Can you Transfer unlisted shares at below fair market value?

What are unlisted shares?

Often people ask us what does unlisted equity shares means and how can unlisted equity shares at a unlisted company can be valued at. Some companies transfer shares in reverse with special information that impacts the stock market. This is considered an insider dealing because of the special information the company has on the market. The regulations need to be followed to the letter to ensure that the company is not facing any legal penalties. In order to avoid legal trouble, it is important to know what you can and cannot transfer.

Below we have you some useful tips on how to transfer unlisted shares, and how to purchase unlisted shares including whether you can transfer them at below the fair market value. In this blog, we’ll cover everything you need to know about the transfer process from the company acquiring the shares to the original company getting the shares. We’ll explain the process of what’s involved, what the transfer prices are, and the answer to the question you must ask – can you transfer unlisted shares at below fair market value?

The New Taxation Provisions

An important objective of the government has been to introduce an environment of greater transparency for unlisted shares taxation. Following demonetisation, one of the key challenges facing the government was removing all opportunities for generating black money, particularly in corporate and private compaines. Transferring shares of unlisted companies between individuals was reportedly a very common means of moving valuable assets between individuals until 2017, when there were no valuation rules for unlisted shares, resulting in cash that was not accounted for.

As a result of amendments to the Income Tax Act, specific guidelines have been provided in Section 50CA of the Income Tax Rules and Rule 11UA of the Income Tax Rules regarding valuation of unlisted equity shares. It is therefore necessary for you to dispose of your equity shares of an unlisted company at a fair price in accordance with the valuation rules if you are the shareholder.

Taking advantage of earlier provisions, the transferor would have been able to save on large taxes when he transferred valuable unlisted equity shares. However, under the new valuation guidelines, the transfer of unlisted shares has to be at fair value, thus bringing in higher taxes to the person who is transferring the shares and thus deterring unlisted equity shareholders from transferring shares for a lower price than fair market value, determined by prescribed valuation rules.

The previous valuation rules stated that the direct book value of the assets and liabilities of the company to which the unlisted equity shares were transferred determined the recipient of the shares. Nevertheless, no adjustment was made in respect of assets held through complicated cross holdings. As a result of the revised regulations, the valuation provisions for unlisted equity shares have been rationalised for both sellers and buyers, and it is necessary to take into account the entire network of shareholdings of the unlisted company when valuing the unlisted equity shares.

The buyers were also provided with a provision. Unlisted equity shares purchased by recipients are subject to the taxation provisions of the Income Tax Act, which have been substantially amended. A new clause (x) under section 56(2) has been drafted to prevent the practice of receiving shares for no consideration or inadequate consideration. When shares are purchased without consideration or for less than the fair market value, the purchaser is liable for tax. Unlisted equity shares should be valued similarly from a buyer’s perspective as they are from a seller’s perspective. New regulations allow both buyers and sellers of unlisted equity shares to be liable for taxes when the price of unlisted equity shares is below the fair market value, as a result of the combination of provisions of the Act. In the case of unlisted equity shares, investors should exercise caution when transferring shares and make sure they are being transferred at a price higher than the valuation guidelines. Although the current valuation guidelines do not include complex equity instruments, such as compulsory convertible debentures and optionally convertible preference shares, it is important to note.

The Takeaway

We hope you enjoyed our article around unlisted equity shares. If you are not familiar with the term, unlisted equity shares likely mean to you that the company does not hold any shares publicly for public trading purposes. Some companies transfer shares in reverse with special information that impacts the stock market.Companies may transfer shares in reverse to individuals with special information that impacts the stock market. This is considered an insider trading because of the special information. These transactions don’t need to be registered with the SEC and can be done without disclosing them to the public. With that said, there are no shares for public trading purposes, so a company could transfer shares in reverse without any disclosure to the public.

Thanks for reading our article on unlisted equity shares. We hope that you were able to get some insight into how these shares are valued at and how they are transferred. If you were a little confused by the terms, don’t worry because we’re here to help! If you need any insight into this topic or would like to discuss further, please email us at info@babliinvestment.com