Unlisted shares of Chennai Super Kings (CSK), the only sports franchise which can be traded in India, jumped 25 per cent at Rs 200-205 per share and pushed CSK’s valuation to Rs 6,300 crore just before the Indian Premier League (IPL) season earlier this year.
The emergence of many retail focussed un-listed shares investment online platforms has now made it easy for many retail investors to invest in unlisted shares. This was not possible a decade ago, says Vinay Bansal, founder and CEO, Inflection Point Ventures, a Gurgaon-based angel investment company.
“But now the unlisted shares investment market has opened for retail and the process can be done online too,” he says.
Vijay Kuppa, co-founder and COO, Orowealth, a stock broking and alternative investment platform, says that the entire process and compliance for buying unlisted shares now typically takes ‘T+3 days."There is a six-month lock-in for the shares post listing. However, before listing, there is no restriction on selling of shares,” he adds.
According to Prashant Narang, co-founder, Agility Ventures, a Haryana-based angel investment company, there is a multi step process for buying shares in a unlisted start up and it begins with scouting, then shortlisting, industry research, negotiating valuations. After this the termsheet is signed and due-diligence process starts.
Lastly the shareholder agreements are signed and the share certificates are given to the buyer. "On an average it takes 50-60 days to complete a startup investment," said Narang.
Apart from this process, one can also buy shares in a pre-IPO round too. Most companies conduct a share sale pre-IPO rounds, before launching an initial public offering (IPO) in the market. Retail investors can buy using specialised set-up with some brokerage houses who are in contact with the pre-IPO session conducting company. There are many fintech companies who does all this backend processes for a commission and retail investors can use them for buying unlisted shares too.
Here are compliances you need to check before investing in unlisted shares.
Company Law-Related Compliance: Abhinay Sharma, managing partner, ASL Partners, a Delhi-based legal and tax consultancy firm, says there are certain company law provisions, including certain specified forms, which have to be filed. These are:
Income Tax Law Compliance: Ankit Jain, partner, Ved Jain and Associates, a Delhi-based legal and tax consultancy firm, says that when buying or selling unlisted shares, it is important to determine the fair value according to the tax laws.
“If you buy unlisted shares at a price less than such fair value, then the difference between the fair value and the purchase price is taxed as income in the hands of the buyer,” said Jain.
"The fair value of an unlisted equity share is effectively computed by reducing all the liabilities from the total assets of the company and dividing it by the number of shares issued. If the company holds any immovable property, those have to be value at the market value. All other assets are to be valued as per book value as per the last audited statement," added Jain.
According to section 50CA of the Income-tax Act, 1961, this differential value in price of the share when compared to its fair value will be added to the income of the seller.
If you are trading in unlisted shares, the same taxation laws applicable for listed shares will apply. But one does not have to pay any security transaction tax (STT) in case of unlisted shares.
An unlisted share which is held for a period of more than 24 months becomes a long-term capital asset. In such a case, the seller will pay tax at the rate of 20 per cent calculated on the indexed cost of acquisition of the unlisted shares.
There are a few things you need to keep in mind before listing in the unlisted shares.
Access to information: Unlisted companies disclose their financial information with the Ministry of Corporate Affairs (MCA), which can be accessed by paying a nominal fee.
Liquidity: The market for unlisted shares is niche and the kind the opportunity which a stock exchange provides for listed shares is not available for unlisted shares.
According to Kuppa, if investors are buying pre-IPO shares in the hope of cashing out after they are listed on the exchange, then that could become challenging due to various reasons, such as delay in the listing process.
Investing in startups is an even further niche segment and hence Narang says that for new investors who are learning about startup investments, they recommend investing smaller ticket sizes to mitigate risk.
