In the diverse landscape of Indian investments, unlisted shares represent an often overlooked avenue that can offer significant opportunities for portfolio diversification and growth. At Dhan Kirti, we’ve observed growing interest in this investment class, particularly among investors looking beyond traditional market instruments. But what exactly are unlisted shares, and why should Indian investors consider them?

Unlisted shares are equity securities of privately held companies that don’t trade on public exchanges like the NSE or BSE. Instead, these shares change hands through private transactions between willing buyers and sellers. This fundamental characteristic shapes everything from their valuation process to their risk-reward profile.

The unlisted securities market in India has grown substantially in recent years. According to a 2023 SEBI report, the unlisted securities market in India has expanded at a CAGR of approximately 17% over the past five years, reflecting increased investor appetite for alternative investment options.

Understanding Unlisted Shares in the Indian Context

Unlisted shares represent ownership in companies that have chosen not to list on public exchanges. Several types of companies fall into this category:

• Pre-IPO companies: Businesses preparing for eventual public listing
• Family-owned businesses: Traditional companies that prefer to remain private
• Startups with significant traction: Companies that have achieved scale but remain private
• Subsidiaries of listed companies: Wholly or partially owned divisions of public companies
• Delisted companies: Previously public companies that have returned to private status

Unlike their listed counterparts, these shares operate outside the regulatory framework of stock exchanges, though they remain subject to Companies Act provisions and other applicable regulations.

Key Distinguishing Features of Unlisted Shares

Understanding what sets unlisted shares apart from listed equities helps investors appreciate their unique position in an investment portfolio:

Valuation Mechanism: While listed shares have market-determined prices updated by the second, unlisted shares are valued through negotiation between parties or using valuation methodologies like discounted cash flow, comparable company analysis, or book value methods. This creates both challenges and opportunities for savvy investors.

Liquidity Considerations: Perhaps the most significant distinction is liquidity. As per a 2023 ASSOCHAM report, the average time to liquidate an unlisted share position in India ranges from 2-6 months, compared to instantaneous execution for listed securities. This liquidity gap affects pricing, with unlisted shares typically trading at 15-30% discounts to their anticipated public market valuations.

Regulatory Environment: Unlisted shares operate under a different regulatory framework. While they don’t require the extensive disclosures mandated by SEBI for listed entities, transactions still need to comply with Companies Act provisions, Foreign Exchange Management Act (FEMA) for foreign investors, and income tax regulations.

Information Asymmetry: Listed companies must follow strict disclosure norms, providing quarterly financial results, material developments, and other relevant information. Unlisted companies have significantly fewer disclosure requirements, creating information gaps that can be both a challenge and an opportunity for informed investors.

The Appeal of Unlisted Shares for Indian Investors

Why would investors venture into this relatively less transparent market? The appeal stems from several potential advantages:

Growth Potential: Unlisted companies often represent businesses in high-growth phases. Recent data from a McKinsey report indicates that private companies in India have demonstrated average annual growth rates of 18-22% compared to 12-15% for publicly listed peers in similar sectors between 2018-2023.

Valuation Arbitrage: Due to illiquidity and information asymmetry, unlisted shares frequently trade at discounts to their intrinsic value or potential public market valuations. This discount typically ranges from 20-40% based on sector, growth stage, and other factors.

Portfolio Diversification: Unlisted shares provide exposure to segments of the economy not well-represented in public markets. For instance, India’s burgeoning fintech space has over 2,100 active startups as of 2023, but fewer than 30 listed entities.

Lower Volatility: Being disconnected from daily market fluctuations, unlisted shares can demonstrate more stability in pricing, though at the cost of liquidity.

Risks and Challenges to Consider

While the potential rewards can be significant, unlisted shares come with substantial risks that every investor must carefully evaluate:

Liquidity Risk: The absence of a ready market makes exit timing uncertain and potentially challenging. Even with growing secondary markets for unlisted shares, realizing value can take months rather than seconds.

Valuation Uncertainty: Without market-determined prices, valuing unlisted shares requires subjective judgment and can lead to significant pricing disparities.

