Foundations
Foundations gives investors a clear, practical introduction to the unlisted and pre-IPO investment space. Learn how unlisted shares work, how valuations are assessed, what liquidity really means, and the risks and regulations involved.
Whether you’re new to private market investing or strengthening your basics, this section helps you make informed decisions — guided by clarity, not hype.
Build Your Understanding of the Unlisted Market
What are unlisted shares?
Unlisted shares represent ownership in companies that are not traded on public exchanges like NSE or BSE. These shares are bought and sold privately, often when companies are in a growth phase before an IPO. While they offer early investment opportunities, they come with higher risks due to limited liquidity and transparency. Investors should understand these factors before entering the unlisted market.
What are pre-IPO shares?
Pre-IPO shares are equity stakes purchased in a company shortly before it goes public through an IPO. They are typically offered during the final private funding round to select investors. The appeal lies in buying at a potentially lower valuation before listing. However, investors should understand the risks and timing involved.
Pros & Cons of Unlisted Shares
Pros
Pre-IPO investing offers early access to high-growth companies, often at attractive valuations with strong return potential. It also helps diversify portfolios beyond public markets while avoiding daily price volatility.
Cons
These investments are highly illiquid with uncertain exits and a real risk of capital loss. Limited transparency and complex valuations add to the overall investment risk.
What is the type of risks associated with an investment in unlisted shares?
Investing in unlisted shares carries multiple risks, including liquidity challenges that make exiting difficult and business risks that can lead to total capital loss. Limited transparency and subjective valuations increase uncertainty in decision-making. Reduced regulatory oversight further exposes investors to governance and fraud risks. Careful evaluation is essential before investing.
Are the shares of private companies in DEMAT form?
Shares of private (unlisted) companies can be held in DEMAT form through depositories like NSDL or CDSL if the company is connected to them. Dematerialization improves security, record-keeping, and ease of transfers. It reduces risks linked to physical certificates such as loss or forgery. Trading, however, still happens through private off-market transaction
Can I transfer physical shares of unlisted companies?
Physical shares of unlisted companies can be transferred, but the process is manual and paperwork-heavy. It involves executing a stamped transfer deed and submitting original certificates for company approval. This method is slow and carries risks like delays, loss, or forgery. Compared to DEMAT transfers, it is legal but far less efficient.
Can an unlisted company give dividends?
An unlisted company can legally declare dividends if it has sufficient profits and receives board and shareholder approval. The process follows regulations similar to listed companies. However, dividends are not guaranteed and depend on profitability and cash flow. Many growth-stage firms prefer reinvesting profits instead of paying dividends.
What is the exit timeframe for any investment in unlisted shares?
There is no fixed exit timeline for unlisted share investments, as exits are event-driven and uncertain. Common routes include IPOs, acquisitions, buybacks, or private secondary sales. Timing depends on company growth and market conditions. Investors should be prepared for long holding periods with limited liquidity.
What are the tax implications on unlisted shares?
Gains from unlisted shares in India are treated as capital gains. Holdings up to 24 months are taxed as short-term gains at your income slab rate, while holdings beyond 24 months attract 20% tax with indexation benefits. Dividends are taxed at slab rates. No securities transaction tax (STT) applies to these trades.
What is the ITR form for unlisted shares? Do you have to declare unlisted shares in ITR?
Income or gains from unlisted shares must be reported using ITR-2 (or ITR-3 if treated as business income). Capital gains and dividends should be disclosed in the relevant income schedules. Declaring unlisted shares in your ITR is mandatory under asset disclosure requirements. Non-disclosure can attract penalties under the Income Tax Act.