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Investment in Unlisted Shares in India - Advantages and Disadvantages

Unlisted shares are shares of companies that are not traded on any formal stock exchange, such as BSE or NSE. These companies may be start-ups, pre-IPO companies, or established firms that prefer to remain private. Investing in unlisted shares can offer some unique benefits and challenges to investors. In this blog post, we will explore the advantages and disadvantages of investing in unlisted shares in India.


Advantages of Investing in Unlisted Shares


- Higher returns potential: Unlisted shares can offer higher returns than listed shares, as they may have a lower valuation and higher growth prospects. For example, some of the top unlisted companies in India, such as Ola, Flipkart, PhonePe, Delhivery, and Byjus, have seen their valuations soar in recent years, making their early investors rich. Unlisted shares can also benefit from events such as IPOs, mergers and acquisitions, or strategic partnerships that can boost their value.


- Diversification: Investing in unlisted shares can help diversify the portfolio, as they may have different risk-return profiles and correlations with the market than listed shares. Unlisted shares can also expose investors to new sectors, markets, or technologies that may not be available in the listed space.


- Access to exclusive opportunities: Investing in unlisted shares can give investors access to exclusive opportunities that may not be available to the general public. For example, investors can invest in pre-IPO companies that have a strong business model and growth potential but are not yet ready to go public. Investors can also invest in start-ups that have innovative products or services that can disrupt the market or create a new niche.


Disadvantages of Investing in Unlisted Shares


- Illiquidity: Unlisted shares are not traded on any formal exchange, which means they have low liquidity and high transaction costs. Investors may find it difficult to buy or sell unlisted shares at their desired price and time. They may also face delays or disputes in the settlement of transactions. Moreover, investors may have to hold unlisted shares for a longer period, as they may not be able to exit before an IPO or a liquidity event.


- Lack of transparency and regulation: Unlisted shares are not subject to the same level of transparency and regulation as listed shares. Investors may not have access to reliable and timely information about the company's financial performance, operations, governance, or risks. Investors may also face legal or regulatory issues if the company violates any laws or norms. Additionally, investors may have less protection and recourse in case of fraud or mismanagement by the company or its promoters.


- Higher risk: Unlisted shares are inherently riskier than listed shares, as they are more volatile and uncertain. Investors may face a higher risk of capital loss, as unlisted shares may lose their value due to various factors such as poor performance, competition, market conditions, or regulatory changes. Investors may also face a higher risk of no dividends, as unlisted companies may not distribute profits to shareholders. Furthermore, investors may face a higher risk of dilution, as unlisted companies may issue more shares to raise funds or reward employees.


Conclusion


Investing in unlisted shares in India can be a rewarding but risky proposition. Investors should do their due diligence before investing in unlisted shares and understand the advantages and disadvantages of this asset class. Investors should also consult a professional advisor or broker who can help them with the price discovery, valuation, and transaction of unlisted shares.


References:


- How to Buy Unlisted Shares in India? - Groww

- How to Invest in Unlisted Shares in India? - Finology

- Income Tax on Unlisted Shares in India - Learn by Quicko

- Top 10 Unlisted Shares To Buy In 2023 - Stocx.in

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