In the dynamic landscape of Indian investments, unlisted shares represent a unique opportunity that many investors overlook. These privately held equities can offer substantial growth potential before companies go public, but navigating this market requires specific knowledge and careful consideration. At Dhan Kirti, we’ve helped numerous investors incorporate unlisted shares into their portfolios, and we’re excited to share this comprehensive guide to help you understand the process.

Understanding Unlisted Shares in India

Unlisted shares are equity shares of companies that are not traded on recognized stock exchanges like the NSE or BSE. These companies operate privately, and their shares are typically held by founders, early investors, employees with ESOPs, and private equity firms.

According to recent data from PRIME Database, India’s unlisted market has grown by approximately 30% annually over the past five years, with a current estimated valuation exceeding ₹15 lakh crore. This growth reflects increasing investor interest in accessing pre-IPO opportunities.

Why Consider Unlisted Shares for Your Portfolio

Before diving into the buying and selling process, it’s important to understand the potential advantages of unlisted shares:

• Early Access to Growth Stories: Invest in promising companies before they go public, potentially at lower valuations
• Portfolio Diversification: Add a non-correlated asset class to traditional investments
• Reduced Volatility: Less susceptible to daily market fluctuations compared to listed stocks
• Unique Opportunities: Access to sectors and business models not readily available in public markets

Recent success stories like Paytm, Zomato, and PolicyBazaar, which delivered significant returns to early private investors, have further spotlighted this market segment.

Step-by-Step Process to Buy Unlisted Shares

1. Educate Yourself About the Unlisted Market

Before making any investment, we recommend thorough research. Unlisted shares operate differently from regular stock market investments:

• Familiarize yourself with private market terminology
• Understand valuation methodologies for private companies
• Research recent transactions in the unlisted space
• Follow news about potential upcoming IPOs

The Securities and Exchange Board of India (SEBI) reported a 45% increase in investor inquiries about unlisted shares in 2023, indicating growing interest but also highlighting the need for education.

2. Establish Your Investment Criteria

We advise developing a clear investment framework:

• Define your investment horizon (typically 2-5 years for unlisted shares)
• Determine risk tolerance (unlisted shares typically carry higher risk)
• Set allocation limits (experts recommend limiting unlisted shares to 10-15% of your portfolio)
• Establish minimum company criteria (revenue growth, profitability path, governance standards)

3. Find Reliable Sources for Unlisted Shares

Unlisted shares can be purchased through:

• Specialized Brokers: Firms like Dhan Kirti that specialize in unlisted securities
• Online Platforms: Dedicated marketplaces for unlisted shares
• Direct Connections: Reaching out to company employees, existing shareholders, or the company itself
• Secondary Market Facilitators: Organizations that help match buyers and sellers

A 2023 report by Praxis Global Alliance indicates that approximately 78% of unlisted share transactions now occur through formalized channels rather than informal networks, representing a significant shift from just five years ago.

4. Complete Due Diligence

This crucial step cannot be overlooked. Before purchasing:

• Review the company’s financials (if available)
• Assess the business model and competitive landscape
• Examine the management team’s track record
• Verify share authenticity and company registration with MCA
• Research recent transaction prices to ensure fair valuation

According to 2023 data from the Ministry of Corporate Affairs, complaints related to fraudulent unlisted share transactions have declined by 25% in the past two years, partly due to increased investor diligence.

5. Negotiate and Execute the Transaction

Once you’ve identified shares to purchase:

• Negotiate the price per share based on recent transactions
• Execute a share purchase agreement (SPA)
• Complete the payment through banking channels (avoid cash transactions)
• Ensure proper documentation is maintained

The average transaction time for unlisted shares has reduced from 15-20 days in 2020 to 7-10 days in 2023, reflecting improvements in the market infrastructure.

