The government has been working on introducing an era of transparency. In the aftermath of demonetisation, eradicating black money was one of the key challenges facing the government. Until 2017, there were no valuation rules for transfer of unlisted shares, which resulted in the transfer of valuable assets between individuals, and the generation of undeclared cash. So how to invest in unlisted shares in India? 

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How to buy and sell shares online?

An analysis of the tax implications of unlisted share transfers from the perspective of the seller is done in this blog.In response to the government’s amendments to the Income Tax Act, detailed guidelines have been introduced (Section 50CA read with Rule 11UA of the Income Tax Rules) regarding the valuation of unlisted equity shares. A transfer of unlisted equity shares must be made at a fair value, in accordance with prescribed valuation rules, if the owner owns such unlisted equity shares. As a result of the earlier provisions, the transferor would have saved significant taxes by transferring valuable unlisted equity shares. The new valuation guidelines, however, require that unlisted shares be transferred at fair value, resulting in higher taxes for the exchequer and deterring the transfer of unlisted equity shares at less than fair market value, as determined according to prescribed valuation rules..

What are the new valuation rules?

A recipient of unlisted equity shares was valued only based on the direct book value of the company whose unlisted equity shares had been transferred, under the former valuation guidelines, applicable to unlisted equity shares. However, no adjustment was provided in relation to assets held by the company through extensive crossholdings. As a result of the new provisions, both the seller and the buyer of unlisted equity shares will benefit from the more rational valuation provisions, and the revised regulations that are required while you are valuing the unlisted equity shares and all other  shareholdings held by the unlisted company.An overview of taxes on transfers of unlisted shares from the buyer’s perspective is given below.As part of the Income Tax Act, the provisions of taxation for unlisted equity shares have also been rationalized. There is a proposal to insert a new clause (x) under section 56(2) in order to prevent the practice of receiving shares for no consideration or inadequate consideration. In the case of unlisted shares acquired without consideration or for a lower price than their fair market value, the buyer of the shares will be liable for taxes. According to the buyer’s perspective, the same principles apply to determining fair market value of unlisted equity shares as they do to sellers. Based on a combined reading of the Act’s provisions, both buyers and sellers of unlisted equity shares have been placed in a delicate position as a result of the new regulations, and now both parties may be liable for tax if the unlisted equity shares are priced below fair market value.

It is important that investors remain mindful when transferring unlisted equity shares and ensure that the price at which the transaction has been conducted exceeds the valuation guidelines. Nevertheless, it should be noted that as of now, valuation guidelines do not cover complicated equity shares and investments like mandatory convertible debentures or optionally convertible preference shares.

How to buy unlisted shares in india?

The following methods are a guide on how to buy shares online :

• Investment in start-ups and other service providers 

You could invest in a pre-IPO company that is currently unlisted but is expected to get listed in the near future. It’s easy to invest in pre-IPOs because the shares are transferred directly into your Demat account, even though the trade happens off-record without the exchange’s involvement. Choosing a trusted intermediary means ensuring that he or she is capable of helping you close the transaction successfully and avoiding any third-party risks. Unlisted start-ups are also a good way to invest, as they can potentially grow many times in the future. Even though these companies may not be on the forefront at the beginning, they have the potential to bring in profits and growth at a later stage. Getting stocks transferred into your Demat account requires at least Rs 50,000 investment in most start-ups.

• Directly purchasing ESOPs from employees

Some brokers can connect you with employees of companies who sell their shares at a set price after a certain time period. Shares of top unlisted Indian companies can be purchased this way. In addition to purchasing stocks directly from promoters, if you are interested in investing in a large stake in a company, you can seek the advice of a reputable investment bank or financial advisor to help you determine the share price. The company will also introduce you to a list of unlisted companies in India as well as help you connect with the company’s promoters directly. Known as private placements, these transactions take place between two parties.

• Consider PMS schemes and AIF investments

Portfolio Management Systems, or PMS, are investment portfolios that pick up unlisted shares. To maximize investors’ net returns, the portfolio manager continuously changes the portfolio’s weight and composition based on market trends. By investing in PMS schemes that include unlisted shares in their investment strategy, you will be able to reap the benefits of investing in unlisted shares in India.

It is more secure to purchase this way than to purchase directly from the seller. It is possible to reduce portfolio risk by using this method across all the assets in a portfolio. As mentioned above, the portfolio manager continuously removes and adds stocks based on the performance of the investments. The risks associated with investing in unlisted stocks can be quite high, but the potential rewards can also be quite high. 

• The risks associated with these investments are:
• Deficiency of liquidity
• There is always a risk of dilution. If you’re wondering how to purchase unlisted shares in India, get in touch with an experienced wealth manager who is trusted and experienced in making investment decisions.

The Takeaway

The term unlisted share refers to a security or financial instrument which does not trade on the open market. Stocks that are not listed on a public exchange include common stocks, penny stocks, corporate bonds, government securities, and derivatives. Start-ups and intermediaries, ESOPs purchased directly from employees and promoters, and PMS and AIF schemes that buy shares from unlisted companies are all ways in which you can invest in top unlisted companies in India. In addition to illiquidity, capital loss, dividend risks, dilution risks, and a risk of no dividends. 

Therefore Trade Wisely, Trade Babli.

We hope you enjoyed our blog. Thank you for reading. For more information on investing in shares, you can contact us at babliinvestment.com