Unlisted shares are referred to as those shares/stocks that are not listed on the formal stock exchanges. Unlisted shares are riskier than listed shares due to their limited liquidity. These stocks trade on Over-the-Counter (OTC) markets. In the OTC market, the trading of instruments takes place between the buyers and sellers of these shares after they connect through some intermediaries. Trading of unlisted shares has credit risk as this market is not regulated and organised. Companies could have unlisted shares when they don’t have any plan of floating an Initial Public Offering (IPO). Another reason can be that they don’t satisfy the requirements of the Securities and Exchange Board of India (SEBI) for listing their shares on an exchange like NSE or BSE.
You can earn enormous returns if you successfully pick unlisted shares which have the potential to get listed and grow.
Usually, the unlisted shares are traded between big brokerage houses, companies, high-net-worth individuals (HNIs), and institutional clients. Considering the reputation of the market participants mentioned above, the risk is reduced. It is also possible to minimise the risk if you select the right intermediary to trade in the unlisted shares.
It should be noted that the main risk depends on your choice of investment. So, an in-depth analysis of the company’s fundamentals and other crucial factors should be done before purchasing an unlisted share.
Tax implications of unlisted shares:
The tax implications for unlisted shares differ from those for the listed ones. If the unlisted stock is sold within a period of 24 months, then the profit will attract short-term capital gain tax, and hence be taxed at a marginal tax rate. But if these shares are sold after 24 months, then a long-term capital gain tax is going to be applicable at 20 per cent and the investor also receives the benefit of indexation.
Valuation of unlisted shares:
The valuation of unlisted shares is done with the help of the Fair market value (FMV) method. There is no actual market price for the unlisted shares as they are not on any stock exchange. Hence, investment bankers or underwriters are the ones who calculate FMV.
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