6. Complete the Transfer Process

For the actual transfer of shares:

• Obtain share transfer forms (typically Form SH-4)
• Have both parties sign the transfer documents
• Submit necessary documents to the company for registration
• Receive updated share certificates or confirmation of transfer

Selling Unlisted Shares: The Exit Process

When you’re ready to sell your unlisted shares, the process essentially reverses:

1. Determine the Right Time to Sell

Consider:

• Upcoming IPO announcements
• Significant business developments
• Valuation changes in the sector
• Your personal investment timeline

Recent data shows that shares of pre-IPO companies often experience value appreciation of 30-80% in the 6-12 months before going public, representing potentially optimal exit windows.

2. Find Potential Buyers

Options include:

• Working with specialized brokers like Dhan Kirti
• Listing on unlisted share platforms
• Networking with other investors
• Approaching the company or existing shareholders for buyback opportunities

3. Negotiate and Execute the Sale

Similar to the buying process:

• Agree on the sale price
• Complete the necessary paperwork
• Ensure proper tax documentation
• Facilitate the transfer process

4. Tax Implications When Selling

Be aware of the tax consequences:

• Unlisted shares held for over 24 months qualify for long-term capital gains (taxed at 20% with indexation benefits)
• Shares held for less than 24 months are subject to short-term capital gains tax at your income tax slab rate
• TDS requirements may apply depending on the transaction value

Legal and Regulatory Considerations

The unlisted shares market operates within a specific regulatory framework:

• Transactions must comply with Companies Act, 2013 provisions
• SEBI regulations apply to certain categories of unlisted securities
• Foreign investment in unlisted shares is subject to FEMA regulations
• Recent regulatory changes have improved transparency but also added compliance requirements

The Finance Act 2023 introduced specific provisions addressing unlisted share transactions, including enhanced reporting requirements for transactions exceeding ₹20 lakhs.

Risks and Challenges in Unlisted Share Investing

We believe in transparent discussions about potential downsides:

• Liquidity Constraints: Finding buyers can be challenging in the absence of an organized marketplace
• Valuation Uncertainty: Limited disclosure requirements make accurate valuation difficult
• Information Asymmetry: Access to company information is often limited
• Regulatory Changes: The evolving regulatory landscape may impact investment terms
• Delayed or Cancelled IPOs: Expected exit opportunities may not materialize as planned

A recent study by IIM Ahmedabad found that approximately 35% of companies expected to go public between 2018-2023 delayed their IPO plans, affecting investor exit timelines.

FAQs About Unlisted Shares in India

What is the minimum amount required to invest in unlisted shares?

While there’s no regulatory minimum, practical minimum investments typically range from ₹1-2 lakhs due to transaction costs and minimum lot sizes. Some high-demand unlisted shares may have higher entry barriers of ₹5-10 lakhs.

How can I verify the authenticity of unlisted shares before purchasing?

You can verify share authenticity by checking company registration with the Ministry of Corporate Affairs (MCA), reviewing the company’s register of members, examining share certificates for security features, and confirming with the company’s registrar. Working with reputable intermediaries like Dhan Kirti adds another layer of security.

What are the main differences between investing in listed versus unlisted shares?

Listed shares offer greater liquidity, price transparency, regulatory oversight, and disclosure standards. Unlisted shares typically provide potential for higher returns, less price volatility, early-stage access to promising companies, and opportunities in niche sectors, but come with increased risk, limited information, and liquidity challenges.

How long should I expect to hold unlisted shares before exiting?

The optimal holding period for unlisted shares is typically 2-5 years. This timeline allows for value appreciation through business growth and potential pre-IPO excitement. However, each investment should have its own exit strategy based on company-specific factors, market conditions, and your financial goals.

Can NRIs invest in unlisted shares in India?

Yes, NRIs can invest in unlisted Indian shares. These investments fall under Schedule 4 of FEMA (Transfer or Issue of Security by Persons Resident Outside India) Regulations and are permitted through both repatriable and non-repatriable routes.