Unlisted Shares in India: Risks, Rewards, and Investment Strategies for 2025

16 January, 2025 | India

Investing in unlisted shares presents a unique opportunity for diversification and potential high returns. Traditionally, the focus has been on publicly traded stocks, bonds, and mutual funds, but unlisted or private shares have captured the attention of both institutional and retail investors alike. Unlisted shares include shares of private companies, pre-IPO shares, and securities issued by private equity and venture capital funds. Several companies' stocks like NSE, Nayara Energy Limited, Tata Capital Limited, OYO, etc. play a major role in the growth of unlisted market space in India. NSE India, being the largest company available in the Indian Private Market, has a market capitalization of INR 4,45,500.00 crores as its shares are currently trading at INR 1800, as on December 10, 2024. However, these rewarding investments come with their own set of risks and challenges that must be understood thoroughly before investing.

Why is Unlisted Market Growing in Popularity in India

Krishna Patwari, Founder and Managing Director of Wealth Wisdom India Pvt. Ltd. observes that with the rise of technology-driven businesses and innovative startup ecosystems, the demand for capital has significantly increased. Many early-stage companies seek funding through unlisted shares to avoid the costs and regulatory hurdles associated with IPOs. Online  platforms like Primex 40 Index track the live performance of the top 40 unlisted companies in India across various sectors and market capitalizations and serve as a benchmark for investors in the unlisted share market, providing insight into the private market landscape.

Rewards of Investing in Unlisted Shares

• Potential for High Returns: Unlisted companies, particularly startups, often provide high return on investments.  These early age startups and private companies experience exponential growth, and early investors can capitalize on their appreciation before they go public or reach a significant liquidity event. For example, Swiggy performed quite well in September 2024 in the pre-ipo market with its share prices initially purchased at Rs. 340 and later traded from Rs. 480-490. Also, NSE India stocks recorded a 100% uptick in December 2024 from a price of Rs. 900 to Rs. 1,800 per share in a period of last 1 Year. (NSE rates are adjusted as it is Ex Bonus now).

• Access to Exclusive Investment Opportunities: Unlisted shares often grant investors access to exclusive and innovative business models as it is not available for public investments. Investing in disruptive technologies or niche markets can provide opportunities that publicly traded companies might not offer.

• Portfolio Diversification: Adding unlisted shares to an investment portfolio leads to enhanced portfolio diversification. The performance of unlisted companies might not directly correlate with public markets, which can reduce overall portfolio risk during times of market volatility.

• Control Over the Investment Process: Investing in private companies often allows investors to engage with the business operation actively. This can include board representation, influence over business strategies, and more direct involvement compared to public company investments.

• Tax Benefits: The tax tax on long-term capital gains from such stocks has been reduced from 20% to 12.5%, simplifying the prior indexation system. Furthermore, the exemption limit for LTCG is Rs. 1.25 lakh, effective for FY 2024-25 and beyond.

Risks of Investing in Unlisted Shares

While the potential rewards can be exciting, Krishna Patwari cautions against the risks associated with unlisted shares.

• Liquidity Risk: Unlisted shares often may have limited liquidity compared to their listed counterparts. Investors may find it challenging to exit their investments due to the lack of a robust secondary market, limiting their ability to access their funds when needed.

• Valuation Challenges: Valuing unlisted shares can present significant challenges since these shares do not have a public price. Potential investors may struggle to determine an appropriate valuation, increasing the risk of overpaying.

• Limited Access to Information: Investors might find barriers when seeking relevant financial information and future prospects about unlisted companies. The lack of transparency can enhance risks, as investors may be unaware of critical issues affecting the business.

The Role of Investment Platforms & Regulatory Framework

Investment platforms like www.wwipl.com have emerged as the best platform to buy unlisted shares in India as it facilitates easy buying and selling of unlisted, delisted and PRE-IPO shares, providing investors with access to immense opportunities. WWIPL simplifies the complex process of investing in unlisted shares by offering a user-friendly interface and smooth process. Before listing any company, WWIPL performs due diligence of financial assessments and reviews the company’s business model, management team, and market potential, mitigating the overall risks involved. Wealth Wisdom India, also offers liquidity solutions with easy trading mechanisms that enable investors to buy and sell these shares more easily.

Strategies for Successful Investment in Unlisted Shares

Krishna Patwari suggests a disciplined approach to maximize returns:

1. Thorough Due Diligence: Assess the company’s business model, financial health, and competitive position.
2. Diversification: Spread investments across sectors to mitigate risks.
3. Partner with Experts: Leverage insights from experienced fund managers or venture capitalists.
4. Long-Term Horizon: Be prepared to hold investments for 5–10 years or more.
5. Stay Updated: Monitor market trends, economic shifts, and regulatory updates.

Investing in unlisted shares in India presents a complex landscape filled with both risks and rewards. Investors should carefully weigh the pros and cons before making investment decisions. It is crucial to conduct thorough research, understand the risks involved, and seek professional advice if necessary. By following a disciplined approach and diversifying their portfolio, investors can potentially reap the rewards of investing in unlisted shares while mitigating the associated risks. As India's economy continues to evolve, unlisted shares will likely play an increasingly important role, making knowledge and preparation key to successful investment in this sector.

Dusclaimer-

(This article is part of DMCL Consumer Connect Initiative, a paid publication programme. DMCL claims no editorial involvement and assumes no responsibility, liability or claims for any error or ommission in the content of the article. The DMCL editorial team is not responsible for this content.)