Investing in the next unicorn before it hits the headlines is the dream of many Indian investors. But how do you buy shares in a company that isn't on the NSE or BSE? Enter the secondary market for unlisted shares.
While the "primary market" is where a company issues new shares (like an IPO), the secondary market is where existing shareholders like employees with ESOPs or early venture capitalists sell their holdings to other investors.
In this guide, we'll break down how unlisted share trading works in India, the risks involved, and how you can participate in thepre-IPO secondary market.
How Unlisted Share Trading Works in India
Unlike the transparent, high-speed environment of the Nifty 50, the unlisted market operates as an Over-the-Counter (OTC) market. This means there is no centralized exchange.
The Transaction Flow
Discovery: You find a buyer or seller, usually through a specialized broker for unlisted shares.
Negotiation: Price is determined by demand, supply, and recent private valuation rounds rather than a ticker tape.
Payment & Transfer: Once a price is agreed upon, the buyer pays the seller (often through the broker's escrow). The shares are then transferred from the seller's Demat account to the buyer's Demat account using an off-market delivery instruction slip (DIS).
Settlement: While listed trades settle in T+1 days, unlisted trades can take 3 to 7 working days to reflect in your NSDL or CDSL statement.
Pricing and Liquidity: The Reality Check
One of the biggest hurdles for new investors is understanding pricing of unlisted shares in India. Without a public exchange, prices are "opaque."
Pricing Drivers
Company Fundamentals: Latest audited financials and revenue growth.
Last Funding Round: The price at which VCs recently invested.
Grey Market Premium (GMP): If an IPO is imminent, the "buzz" can drive prices significantly higher than the book value.
The Liquidity Challenge
Liquidity in unlisted shares is significantly lower than in the public market. You cannot sell these shares with the click of a button. Finding a counterparty can take days or even weeks. Furthermore, once a company goes public, SEBI mandates a 6-month lock-in period for pre-IPO investors, meaning you cannot sell your shares immediately after the listing.
Risks of Secondary Market Unlisted Shares
While the potential for multi-bagger returns is high, the risks are equally substantial:
• Capital Risk: The company may never go public, or its valuation could crash before the IPO. • Information Asymmetry: Unlisted companies aren't required to publish quarterly results, making it harder to track performance. • Counterparty Risk: Since it's an OTC market, there is a risk of the seller backing out or fraudulent intermediaries. • Regulatory Scrutiny: SEBI has recently cautioned investors against using unregistered platforms. Always ensure your broker for unlisted shares has a solid reputation.
How to Buy and Sell Unlisted Shares in India
If you are ready to diversify your portfolio, here is how to get started:
1. Choose a Trusted Broker
Avoid "Telegram-only" dealers. Look for established platforms like Neoma Capital, which provide research and secure settlement processes.
2. Complete Your KYC
Just like regular trading, you need a valid PAN, Aadhaar, and an active Demat account.
3. Minimum Investment
While there is no legal minimum, most brokers set a floor of ₹25,000 to ₹50,000 to make the transaction costs viable.
4. Taxation
Short-Term Capital Gains (STCG): If held for less than 24 months, gains are taxed as per your income tax slab.
Long-Term Capital Gains (LTCG): If held for more than 24 months, gains are taxed at 20% with indexation benefits.
Is the Pre-IPO Market Right for You?
The pre-ipo secondary market in India is no longer just for High Net-Worth Individuals (HNIs). However, it requires a long-term horizon (3–5 years) and a high risk-tolerance.
Frequently Asked Questions (FAQ)
1. Is it legal to buy unlisted shares in India?
Yes, buying and selling unlisted shares is completely legal in India. These transactions are considered "off-market" transfers. The shares are transferred from one Demat account to another via a Delivery Instruction Slip (DIS), and the process is governed by the Companies Act and SEBI's depositions guidelines.
2. How do I track the price of unlisted shares?
Since there is no live exchange like the NSE, you must rely on brokers for unlisted shares or specialized financial portals. Prices are updated daily based on demand-supply dynamics, recent private equity deals, and the company's latest financial performance.
3. Can I sell my unlisted shares anytime?
While you can technically sell whenever you find a buyer, liquidity in unlisted shares in India is much lower than in the public market. It may take a few days to find a counterparty. Additionally, if the company goes for an IPO, your shares will be locked in for 6 months from the date of listing per SEBI regulations.
4. What happens to my shares when the company gets listed?
Once the company successfully completes its Initial Public Offering (IPO), your unlisted shares automatically convert into listed shares. They will carry the same ISIN (International Securities Identification Number) as the shares traded on the exchange, but you will be subject to the mandatory pre-IPO lock-in period.
5. Do I get dividends on unlisted shares?
Yes. As a shareholder, you are entitled to all corporate actions, including dividends, bonus shares, and stock splits. These are credited directly to your registered bank account or Demat account, just like listed stocks.
6. What are the main risks of the pre-IPO secondary market?
The primary risks of secondary market unlisted shares include capital loss if the company fails, lack of transparency in financial reporting, and "listing risk"-the possibility that the company may delay or cancel its IPO indefinitely.
7. How is the stamp duty calculated on these trades?
Currently, a stamp duty of 0.015% is applicable on the value of the transfer of shares in the Demat form. This is typically collected by the repository (NSDL/CDSL) or the broker during the transaction process.