Should you buy Unlisted Shares before IPO Listing? How to invest in unlisted shares.

 What is an Unlisted Share:

Listed Shares are the securities and instruments of a business that are listed and traded publically and the investors can buy a small percentage or fractions of it.

Unlisted shares are however the business whose securities are publically not available for participation in stock exchanges for buy and sell. That means the company has not yet filed for an IPO ( Initial public offering) or is yet to file for an IPO.

Unlisted shares are however still bought using private platforms which also retails investors to put in some cash way before the IPO. This has both advantages and disadvantages which will be discussed below.

Why even look for unlisted shares for when there are 1000s available in the listed platform?

True, unlisted shares are one the riskiest bet since there is no past information about the price, trades, or even business performance. These are only bought by investors for specific companies which they feel would make good and also bet with a small amount of their overall amount. The type of investors who prefer this investment take the largest risk and sometimes turn out quite well.

Differences

Listed shares:

Listed and Traded on Stock Exchange.

Listed shares have High Liquidity.

Listed Shares are regulated by SEBI.

A lot of disclosures are required in Listed Shares.

Less Tax.

Unlisted Shares:

Listed and Traded Over the Counter.

Unlisted Shares have Low Liquidity.

There is no Regulator in Unlisted Shares.

Disclosures are lower in  Unlisted Shares,

More tax.

Lock in 6 months after IPO until which the securities cant be sold.

What are the factors to consider while buying unlisted shares in terms of valuation?

Unlike Listed shares which have several factors which can be decided before the stock can be bought, like PE ratio, PS ratio, ROCE, ROE, sales, and revenue growth Not all factors are available for unlisted shares. Finding the information is relatively tough unless the unlisted company discloses everything. The most way is to find the last investment raised, sales every quarter,   and profit growths.

Advantages of Unlisted shares:

1. Invest way early at a low valuation:

The advantage here is that investment at an early stage helps to get a lower valuation, and the advantage of buybacks, and high valuation increase if they get an investment at a high valuation later.

2. Multifold returns: Since it's early, and if the company has potential it would result in high returns.

3. Diversification: Getting exposure to micro or startup investments.

Disadvantages:

High Tax:

Long-term will be 20% with indexation and short-term as per tax slab. Also, the duration here is 24 months and not 12 months for short and long term.

High commission:

The private company form where the unlisted shares are bought generally has few commissions which are way more than listed companies.

Less Liquid: Once the unlisted shares are bought, the chances of less are almost less. Some private companies allow selling but point the to note is there is way less liquidity.

Lock-in period: There is a lock-in of 6 months if the company announces an IPO before which you can't sell the shares.

Limited company data:  As discussed earlier, there is less financial data available as compared to listed shares.

Ways to sell Unlisted shares:

1. IPO: You can sell the shares after IPO, after a 6-month lock-in period.

2. Buybacks

3. Selling if the private company allows it.

4. If the company is acquired by a listed company.

5. Mergers/acquisitions.

Where to buy Unlisted shares before listing:

Few private companies provides a platform to buy unlisted shares. Some do provide a sell option too. some of the platforms are:

1. Leadoff

2. Altius invest

3. unlisted zone