Investing In Unlisted Shares
September 17, 2014 15 Comments
If you’d like to be part of the action and excitement of various start-ups, you can consider investing in unlisted shares. But there are a few challenges to overcome and difficulties to bear up to.
Since these companies are unlisted, very little financial information is available. Also, because there’s no formal platform to trade these shares, the demand-supply situation varies and the price at which deals are struck are a function of the quantity, demand-supply situation and the sentiment prevailing in the secondary markets.
Unlike listed stocks, the unlisted space has few brokers and trades are made through known sources.Often, a broker accumulates small lots of shares from employees who have earned them as ESOPs, or from investors who have bought earlier and are looking for an exit. Once the broker has a sizeable chunk of shares, typically worth more than Rs 1 crore, it’s offered to HNIs.
Unlike listed shares, where a holder can exit through the stock exchange, liquidity is poor in unlisted companies. You would have to look for an IPO or another buyer.
Also,investors need to be careful about promoter pedigree and management as there have been several instances in the past when companies offloaded shares to investors and simply disappeared.
However, the biggest deterrent in the case of unlisted shares, when compared with listed ones, is the tax treatment.Investments routed through the stock exchange and held for more than a year qualify for zero long-term capital gains tax. However, taxation is different for unlisted shares: you have to pay shortterm capital gains tax of 30% if you sell before three years and long-term capital gains tax of 10% or 20% with indexation if you sell them after three years.Also, as per regulatory guidelines, preissue capital will be locked for one year from the date of a public issue. That means investors can sell only a year after the public issue. Also, an employee who acquires an ESOPs pays a perquisite tax which is the difference between the fair market value (FMV) of the shares on the date of exercise of the option and the price paid by the employee.
Following are some of the unlisted shares currently available in the market: Ratnakar Bank:Rs170,BSE Rs200,ICICI PruLife Rs210,HDFC Life, UTI AMC=4000,Lux Hosiery=380.