Things to Know Before Buying Unlisted Shares

Introduction

=> Investing in unlisted shares offers unique opportunities for investors looking to access private companies before they go public. 

=> Unlike listed stocks, these shares are not available on stock exchanges and require careful planning. 

=> Unlisted shares can provide early entry into high-growth companies, potentially higher returns, and diversification for your portfolio. 

=> However, they also carry challenges like limited liquidity, valuation complexities, and regulatory considerations.

=> This blog will guide you through the essential aspects of unlisted shares, helping you make informed investment decisions.

1. How Unlisted Companies Differ from Listed Stocks

=> Unlisted companies are private firms whose shares are not publicly traded. 

=> This makes them fundamentally different from listed companies, which trade on exchanges like NSE or BSE. 

=> Understanding the difference between listed and unlisted shares helps investors weigh convenience, risk, and potential reward.

~ Key Differences

  • Accessibility: Listed shares can be bought by anyone through a trading account. Unlisted shares are often offered to select investors, employees, or via intermediaries.

  • Transparency: Listed companies disclose financials quarterly and annually. Unlisted companies provide limited data, typically only to investors.

  • Liquidity: Selling listed shares is easy and instantaneous. Unlisted shares require negotiation and can take weeks or months to sell.

  • Market Risk: Listed shares have prices determined by supply and demand, while unlisted share prices are negotiated privately.

~ Table: Comparison of Listed vs Unlisted Companies

Feature

Listed Companies

Unlisted Companies

Trading Platform

NSE, BSE

Private deals / intermediaries

Liquidity

High – can sell instantly

Low – finding buyers takes time

Price Determination

Market-driven, changes daily

Negotiated based on valuation

Regulations

Strict SEBI & exchange rules

Limited SEBI oversight

Investor Access

Open to all investors

Restricted to private investors

~ Why It Matters

  • Listed shares offer ease, transparency, and instant exit options.

  • Unlisted shares provide early access to potential growth companies but require patience, due diligence, and risk management.

  • Investors must balance the trade-off between opportunity and convenience.

2. Risks of Investing in Unlisted Shares

=> While unlisted shares can offer high returns, they also carry risks. 

=> Understanding the risks in unlisted shares helps investors prepare and protect their capital.

~ Common Risks

  • Limited Liquidity: Shares cannot be sold instantly, and finding a buyer may take a long time.

  • Lack of Transparency: Access to financial and operational data is limited, making informed decisions harder.

  • Valuation Challenges: Prices are negotiated privately and may be inflated.

  • Regulatory Risks: Less oversight increases chances of mismanagement.

  • Business Failure: Many unlisted companies are startups or small firms, which carry higher risk of failure.

~ Table: Risk Comparison

Risk Area

Unlisted Shares

Listed Shares

Liquidity

Low

High

Transparency

Limited financial data

High, mandatory disclosures

Valuation

Negotiated, subjective

Market-driven

Regulatory Oversight

Limited

Strict SEBI monitoring

Business Stability

Higher risk

Generally lower risk

~ Risk Mitigation Tips

  • Conduct thorough research and verify company background.

  • Invest smaller amounts initially and diversify across multiple unlisted shares.

  • Use intermediaries or platforms with a good track record.

  • Review the company’s management, growth potential, and financials carefully.

3. How to Check the Valuation of Unlisted Shares

=> Valuing unlisted shares is challenging because no exchange sets a daily market price. 

=> Understanding the valuation of unlisted shares helps investors make informed decisions and avoid overpaying.

~ Common Valuation Methods

  1. Net Asset Value (NAV) – Calculated as company assets minus liabilities, suitable for asset-heavy firms.

  2. Discounted Cash Flow (DCF) – Estimates the present value of future cash flows, ideal for companies with predictable earnings.

