation is sometimes uncertain, and the share value of a proxy traded firm can only be used to arrive at acceptable market value.
Regulatory Requirements
Complicated and strict regulatory standards have been set for listed companies.
Unlisted companies have less complicated and stringent regulatory requirements compared to listed companies.
Benefits of Investing in Unlisted Shares
Although there are several reasons as to why you should invest in unlisted shares, some of the most common benefits of owning unlisted shares are as follows.
High Value Investments
Since the markets are not quite liquid, they are mostly either overvalued or undervalued for prolonged times. And, if an investor can buy while the stock is undervalued, then he/she will make good returns on the investments.
Peace Of Mind
Unlike listed equity shares, unlisted equity stock prices are relatively steady, and the buyer does not need to worry about price fluctuations.
High Growth Investments
Usually, unlisted companies are smaller in scale and are yet to hit a point where they can go to the market and make use of funds and satisfy their capital needs.
As a result, investment when the firm is low and when it is listed on stock exchanges being invested in its growth also yields good returns due to limited base impact.
Diversification Of Risk
Unlisted equity shares are a different investment option on their own and thus offer some risk diversification for investors who are primarily invested in the listed equity markets.
Importance of Tracking Unlisted Share Prices
The current price is often referred to as the unlisted valuation of the market, which is essentially the price at which a stock share or some other asset was last traded.
The current price serves as a benchmark in an open market. It shows the price a buyer would be ready to pay, and a seller would be willing to agree to that value for a future sale. Hence, you should also know how to check unlisted share price.
Here are a few of the top reasons why it’s essential to track unlisted share prices:
Market Value
The market value of a stock fluctuates during a trading day, depending on the availability of shares combined with the demand of buyers. The stock valuation lets an investor know if the shares are affordable at present. The interest is significant as trading techniques are used too.
Profiting
An investor can lose out on an opportunity to cash in on investment and profit without realising when a stock is too richly priced, or overvalued. Worse, a buyer might end up buying a stock with a price that's not going anywhere but going down.
Opportunity
Investors may seize an opportunity to gain money by finding stocks on the market that are undervalued or sold below where they are worth depending on specific metrics.
Companies offer employees equity investment options by providing staff with the ability to purchase some amount of shares in the company over a fixed time at a predefined price. You should get these transactions reviewed with your broker.
Buy from Promoters Directly
These are described as Private Placements, and investment banks and fund managers support many of these private assets. Network pushes this sort of transaction, and you can look at a substantial amount of risk.
Buy PMS or AIFs which pick up unlisted shares
Financial companies managing portfolio management services (PMS) and alternative investment funds (AIF) buy up unlisted shares in addition to institutional investors. Many of these funds engage in "capturing pre-IPO valuations" to benefit from an increase in valuations after an initial public offering.
Taxation on Unlisted Shares (Private Share)
Unlisted Stock is not registered on any approved stock exchange. Therefore, the Organization will not pay STT, i.e. Securities Tax on these shares. The retention time is 24 months.
Long Term Capital Gain (LTCG): The Long Term Capital Gain (LTCG) or Long Term Capital Loss (LTCL) is the gain or loss on such transactions if an investor sells an unlisted stock owned for more than 24 months.
Short Term Capital Gain (STCG): When an owner sells an unlisted stock owned for up to 24 months, a short term capital gain (STCG) or short term capital loss (STCL) is a gain or loss on such a transaction.
Income Tax on Unlisted Shares
Income Tax on Trade of Unlisted Shares is equivalent to most financial assets' tax status. Below is the rate of income tax on the selling of Domestic Business or International Corporation unlisted shares.
Long Term Capital Gain – 20% with Indexation
Short Term Capital Gain – taxed as per slab rates
Note: In the case of a non-resident, LTCG without indexation on Unlisted Stock is 10 per cent.
Fino is a professionally run organisation and is Fino payments bank's parent company, which was founded to catalyse nation-building and make every person financially secure. The firm is the country's most prominent business correspondent and has played on the unlisted stock (bid) market in favour of the Fino Paytech Ltd share price.
HDB Financial Services (HDBFS) is an HDFC Banking subsidiary. The company is the largest Non-Banking Financial Company (NBFC), serving both individual and business customers.
The share value of HDFC securities depends on its vast array of products. The company provides 3 in 1 online investment accounts which is a blend of HDFC bank and Demat bank account and HDFC Securities trading services.
Motilal Oswal Home Finance Limited (MOHFL), is a Motilal Oswal Financial Services Limited (MOFSL) subsidiary. The housing finance business is run efficiently by a rare mix of financially stable and technologically competent promoters who are well known for professional integrity and good implementation skills in their jurisdiction.
Metropolitan Stock Exchange of India Limited (MSE) is identified under Section 4 of the Securities Contracts ( Regulation) Act, 1956 with the Securities and Exchange Board of India (SEBI). The Exchange has been declared a "recognised stock exchange" via the Corporate Affairs Ministry, Govt. by India, on 21 December 2012. In Stock Market, Futures & Options, Currency Derivatives and Debt Market Pieces, MSE provides an online, free, and hi-tech network.
If you are looking for more information on unlisted shares, our team at Unlisted Deal provides analysis reports on select companies and their securities of investments from well-known venture capitalists and significant private equity firms. For more details, please contact us!
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