Exploring Unlisted Shares: Risks and Rewards

Ankur Chopra
5 days ago
4 min read

Investing in shares is a popular way to build wealth, but not all shares are created equal. While many investors focus on stocks listed on major exchanges, there is a whole world of unlisted company shares that offer unique opportunities and challenges. These shares belong to companies that are not traded on public stock exchanges, making them less visible but potentially rewarding for those who understand the market.

In this article, we will explore what unlisted company shares are, their benefits and risks, how they can be sold, and practical strategies for investors interested in this niche market.

Understanding Unlisted Company Shares:

Unlisted company shares refer to equity in companies that do not trade on formal stock exchanges like the NSE or BSE. These companies might be startups, private firms, or businesses that have chosen to stay private for strategic reasons. Because they are not listed, their shares are not available through regular stockbrokers or trading platforms.

Why do companies remain unlisted?

Cost savings: Listing on a stock exchange involves significant regulatory compliance and fees.
Control: Founders and early investors often prefer to keep control without public shareholder pressure.
Growth stage: Many startups remain private until they reach a certain scale or valuation.

How do investors buy unlisted company shares?

Investors typically acquire these shares through private placements, employee stock options, or secondary markets that specialize in unlisted shares. Platforms like Unlisted Mitra facilitate buying and selling these shares, providing a marketplace for interested parties.

Benefits and Risks of Investing in Unlisted Company Shares

Investing in unlisted company shares can be lucrative but comes with distinct risks. Understanding both sides is crucial before making any commitments.

Benefits:

Potential for high returns: Early investment in a private company can yield significant profits if the company grows or goes public.
Access to innovative companies: Many startups and emerging businesses offer shares only privately.
Diversification: Adding unlisted shares to a portfolio can reduce correlation with public markets.

Risks:

Lack of liquidity: Unlike listed shares, unlisted shares are harder to sell quickly.
Limited information: Private companies are not required to disclose as much financial data, making due diligence challenging.
Valuation uncertainty: Without a public market, determining the true value of shares can be difficult.
Regulatory risks: Compliance and legal frameworks may vary, increasing complexity.

Practical Example

Suppose you invest in a tech startup’s unlisted shares at an early stage. If the company succeeds and lists on a stock exchange, your shares could multiply in value. However, if the company struggles or fails, your investment might become worthless.

Unlisted Shares can be sold?

One of the biggest concerns for investors is the ability to sell unlisted shares. Since these shares are not traded on public exchanges, selling them requires alternative methods.

How to sell Unlisted Shares?

Private sale: Selling directly to another investor, often through personal networks or brokers.
Secondary markets: Platforms like Unlisted Mitra provide a marketplace for buyers and sellers of unlisted shares.
Company buyback: Sometimes, the issuing company may offer to buy back shares from investors.
Initial Public Offering (IPO): If the company goes public, unlisted shares can be converted into listed shares and sold on the stock exchange.

Important Considerations:

Valuation: Agreeing on a fair price can be challenging without market-driven pricing.
Legal documentation: Transfers often require formal agreements and compliance with company policies.
Lock-in periods: Some shares may have restrictions on when they can be sold.

Actionable Strategy:

Before investing, clarify the exit options and restrictions with the company or platform facilitating the transaction. This will help you plan your investment horizon and liquidity needs.

How to evaluate unlisted company shares:

Evaluating unlisted shares requires a different approach compared to listed stocks. Since public data is limited, investors must rely on alternative methods.

Key factors to consider:

Company fundamentals: Analyze financial statements, revenue growth, profitability, and cash flow.
Management team: Assess the experience and track record of the leadership.
Market potential: Understand the industry, competition, and growth prospects.
Shareholder agreements: Review rights, restrictions, and dividend policies.
Valuation methods: Use discounted cash flow (DCF), comparable company analysis, or recent funding rounds as benchmarks.

Due diligence checklist:

Request audited financial reports.
Meet with company executives.
Verify legal compliance and intellectual property.
Understand the company’s business model and customer base.

Practical Example

If a private healthcare company shows consistent revenue growth and has a strong management team, it might be a good candidate for investment. However, if the company lacks transparency or operates in a highly competitive market without differentiation, caution is advised.

Strategies for investing in unlisted company shares

Investing in unlisted shares can be profitable if approached with caution. Here are some practical strategies to guide you through this market:

Start small: Allocate only a portion of your portfolio to unlisted shares due to their higher risk.
Use trusted platforms: Engage with reputable marketplaces like Unlisted Mitra to ensure secure transactions.
Diversify: Spread investments across different companies and sectors to reduce risk.
Understand lock-in periods: Be prepared to hold shares for several years before liquidity options arise.
Seek professional advice: Consult financial advisors or legal experts familiar with private equity investments.
Stay informed: Keep track of company updates, industry trends, and regulatory changes.

By following these guidelines, investors can better manage the risks and maximize the potential rewards of unlisted company shares.

Exploring unlisted company shares opens up a world of investment opportunities beyond traditional stock markets. While the risks are higher, the potential for significant returns and portfolio diversification makes them an attractive option for informed investors. With careful evaluation, proper due diligence, and strategic planning, investing in unlisted shares can be a valuable addition to your financial journey.