  3. Comparable Company Analysis – Compares metrics like P/E ratios with similar listed companies.

  4. Recent Transactions – Uses prices from recent funding rounds or private deals, common in startups.

~ Table: Valuation Methods

Method

Description

Best Use Case

Net Asset Value (NAV)

Assets minus liabilities

Asset-heavy companies

Discounted Cash Flow (DCF)

Present value of future cash flows

Stable earning companies

Comparable Company Analysis

Compare with similar listed companies

Growth-stage companies

Recent Transactions/Funding

Price from recent private deals

Startups / pre-IPO companies

~ Tips for Investors

  • Cross-check valuations using multiple methods for accuracy.

  • Seek professional reports for large investments.

  • Understand assumptions behind projections to avoid hype-driven valuations.

~ Example

A tech startup may show NAV of ₹500 per share, DCF estimate of ₹650, and comparable companies suggest ₹600. Considering all methods together, a fair price could be around ₹600, helping investors avoid overpaying.

4. Liquidity Challenges in Unlisted Share Market

=> Liquidity is a critical factor in unlisted share investments. Understanding liquidity in unlisted shares helps investors manage exit strategies effectively.

~ Key Challenges

  • Limited Buyers: Selling may take weeks or months.

  • Price Negotiation: Fewer buyers may require accepting a lower price.

  • Lock-in Periods: Some shares cannot be sold for a set time.

~ Table: Liquidity Comparison

Feature

Listed Shares

Unlisted Shares

Ease of Selling

High – immediate sale

Low – may take months

Price Stability

Market-driven

Negotiation-based

Buyer Pool

Large

Limited

Lock-in Periods

Usually none

Sometimes required

~ Tips

  • Treat unlisted shares as a long-term investment.

  • Diversify to manage liquidity risk.

  • Use trusted intermediaries to facilitate transactions.

5. Role of SEBI Regulations in Unlisted Investments

=> SEBI regulates securities markets to protect investors. Understanding the SEBI rules for unlisted shares ensures safer investments.

~ Key SEBI Guidelines

  • Private Placement Rules – Companies must follow approvals and proper documentation for issuing shares privately.

  • Disclosure Requirements – Companies provide financial statements and business data to investors.

  • Valuation Guidelines – SEBI recommends fair valuation methods.

  • Lock-in Periods – Sometimes required to prevent sudden sell-offs.

~ Table: SEBI Oversight

Aspect

Listed Shares

Unlisted Shares

Regulatory Authority

SEBI & Stock Exchanges

SEBI guidelines, limited enforcement

Disclosure Requirements

Mandatory public reporting

Only to investors

Fundraising Rules

IPO & FPO regulated

Private placements under SEBI rules

Investor Protection

High

Moderate

~ Tips

  • Verify SEBI compliance before investing.

  • Check lock-in periods and exit options.

  • Work with experienced intermediaries familiar with regulations.

6. Ways to Buy and Sell Unlisted Company Shares

=> Buying and selling unlisted shares requires strategy and planning.

~ Buying Methods

  • Private Deals – Direct purchase from the company or shareholders.

  • Through Intermediaries – Brokers or online platforms specialized in unlisted shares.

  • Employee Stock Options (ESOPs) – Some companies offer shares to employees.

~ Selling Methods

  • Private Negotiation – Selling shares directly to another investor.

  • Through Platforms – Online marketplaces for unlisted shares.

  • Secondary Markets – Investment funds or professional networks may purchase shares.

~ Table: Buying vs Selling

Method

Buying

Selling

Direct Transaction

Private deals with shareholders

Find a buyer via negotiation

Intermediary/Platform

Brokers or online platforms

Brokers help locate buyers

Employee Shares

ESOPs or private offers

Transfer to eligible investors

~ Tips

  • Verify the authenticity of shares before buying.

  • Keep detailed records of all transactions.

  • Work with experienced intermediaries to reduce risk.

Note: To learn more about investing in unlisted shares, exploring the risks, valuation methods, and how to buy or sell them safely, visit our website unlistedhub.in for detailed guides, tips, and expert insights.

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