How to invest in unlisted companies in India
Unlisted shares are those shares which are not listed by the Securities and Exchange Board of India (SEBI). The stock market listed shares are monitored and regulated continuously. Unlisted shares provide great opportunities for growth and exposure while also have the risk of having less stringent regulations. If you are one to take up the risks, this might help you understand unlisted stocks investment a little better.
What are Unlisted Shares?
The shares which are not listed on the stock exchange are known as Unlisted Stocks or over-the-counter (OTC) securities. These shares or any financial instrument or security are available for trade on over-the-counter markets.
Most unlisted companies in general do not trade on any formal stock exchange. The main reason being, new companies or smaller firms do not want to or in most cases are not able to comply with the requirements of being listed, eg: market capitalization, listing charges , etc.
While the common stock is the most frequently found unlisted financial instrument, the other financial instruments include
- The government issued securities
- Corporate bonds
- Penny stocks
- Swaps ( any type of a derivative product)
HOW TO TRADE IN UNLISTED STOCKS?
Following are some known methods by which an investor can invest in some of the most leading unlisted companies of India.
INVEST IN INTERMEDIATARY AND NEW BUSINESS
Any company which is not listed and is in pre-IPO, will have plans to go public in future. In such cases, when you invest in their stocks, the returns will directly go to your demat account, though the transaction may be off the record and there is no exchange involved. Although one must be careful while trading in unlisted stocks and look for a person who can help you deal with the transactions successfully and avoid any risks. Another good option while trading in unlisted stocks are start-up firms. Even though these companies may be small and not on the market radar, they have the potential to grow in future and bring you profits. For most of these small strat-ups, the minimum investment is ₹50,000 in order to have stocks directly transferred in the investor’s demat account.
BUY ESOP FROM COMPANY EMPLOYEES
There are many brokers who help you connect with the employees of the companies who will in turn help you buy shares of the company. Since you are buying from the employee, he will sell the shares at a predetermined price for some set period of time. This method is the most popular one while trading in unlisted shares in India.
INVEST IN STOCKS VIVA STOCK PROMORTERS
When wanting to invest in a certain company, visit any investment bank or a wealth manager, or maybe a broker who will help you connect to a promoter. The other benefit of going to a professional for more information is that they will guide you and teach you how to calculate the shares of the unlisted companies. They will also guide you by giving you a list of the unlisted companies in India. Such transactions are also called as Private Placements.
INVEST IN SCHEMES LIKE PMS and AIF WHICH ACQUIRE UNLISTED STOCKS
PMS which is also known as Portfolio Management Systems, are those investment portfolios which are managed professionally. In such cases when a portfolio manager manages the portfolio, he manages the portfolio based on the market trends in order to gain maximum trends. If you invest in unlisted companies via PMS scheme, is the most beneficial way to trade in India, since it will include financial strategies. This is much better, secure and safe than a direct purpose since the risk is divided across your portfolio. On the basis of your portfolio’s performance, the portfolio manager will add and remove the stocks.
One must also keep in mind that even though investing in these stocks is advantageous, it can be a risky business as well. The risks involve the ill-liquidity of share, capital depletion, chances of dividend not being paid and dilution risk to name a few. Therefore, before investing , one must weigh all the pros and cons and get an experienced portfolio manager to study your portfolio.
A company that does not trade in any stock exchange is considered to have an unlisted share or financial instrument.
The examples of unlisted stock are penny stocks, corporate bonds, government securities, common stocks.
Ways to invest in unlisted stocks include investing in startups or intermediaries, purchasing ESOPs through employees, investing ins PMS schemes.
The risks of having an investment in an unlisted stock include illiquidity, capital loss, no dividend returns and company dilution.