How to buy unlisted shares? Know the nitty-gritty involved in them!

From where can one buy these unlisted shares? 

In India, we are witnessing explosive growth in the number of retail investors and given the fact that the markets have turned highly volatile amid an alarming rise in inflations, the central banks worldwide are raising their core bank lending rates. Hence, investors are looking at alternative investment avenues to chase better returns. In order to get better returns, the investors are shifting to investing in the unlisted shares’ space and the testimony of this is a statement from Umesh Paliwal, Co-Founder of UnlistedZone wherein, he states, “Five years back, it was mostly from HNIs but now, retail investors are also participating”. However, this segment is a minefield; unless investors exercise utmost care! Investment in this space can be extremely perilous.  

Before we proceed, let’s first understand the concept of unlisted shares. 

An unlisted share is any security or financial instrument that’s available for traders on over-the-counter market.  

Thus, unlisted shares are the ones that are not listed on the stock exchanges. 

Why are unlisted shares hogging the limelight these days?  

Unlisted shares of high-energy pre-IPO companies are witnessing heavy interest among investors. Trading volumes and premiums soar as the demand for shares of the companies yet to list on the bourses surges.  

From where can one buy these unlisted shares? 

Previously, large institutions & funds could only invest and participate in unlisted equity opportunities but now, individual investors also have access. They can invest in unlisted shares via intermediaries as well as platforms, which specialise in sourcing & placement of unlisted shares and can facilitate the trade. Intermediaries and platforms buy shares from Employee Stock Ownership Plan (ESOP) as well as existing investors and offer them to new investors, who are keen to invest, and one such platform is UnlistedZone.  

Presenting you an interesting conversation with Umesh Paliwal wherein, you can get a complete insight into the trading of unlisted shares: 

1. Can you explain how this unlisted share trading mechanism works in layman's terms? 

Answer: Trading of unlisted shares is done via over-the-counter (OTC) mode. 

For buying: 

You just need to provide us with three documents i.e. client master report (CMR) copy, PAN card, and cancelled cheque. 

 For selling: You can sell via two modes: 

Offline:Using DIS (delivery instruction slips). Fill out the DIS slip and give it to your broker.

Online: CDSL and NSDL provide an online facility to transfer shares. The process is easy for CDSL users as compared to NSDL users.

 Note: Here, Demat to Demat of transfer of shares is done. 

2. How does unlisted share trading differ from the listed ones in terms of volume, arbitrage, and pricing mechanism? 

Answer: Unlisted market can be divided into two parts: 

a)  SEBI-regulated private market where angel investors, private equity, and venture capital firms invest in a company by purchasing either new shares or existing shares. 

Here, the pricing mechanism would be as per the valuation reports given by the valuer. 

b)  The unlisted market, where we are operating, is not yet regulated by SEBI. Suppose, an employee is selling shares in the secondary market, a platform like UnlistedZone helps employees to sell their shares to investors in the market. The size of this market is very hard to gauge. If this market is regulated, the volumes generated at NSDL or CDSL can be tracked to know the volumes.

Here, the pricing is mostly dependent on demand and supply. 

3. How much time does it take to complete the transaction, i.e., from selling the shares to getting them into the Demat account of the buyer? 

Answer: The transaction generally takes two to three hours to complete. It is Demat to Demat transfer of shares. This is when platforms like UnlistedZone are transferring shares. 

4. As we can see on your website, lot sizes are mentioned as in, one can buy a whole lot of the company and not just a single share. Why is that so? Also, how is the lot size decided?

Answer: The lot size is the minimum number of shares that can be purchased. The minimum amount of shares we offer is between Rs 20,000& Rs 25,000 and the lot size is determined solely by this amount.

For instance, Reliance Retail's share price is Rs 3,000; thus, we can sell ten shares. CSK's share price is Rs 150; so, we must sell a minimum of 200 shares. We have thus specified lot sizes. However, there is no hard and fast rule that we must use only these sizes. 

The cost of DP is Rs 25 per transaction, regardless of the size of the transaction, rendering single shares unprofitable.

5. Does the lot size and price of each company differ on each platform? 

Answer: Yes, it may vary from one to another. It depends upon the price at which, each platform purchased the shares and the price at which they are ready to sell them. 

6. What are the transactions charges associated with buying and selling unlisted shares? Also, does taxation differ between the listed and unlisted shares? 

Answer: DP charges, stamp duty (Rs 15 on1 lakh transaction), and TDS & TCS if the size of the deal is above 50 lakh.

7. Once an investor buys unlisted shares, can he sell them immediately after buying, or is there a pre-defined period for that? 

Answer: Yes, he can sell immediately. Once it is listed, then there is a lock-in period of six months. 

8. How to check the daily price of unlisted shares? 

Answer: There are two ways to check it: First, you can join Telegram channel of the company where on daily basis, the share price is updated, and secondly, one can download the company’s App from Playstore to keep track of the historical graphs and prices of all the shares at one place.  

9.  What are the short as well as long-term capital gain taxes to be paid on unlisted shares? 

 Answer: If you sell your shares within two years, then you will have to pay short-term capital gains on unlisted shares. In the case of long-term capital gain tax, 20 per cent is to be paid if you sell your shares after two years.  

Have you ever bought an unlisted share? Share your experiences with us in the comments section!