Regulatory and Governance Concerns: With fewer disclosure requirements and regulatory oversight, unlisted companies may present higher governance risks. According to a 2023 survey by the Indian Institute of Corporate Affairs, governance standards in unlisted entities lag listed peers by significant margins in areas like board independence, related party transaction disclosures, and audit committee functioning.

Information Limits: The restricted flow of information makes thorough due diligence more challenging and increases the importance of investor networks and specialized knowledge.

How to Invest in Unlisted Shares in India

For investors interested in exploring this space, several pathways exist:

Direct Acquisition: Purchasing shares directly from existing shareholders through platforms specializing in unlisted securities, including specialized brokers and intermediaries.

Pre-IPO Funds: Participating in funds specifically designed to invest in unlisted companies approaching public offerings.

Alternative Investment Funds (AIFs): Investing in SEBI-registered AIFs that focus partially or primarily on unlisted equities.

Employee Stock Options: For those working in private companies, ESOPs can provide exposure to unlisted equity.

In terms of transaction mechanics, unlisted share transfers require:

• Execution of share transfer forms
• Board approval from the issuing company in many cases
• Payment of stamp duty
• Registration of transfer in company records

Tax treatment deserves special mention. Unlisted shares held for more than 24 months qualify as long-term capital assets, taxed at 20% after indexation benefits. Short-term gains are taxed at applicable income tax slab rates.

Due Diligence Essentials for Unlisted Investments

Success in unlisted investments hinges on thorough due diligence. We recommend focusing on:

Company Fundamentals: Analyze business models, competitive advantages, revenue streams, and growth drivers.

Financial Health: Review financial statements for at least 3-5 years, examining trends in revenue, profitability, debt levels, and cash flows.

Management Quality: Assess the track record, experience, and integrity of the leadership team.

Ownership Structure: Understand the shareholder pattern, rights attached to different share classes, and any transfer restrictions.

Exit Possibilities: Evaluate potential exit mechanisms, including IPO plans, strategic sales, or buyback provisions.

Legal Compliance: Verify regulatory compliance, pending litigation, and potential legal challenges.

Current Trends in India’s Unlisted Securities Market

The unlisted securities landscape in India continues to evolve rapidly:

Growing Intermediary Ecosystem: Specialized platforms like Unlistedkart, Trica, and Grip Invest have emerged to facilitate transactions, improving liquidity and price discovery.

Increasing Institutional Interest: According to a 2023 SEBI report, AIFs have allocated approximately 18% of their capital to unlisted equities, up from 12% in 2019.

Sector Shifts: Technology, renewable energy, financial services, and healthcare dominate the unlisted space, accounting for over 65% of transaction value in 2023.

Regulatory Evolution: SEBI’s ongoing consultations on creating a formal framework for unlisted share trading platforms could significantly impact market structure in coming years.

Is This Investment Right for You?

Unlisted shares typically best suit investors who:

• Have a high risk tolerance
• Can tie up capital for extended periods (3-5+ years)
• Possess or can access specialized sector knowledge
• Have sufficient portfolio diversification already in place
• Can invest meaningfully in due diligence

For most investors, unlisted shares should represent no more than 10-20% of an overall investment portfolio, depending on individual risk capacity and goals.

FAQ

Are unlisted shares completely unregulated in India? No, unlisted shares are still governed by the Companies Act, 2013, Income Tax regulations, and in certain cases, FEMA regulations for foreign investors. However, they lack the additional layer of SEBI regulations that apply to listed securities.

How do I determine a fair price for unlisted shares? Fair pricing typically involves analyzing company financials, comparing with similar listed entities (with an illiquidity discount), evaluating recent transaction prices, and assessing future growth prospects. Professional valuation services or specialized platforms can provide guidance.

What is the minimum investment required for unlisted shares? There’s no formal minimum, but practical considerations often make smaller investments challenging. Most unlisted share transactions in India typically start from ₹1-2 lakhs, though this varies widely.