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Read ArticleUnlisted and pre-IPO shares: what to check before you invest
Pre-IPO and unlisted shares can be attractive, but pricing, liquidity and information are very different from listed stocks. A checklist before you invest.
Stories of early investors who bought into a company before it listed make unlisted and pre-IPO shares sound like an easy opportunity. The reality is more mixed. Some investments do well; others list below the price paid, or do not list at all. The difference often comes down to the questions asked before buying.
How unlisted shares are bought
Unlisted shares are usually bought from existing shareholders, such as employees with stock options or early investors, through brokers or intermediaries who specialise in this market. The shares are transferred into your demat account off-market. There is no exchange setting the price, so you rely on the seller and intermediary for price discovery.
The checklist
- Valuation: what are you paying relative to the company’s earnings, growth and listed peers? Popular names often trade at steep premiums.
- Information: are recent audited financial statements available? Unlisted companies disclose far less, and less often, than listed ones.
- Liquidity: you may not be able to sell quickly, or at a fair price, until the company lists, and listing plans can be delayed or cancelled.
- Lock-in after listing: SEBI rules generally lock in pre-IPO shareholding for six months from the date of allotment in the IPO, so you cannot sell immediately after listing.
- Intermediary: who is selling, how is the price set, what are the charges, and how and when will the shares reach your demat account?
- Concentration: how much of your portfolio would one unlisted company represent if it fails?
How gains are taxed
Unlisted shares held for more than 24 months are long-term capital assets, and long-term gains are currently taxed at 12.5% without indexation. Gains on shares held for 24 months or less are taxed at your slab rate. If the company later lists, the holding period and cost generally continue from your original purchase, but tax treatment of the eventual sale depends on the rules at that time.
Where unlisted shares fit
For most investors, unlisted shares are best treated as a small, high-risk satellite allocation alongside a diversified core portfolio, and only with money that will not be needed for several years. Approach them with the same discipline as any other investment, and assume that the price you pay matters as much as the company you choose.
