Understanding Unlisted Stocks: Opportunities, Risks, and Regulations
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 explores the mechanics of unlisted stocks, the purchasing process, tax liabilities, challenges of selling before an IPO, and the lock-in 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, unlisted stocks come with less regulatory oversight and can be illiquid, making 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
- Private Placements
- Employee Stock Options (ESOPs)
- Intermediaries & Brokers – PaisaNurture sources unlisted stocks through multiple channels, offering a wide variety of companies
Risks and Challenges
- Liquidity Risk: Difficult to sell quickly
- Valuation Challenges: No standardized pricing
- Regulatory Compliance under SEBI and RBI norms
- Limited public financial and performance information
Taxation on Unlisted Shares
Holding Period:
- Short-term: Held for less than 24 months, taxed as per income tax slab
- Long-term: Held for more than 24 months
Capital gains from unlisted shares are taxable. TDS is not applicable unless sold through specific transaction structures.
Exit Strategy for Unlisted Stocks
- Company listing through an IPO
- Selling to private investors or institutions
- Mergers and acquisitions
- Buyback offers from the company
Liquidation Challenges for Unlisted Stocks
One of the major challenges with unlisted stocks is liquidity. Unlike publicly traded stocks, selling unlisted shares requires finding private buyers.
- Difficulty in accurate valuation
- Long holding periods before finding buyers
- Potential financial losses if sale conditions are unfavorable
Investors should have a well-defined exit strategy and be prepared for a potentially 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 holding unlisted shares are subject to lock-in periods as per SEBI regulations.
Retail & Individual Investors (Pre-IPO)
Unlisted shares purchased before the IPO are locked in for 6 months (180 days) from the listing date. This applies to HNIs, ESOP holders, and private investors.
Promoters & Anchor Investors
- Promoters: 18-month lock-in period
- Anchor Investors: 30-day lock-in period
- In certain cases, 50% of anchor investors’ shares are locked for 90 days
QIBs & Non-Promoter Pre-IPO Investors
Investors holding shares for at least one year before IPO filing have a reduced lock-in period of 6 months.
Why Does SEBI Impose a Lock-in Period?
- Prevents excessive selling pressure after listing
- Ensures market stability
- Builds confidence in newly listed companies
Can You Sell Unlisted Shares Before IPO?
Yes, unlisted shares can be sold before the IPO in the grey market. Once the IPO is announced, unlisted share prices often rise, offering an opportunity to book profits.
Final Thoughts
Unlisted stocks offer high-reward potential along with considerable risks. Understanding taxation, exit strategies, and lock-in rules is critical for making informed investment decisions.
Being well-informed helps investors unlock the potential of unlisted stocks while effectively managing associated risks.
Please contact us if you are looking to buy unlisted stocks. We can procure them at the best price.
