What is an Unlisted Share?

An unlisted share refers to a company’s stock that is not traded on any formal stock exchange, such as the NSE or BSE. These shares belong to private companies that have not yet gone public through an Initial Public Offering (IPO), or they may be shares in small or family-owned businesses that have chosen to remain private.
Unlisted shares are typically traded over-the-counter (OTC) or through direct transactions between buyers and sellers, and they are not subject to the same level of regulatory oversight and liquidity as listed stocks. Because of this, investing in unlisted shares can involve more risk, but it can also offer high growth potential if the company later decides to go public.

Understanding How Unlisted Shares Work

Unlisted shares are those that are not traded on formal stock exchanges. Here’s a breakdown of key aspects:

Issuance of Unlisted Shares

Unlisted shares are typically issued by private companies that do not offer their stock on public exchanges. These shares are usually sold to a select group of investors, such as founders, private equity firms, venture capitalists, or employees through employee stock options. The issuance of shares may occur during early funding rounds, such as seed funding or Series A funding, or when the company raises capital for expansion. These shares are not available to the public, unlike those of companies listed on stock exchanges.

Private Transactions

Since unlisted shares are not available on public exchanges, they are often traded in private transactions. These transactions can occur between individuals, institutions, or through specific platforms that facilitate the buying and selling of unlisted shares. Transactions are usually negotiated directly between the buyer and seller, which means they might not have the same level of liquidity as listed stocks. Because of the lack of a formal market, the process of buying or selling unlisted shares may take longer, and the pricing is often based on the agreement between both parties rather than market dynamics.

Valuation

Valuing unlisted shares can be more challenging than listed shares due to the absence of public market prices. Their value is often determined through methods like financial modeling, which includes analyzing the company’s assets, revenues, growth potential, and other factors like comparable companies in the industry. Valuations are typically carried out during funding rounds, mergers, acquisitions, or when the company undergoes audits. It’s common to use discounted cash flow (DCF) analysis or comparable company analysis to estimate their value.

Regulation

Unlisted shares are less regulated than those of listed companies. While companies issuing unlisted shares still need to adhere to basic legal requirements, such as those set by the Companies Act in India or similar regulations in other countries, they don’t face the stringent rules that listed companies do, such as disclosure requirements or the need to file quarterly financial reports. However, some regulations exist to ensure transparency in private transactions, especially when the company decides to go public or if the shares are sold to a wider audience. In India, unlisted shares are still regulated by authorities like the Securities and Exchange Board of India (SEBI) to some extent, especially when it comes to investor protection and fraud prevention.

In conclusion, unlisted shares are a form of equity issued by private companies and traded in private transactions. Valuation can be more subjective, and while they offer investment opportunities, they come with certain risks and challenges due to lower liquidity and regulation.

Minimum Investment Requirements for Unlisted Shares in India

In India, the minimum investment requirement for unlisted shares varies based on the company and the type of transaction. Generally, private companies do not have a fixed minimum for investment, but certain factors can influence this:

Individual investors have two main options for investing in unlisted shares:

Direct Investment in Unlisted Shares

Direct investment in unlisted shares involves purchasing shares directly from the company or through private transactions (e.g., through a broker or existing shareholders). The minimum investment amount for direct investment can vary significantly based on the company, type of transaction, and the investor’s status. Typically:

Private Companies: The company may set its own minimum investment threshold, which can range from ₹1 lakh to ₹10 lakh or more, depending on the company’s size, stage of funding, and investor type (e.g., angel investors or venture capital).

Negotiated Deals: In private deals, the investment size is often subject to negotiation between the buyer and seller. Some companies may allow small-scale investments, while others may require larger amounts from institutional investors or high-net-worth individuals (HNWIs).

Investment Funds in Unlisted Shares

Investment funds that focus on unlisted shares, such as private equity or venture capital funds, pool money from multiple investors to invest in unlisted companies. The minimum investment amount for these funds is generally higher than direct investments due to the pooled nature of the fund.

Private Equity/Venture Capital Funds: The minimum investment for such funds can range from₹5 lakh to ₹25 lakh or more, depending on the fund’s focus, investor type, and risk profile.

Fund Type: Larger institutional funds may have higher minimum investments, while some smaller or newer funds may accept lower amounts from individual investors, but it still tends to be substantial compared to direct investments in unlisted shares.

In both cases, the investment size largely depends on the company or fund’s requirements, as well as the investor’s financial capacity and status. Investors should carefully evaluate the risks and returns before committing to such investments.