Buying unlisted shares is a newfag among Indian equity investors. Thanks to the ease of accessibility and growing awareness, the deep penetration of the internet have led to a sharp rise in the number of investors in the unlisted space.
However, there is a streamlined process of buying unlisted shares or the Pre-IPO equity. Though, you would require some bare minimum and basic requirements to be met for buying their shares.
Investors can buy shares of a public company, which is not listed on the bourses, from the pre-IPO market where private players or employees of the company offload their stake at better prices.
The equity shares of the company get listed on the BSE and/or NSE, where they are freely tradable across retail and institutional investors. If you invest in the shares of a listed company, you purchase those listed shares.
But when the company is not listed on any exchange and falls in the category of an unlisted public company, it can also offer share capital to the investors, which are known as unlisted shares.
There are multiple examples of companies trading in unlisted markets for example Reliance Retail, Sterlite Power, Tata Technologies, AGS Transact, and more.
Not only the traditional companies, but investors can also buy a stake in various start-ups which include Oravel Stays (OYO), One97 Communications (Paytm), ANI Technologies (Ola), and more.
To buy or sell unlisted shares, one needs a trusted dealer or share brokers like UnlistedZone, which not only have a soundtrack record but also have more shares in the kitty and give proper advice to investors to make a long term relationship.
The companies issue shares to private investors to raise funds or their employees as rewards during the early stage, especially at the growing stage.
The companies, with innovative ideas and new technology, come with their equity sales to generate revenue and can grow up to become established players.
Also, investors buy shares of the companies which are subsidiaries of homegrown conglomerates, which are backed by strong parentage, anticipating that these subsidiaries will be a big success and post strong returns in the future.
More often than not, unlisted shares are owned by employees of the companies, angel investors, venture capitalists, or startups and intermediaries. They offload their stake in the open market to liquidate their positions.
To crack such deals, the existing investors require an unconventional market and ample buyers to offload their stake. Though these shares lack a fair price mechanism as the price completely depends upon the demand and supply of the shares.
The Process of Sale
The process of selling unlisted shares is very much easy if you are able to find a genuine dealer. Get in touch with the concerned spokesperson.
An Investor will need to share his details with proofs including the DEMAT account, Client Master Report (CMR), and bank account details. CMR is the most important document in the transition.
The seller needs to transfer the unlisted share which he wants to sell with the quantities to the buyer’s Demat account. Once the transfer of the amount is done, shares are transferred to the Demat account. The payment is done via the preferred mode of transfer.
What is a Client Master Report (CMR)?
Client Master Report (CMR) copy is a paramount document, required to buy unlisted and Pre IPO shares. CMR contains Depository Participant Identity (DP ID), Client ID, PAN number, Bank Account Number, along with more details.
This can be easily obtained by sending an email to the broker and the same is delivered within a few hours. The dealer will require a PAN Card, Aadhar Card, and a copy of DIS Slip, which is used to transfer shares into the account.
How to transfer unlisted or Pre-IPO shares?
It is possible to transfer shares from one Demat account to another using a simple procedure. Trading through a Demat account is just like making transactions through a bank account. The only difference is that you transfer shares through the Demat account instead of money.
With respect to shares held with NSDL or CDSL depositories, the offline procedure for transfer of shares through off-market transfer is possible. One needs to fill out a DIS (Delivery Instruction Slip).
ISIN number of the shares to be transferred, name of the company (security), Demat account, and DP ID of the account to which the shares are being transferred must be filled up in the form. The form needs to be submitted to the old broker’s office for further processing.
If shares are held with CDSL, there is an online facility for the transfer of shares using the ‘EASIEST’ platform. One needs to register on this platform using the link, https://web.cdslindia.com/
Next, a trusted account needs to be added which essentially is the Demat account where the shares are to be transferred. Once the account is successfully added after 24 hours, one can transfer securities from the old Demat account to the new one.
Points to note
* This transfer of shares does not amount to change of beneficial ownership and does not amount to capital gains on transfer.
* The broker may charge a stated fee for processing the transfer request. However, if the old account is being closed, no fee can be charged.
Note: Shares could be transferred to the different Demat accounts of the same individual or different persons. In the case of transfer of shares to the same person, there will be no added tax liability.
Before one invest in unlisted shares, he/she should understand that:
High Risk: Unlisted shares require a lot of homework. The risk associated with their shares is more and hence one needs to understand the business model and growth opportunities offered by the company.
Time taken: Transfer of shares in an unlisted market may take some time. Unlike the listed markets, where shares are instantly transferred from one account to another, unlisted markets take some extra time.
Payment System: The payment to dealers shall be made from the bank accounts associated with the concerned Demat account only. This is done to eliminate the chances of money laundering and other illegitimate activities.
Paper Work: Various companies require a lot of paperwork to allot shares and despite completion of documentation, allotment of shares is not guaranteed. Shares of the National Stock Exchange (NSE) are one such big example.
Size of Investment: Unlike listed markets, investors can not buy a small number of unlisted shares. There is a minimum ticket size for every share. However, the retail ticket size is not very big but it is big enough to justify the transaction cost.
Liquidity: Unlisted markets may get illiquid as there might not be buyers for the shares you wish to sell. There is a complicated process to settle for the selling price, which is usually lower than the market price levied from buyers.
Mistakes to avoid
Whether listed or unlisted market, if you are not careful, you might end up making losses due to some horrible mistakes. Such mistakes would be costly as you might block your capital, incur opportunity costs and even incur a loss if the shares are devalued.
a) Do not follow the herd mentality. Do your homework and research well about the company before investing.
b) If you are getting shares at very low rates, do not jump at the chance. There might be a reason for existing investors taking an exit at lower prices.
c) Price fluctuations of unlisted shares are considerably high. In case of major fluctuations, assess the fair value of the share based on the company’s prospects.
d) Do not invest in unlisted shares with a short-term investment horizon. Remember, unlisted shares prove their mettle with time when the company grows and establishes itself in the market. Have patience and a long-term perspective.
e) Do not invest in unlisted shares without a trusted advisor to guide you. If you need advisory services you can get in touch with many of the reputed names which will help you to reap high returns.