While all listed shares can be very easily bought by anyone who has a Demat account, it is also possible, though not as easy, for investors to buy shares of firms that have not been listed yet.
However, one must note that since these shares do not trade on any exchanges, they are not very well regulated. Listed shares are closely monitored by the market regulator SEBI, but the same does not apply to unlisted shares. While these shares can provide great growth opportunities and have massive potential, they also have very high risks.
These shares are usually available for trade on over-the-counter (OTC) markets. A number of times these shares are not listed because they cannot fulfill one or more criteria for listing like fees or market capitalization etc.
So how can you buy these shares, let's understand?
1) For Pre-IPO firms, which are not currently listed but intend to be, you can buy shares in the grey market. Since it is an off-record transaction, there is no involvement of any exchange, but the shares will appear in your Demat account.
However, for this, you must find a trusted intermediary to decrease risks since it will not come under the purview of Sebi.
2) You can also invest in budding startups that have huge growth potential. Such companies are always looking for investors and provide opportunities to buy unlisted shares. Generally, in the case of startups, the minimum investment amount is ₹50,000 and the shares get transferred to your Demat account.
3) You can also look for companies that offer ESOPs but are not listed and buy shares directly from their employees. This is one of the most popular ways of buying unlisted shares. Since the shares are available for sale after a predetermined period at a set price, the employee who owns them can easily transfer the shares in exchange for a price.
4) If you have enough money saved, you can also invest in PMS (Portfolio Management Systems) to buy shares of unlisted firms. These are professionally managed portfolios, designed to suit your financial goals. However, it has a very high initial investment. People who invest in PMS get the benefits of investing in unlisted shares. This is safer than a direct purchase as you can diversify to lessen your risk. Also since it is professionally managed, you get a proper insight into the firm you want to invest in.
Now that we know where you can buy unlisted shares of a firm, it is important to understand the risks associated.
1) Most unlisted shares have very low liquidity. Since they are not traded on an exchange, it can be very difficult to find a buyer, in case you want to sell.
2) There is no guarantee that the investment will work out. Such firms can go bankrupt, lose investments, etc very easily. Since they are not very regulated, it can be difficult to recover your money in that scenario. There is always a risk of dilution of the firm leading to loss of your capital.
3) You also do not get any company benefits like dividends etc.
4) It is also not necessary that such companies are transparent. Due to the lack of regulations and monitoring of these firms, it can be difficult to do thorough research into such firms.
Other features
1) These shares are also taxes on the basis of the holding period. The Long term capital gains tax of 20 percent is applicable with indexation for shares held over 2 years. For less than that, they are taxed as per your tax slab.
2) NRIs can also buy unlisted shares the same way domestic investors can.
3) It is important to have a Demat account for unlisted shares as well. After the transaction is complete, these shares are stored there.
4) You can only sell your shares after the firm goes for an IPO and gets listed. It may be difficult to buy buyers when the shares are unlisted.
While unlisted shares may provide great growth potential, it is important to clearly understand the risks before investing in them. It may not be safe to buy these shares without a proper intermediary, professional advice and thorough research.