How to Buy Unlisted Shares?

Securities or financial instruments that are not listed on a stock exchange are known as unlisted shares. They are referred to as OTC (over-the-counter) securities since they can be purchased and traded over the counter. You may not be able to purchase unlisted shares online because they aren't traded on stock exchanges. To acquire such shares, you will have to contact the company, its promoters, staff, or the intermediary firm.

You will receive physical share certificates bearing your name if the shares of these companies are kept in physical form. In this article, we’ll learn how to buy unlisted shares in India along with the different types and risks involved.

What are Unlisted Shares?

Ownership in a company through shares that are not listed on stock exchanges is referred to as owning unlisted shares. Alternatively, these shares are traded via less regulated channels. Hence, it is often referred to as over-the-counter (OTC) trading. Unlisted shares offer an investment opportunity in businesses that favour more flexible and private trading mechanisms. unlisted shares allow investors can invest in companies that avoid listing their stocks on official stock exchanges. 

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Different Ways to Purchase Unlisted Shares

The following methods for purchasing unlisted shares can help you better comprehend and handle this financial instrument:

1. Investing in companies before they launch IPO

Invest in pre-IPO companies or businesses that may go public soon. They usually have development potential, so making an early investment can be beneficial. The shares are credited to your Demat account directly, avoiding the stock exchange. For an investment to be successful, however, dealing with a trustworthy middleman is essential.

2. Evaluating startup opportunities

The startup environment in India is quite a favourable one. Investment opportunities exist for startups with bright futures. A minimum investment of approximately Rs 50,000 is often required by most businesses, and shares are promptly credited to your Demat account.

3. Purchasing Employee Stock Options (ESOPs)

Employee stock options plan (ESOP) offers employees discounted shares. You may be able to invest in unlisted companies through the assistance of some brokers in connecting you with employees who are willing to sell their ESOPs.

4. Purchasing straight from sponsors

You can work with investment banks, wealth managers, or reputable brokers to acquire a sizeable interest in an unlisted business. Through private placement, they can let you buy shares straight from the company's promoters.

Things to Consider Before Buying Unlisted Shares

After understanding how to buy Unlisted shares in India, before investing in them, you need to consider a few crucial factors. This might assist in understanding how to purchase shares in an unlisted company . Let's examine some of the more important ones. 

• Taxation: Capital gains tax is an important factor to consider. Depending on the length of time you hold the shares, you may be subject to either long-term or short-term capital gains tax. 
• Liquidity: Prior to making an investment, it is important to evaluate the market's demand for the stock of an unlisted company. This will allow you to determine if the investment is effective.  
• Industries: Think about making investments in unlisted businesses that are a part of emerging and future sectors like drone manufacturing or solar energy. The industry is new, so there may be less competition and scope for growth. Companies in these sectors are frequently rated among the finest unlisted stocks to purchase. 
• Financial Performance: Before investing, it is essential to thoroughly review the unlisted company's financial statements. For companies launching their initial public offering (IPO), you can obtain financial performance details from their Draft Red Herring Prospectus (DRHP). For other companies, you can obtain a copy of their audited financial statements.

Risks of Investing in Unlisted Companies

Now that you are aware of the various methods available for purchasing unlisted shares in India, let's explore some of the risks connected to this kind of investment. 

• Liquidity Issues: Since there isn't a specific platform for investors to purchase and sell unlisted shares, illiquidity issues are quite frequent. This implies that you will have to sell your equities at the end of the holding term or after the company's IPO. 
• False Pricing: Some brokers may inflate the value of their investments to receive larger commissions because there isn't a formal marketplace for trading unlisted shares. The valuation of the company as a whole is harmed by the significant discrepancy between prices and fair value. As a result, making financial judgments based on it becomes challenging. 
• Absence of Transparency: Unlike listed companies, unlisted companies need not to disclose their annual or quarterly financial reports to the public. They are also not required to inform about the major corporate announcements with investors. 
• Increased Risk: As unlisted firms and their equities are not governed by the Securities and Exchange Board of India (SEBI), trading them involves a number of risks. They include the possibility that the dealer will mislead investors about the price or even fail to deliver the stock.  
• Minimal Regulation: There is limited regulation surrounding unlisted share transactions; only a few aspects, like stamp duty and DP charges, are regulated. This leads to fraud that results from a lack of transparency.

Types of Unlisted Financial Instruments

Along with the unlisted shares meaning​, you must be familiar with the different types of unlisted shares. This can help you to understand how to buy shares of unlisted companies properly.

Common Stock 

Common stock, sometimes called capital stock, represents your ownership in a company. One common stock share is equivalent to a fraction of the company's ownership. For example, if a corporation has 100 shares, owning one share entitles you to 1% of the company's ownership.

Penny Stocks

Penny stocks are affordable shares as they are quite cheap. Both their trading volume and market capitalisation are often minimal. Penny stocks are thought to be volatile and risky to invest in as they have low liquidity and sometimes insufficient details available.

A thorough knowledge of all these types of unlisted shares is essential. This will help you properly plan how to buy unlisted shares in India. 

Conclusion
Unlisted shares are not listed on stock exchanges and are traded over the counter. You must understand how to purchase shares of unlisted businesses and also be aware of the related investment risks. As they are not traded on stock exchanges, unlisted shares are less liquid than public shares. These shares may also be more volatile and their prices are less clear. However, investment in unlisted shares can earn significant returns if you understand market dynamics. Consider using a stock market app which can provide real-time information and streamline transactions.