Section 55 of the Indian Income Tax Act now requires that unlisted shares should be transferred in an Offer for Sale. Cost of acquisition will be based on fair market value as of 31st/January/2018 and, hence, calculated based on the Cost Inflation Index for FY17-18 to correct prior calculation issues. However, it may increase investor’s tax liabilities! Let’s understand about Unlisted equity shares.

Key Facts

• Unlisted shares often have fluctuating valuations.
• Investors have to conduct in-depth due diligence due to limited public information.
• Unlisted shares include long-term lock-up periods that affect resale and liquidity.

All About Unlisted Equity Shares

Unlisted equity shares are stakes in organizations that are not traded (or) listed on public stock exchanges like NSE, NYSE, NASDAQ, Etc. They are traded directly between organizations and investors over the counter.

They grant ownership in the company’s stake, assets, earnings, and voting rights. However, shareholders have to sacrifice liquidity and public listing.

Resale challenges

• Selling unlisted shares is tougher as they are not listed in public trading exchanges for transactions. Hence, they are potentially sold at lower prices.

Unlisted Equity Shares Regulatory Oversights

• Unlisted equity shares have private regulations. Hence, conventionally, they have less rigorous reporting standards.

Transferring Challenges

• Transferring unlisted shares is subjected to company rules, shareholder agreements, and approval from other stakeholders. Therefore, unlisted equity shares are often sold to existing shareholders by giving them the first chance to buy.

Tax Payments

• Tax assessment of profits from these shares is different from publicly listed shares. Hence, they are subjected to capital gains tax, dividend tax, income tax, wealth tax, and transaction tax.

Unlisted Shares Valuation Methods

• Discounted Cash Flow estimates the current value of expected cash flows.
• Comparable Company Analysis will gauge financial prospects with similar publicly traded companies.
• Precedent Transactions looks at recent transactions of competing firms.
• Net Asset Value calculates the company’s position by deducting liabilities from assets.

Categorization

Private Company Shares

• Shares owned by founders or large institutional investors.

Pre-IPO Shares

• Shares of companies moving towards IPO by preparing for an unlisted public offer.

Restricted Unlisted Shares

• Shares with conditions, employee compensation plans, or subject to lock-up periods.

Investment Strategies

Private Equity

• Investing or buying companies to eventually sell them for profits.

Venture Capital

• Focused on investing in early-stage companies with increased growth potential.

Angel Investing

• Investing in new startups to get high RoI by listing them in future public offers.

Advantages of Unlisted Equity Shares

• Flexible management and decision-making processes due to fewer regulatory constraints.
• Shareholders have more influence over company decisions.
• Unlisted shares have more long-term growth potential in new startups.

Drawbacks of Unlisted Equity Shares

• To ascertain their value, investors have to rely on subjective methods.
• Government, compliance rules, law, tax, regulatory, and reporting requirements still apply.
• Unlisted companies have fewer capital-raising options like private funding or loans.

Unlisted Equity Shares Final Verdict

The removal of indexation benefits and higher capital gain taxes may discourage some investors and affect exchange markets. Furthermore, demand for Unlisted Equity Shares has grown. However, higher capital gains taxes that the government will benefit from 23rd/July/2024 are likely to push yields up. For more exciting finance news and stories like and subscribe to Financereview.org.