Unlisted Equities (Stocks)

Unlisted Shares & Pre-IPO Shares

Unlike publicly listed companies whose shares are available for trading on established stock markets, unlisted shares are not listed on recognised stock exchanges like the National Stock Exchange (NSE) or Bombay Stock Exchange (BSE). Unlisted shares may be privately held by a limited number of investors in the company's pre-IPO (Initial Public Offering) stage for example companies like HDB Financial Services, NSE India, Tata Capital, SBI Funds Management, Hero Fincorp, etc.

Merits Of Buying Unlisted Shares In India While investing in pre-IPO stocks in India, the chances of earning huge rewards multiply.

Here are a few benefits to consider when you buy unlisted shares in India:

High Return Potential Investments: The unlisted shares have very low liquidity and frequently get overpriced or underpriced for an extended period based on the company’s recent happenings. Henceforth, the investors can make a sizable return if they buy pre-IPO stocks in India when they are cheap.

Risk/ Portfolio Diversification : Unlisted shares come with an excellent benefit which is risk/portfolio diversification. Investing in unlisted shares in India is a great way to establish yourself in the stock market but keep the risk of loss to a minimum. Moreover, unlisted shares offer stability and have similar or better return potentials to that of listed shares. It helps you gain access to new-age businesses that are highly innovative.

High Growth Potentials: Lastly, unlisted shares in India are the quickest way to make huge profits. The companies trading their pre-IPO shares are majorly smaller in size and still need to be on a scale to trade their shares publicly. This gives birth to the small base effect: invest in the company in its growing period and generate hefty returns when the company gets listed and enters the stock exchange market.

However, they may also come with increased risks and challenges compared to investing in publicly listed securities. Therefore, it is important to be careful and research well before picking any stocks.

Capital gains tax on unlisted shares

Unlisted shares taxation in India is divided into two categories – long-term capital gains tax and short-term capital gains tax. These differ based on the holding period of the investment. Here's how this is done:

Long-Term Capital Gain Tax: If an investor sells an unlisted stock that has been held for more than 24 months or two years, any gain from the sale is categorised as a Long-Term Capital Gain (LTCG). LTCG earned from unlisted stocks is taxed at 20% with indexation. Indexation refers to a benefit where the cost of an investment is adjusted according to the inflation rate. This helps in reducing the overall tax incurred.

Short-Term Capital Gain Tax: If an investor sells an unlisted stock that has been held for up to 24 months or two years, any gain from the sale is considered a Short-Term Capital Gain (STCG).   STCG earned from unlisted stocks is taxed as per the investor's tax slab for the year. These profits are added to the total taxable income for the concerned year and taxed as per the prevailing income tax laws.

An important point to note about unlisted shares taxation is that there is no Securities Transaction Tax (STT) on these stocks.

Disclaimer: This write up is solely for educational purposes. This in no way should be construed as a buy/sell recommendation. Please consult your investment advisor before investing.