Understanding Unlisted Shares and Their Types

Have you ever considered investing in companies not listed on the stock exchange? It might sound unusual, but unlisted shares can offer significant opportunities for growth, especially in India’s booming startup ecosystem. 

Many investors are now turning to these shares as a way to get early access to promising businesses before they go public. You’re in the right place if you’re curious about how this works.

In this blog, we’ll guide you through everything you need to know about the meaning of unlisted shares. We’ll break down the different types you can invest in. You’ll also discover the exit strategies that could help you maximize your returns. 

Whether you’re exploring this investment option for the first time or looking to refine your knowledge, we’ve got you covered!

What Exactly are Unlisted Shares?

Unlisted shares are the stocks of a company that are not traded on public stock exchanges like the NSE or BSE. These shares belong to private companies or startups that haven't gone public yet. Since they are not listed, you can’t buy or sell them easily on the stock market. 

India’s unlisted share trading market has significantly increased, with monthly trading averaging approximately $300 million in the current fiscal year. This substantially rose from around $50 to $60 million per month last year, reflecting growing investor interest in private companies.

Now that we know the meaning of unlisted shares, let’s move on to the different types.

Types of Unlisted Shares

Unlisted shares come in different forms, with characteristics and investment potential. Here are the different types of unlisted shares you might come across and examples to help you understand their importance.

1. Pre-IPO Shares
   

Pre-IPO shares are those of companies planning to go public but haven’t yet launched their Initial Public Offering (IPO). These shares are typically offered to a select group of investors before the company’s stock starts trading on public exchanges.

Investing in pre-IPO shares can be very rewarding if the company performs well after it lists.

2. Employee Stock Ownership Plans (ESOPs)
   

ESOPs are shares given to employees as part of their compensation. These shares motivate employees to work towards the company’s growth, aligning their interests with its success. 

Big companies like Infosys and Wipro have used ESOPs to reward employees. This helps retain talent and allows employees to benefit from the company’s success over time. If you’re working in a growing company that offers ESOPs, it can be a great way to build wealth.

3. Preference Shares
   

Preference shares are equity shares that give investors priority over common shareholders when receiving dividends or liquidation proceeds. These shares often come with fixed dividends, making them appealing to conservative investors.

For example, a company may issue preference shares with a guaranteed 6% annual dividend before paying any dividends to common shareholders. This fixed income can be attractive if you want steady returns.

4. Founders’ Shares
   

Founders' shares are typically held by the company’s founders and usually come with special voting rights or restrictions on transferring ownership. These shares often reflect the founders’ long-term commitment to the company’s vision. 

A good example is Facebook, where Mark Zuckerberg retained majority voting control through his founders’ shares. Founders' shares can be powerful because they give the founders significant influence over the company's direction, even if they own a smaller portion of the company.

5. De-listed Shares
   

De-listed shares are those of companies once listed on stock exchanges but have been removed due to non-compliance with regulations or other issues. Investing in de-listed shares can be risky, as these companies are often less transparent, but they can also offer big returns if the company recovers. 

Some de-listed companies later restructure and re-list on exchanges, providing profitable exit opportunities for early investors. However, this type of investment requires careful consideration of the company’s financial health.

6. Private Equity Shares
   

Private equity shares involve investments in private companies, typically made through venture capital or private equity funds. These investments carry higher risks but can yield significant returns if the company grows and succeeds.

Having understood the various types of unlisted shares, let’s move on to how investing in them can benefit you and what risks you should be aware of.

Benefits & Risks of Investing in Unlisted Shares

When investing in unlisted shares, weighing the benefits and risks is crucial. Unlisted companies can offer great opportunities, but they also come with challenges. 

Here is a table of the benefits and risks to help you decide if this type of investment is right for you.

With the benefits and risks in mind, the next step is to evaluate the available exit strategies that can provide liquidity and manage investments effectively.

Exit Strategies for Unlisted Shares

Understanding how to exit your investment in unlisted shares is key to maximizing your returns. Here are some exit strategies that you should know about, with real-world examples, particularly relevant in India:

1. Initial Public Offerings (IPOs)
   

The most common way to exit unlisted shares is through an IPO. When a company goes public, it offers shares on the stock exchange, allowing you to sell your holdings. 

For example, Niva Bupa Health Insurance recently launched its IPO, allowing existing investors to exit at potentially higher valuations as the company gained visibility in the market. This is a great opportunity if the company has grown and is well-positioned for public trading.

2. Mergers and Acquisitions (M&A)
   

Another exit option is when a larger company acquires the one you’ve invested in. You may receive cash or shares in the acquiring company.

For example, Paytm was acquired by One97 Communications before going public, which allowed early investors to cash out when Paytm launched its IPO. If the acquisition price is high, this can be a very profitable exit strategy.

3. Share Buybacks
   

Some companies offer to buy back shares from investors, often at a premium. This can be a good way to exit while still retaining some ownership in the company. 

For example, In December 2017, Infosys launched its first share buyback, repurchasing shares worth ₹13,000 crore through a tender offer at ₹1,150 per share. 

Then, in 2019, the company announced another buyback worth ₹8,260 crore, using the open market route, with a buyback price of ₹747.38 per share. These buyback offers allowed investors to exit at a premium while keeping some stake in the company.

Having explored unlisted shares & their exit strategies, let’s move on to a final overview of the key points to remember.

Conclusion

Understanding the meaning of unlisted shares is essential for anyone looking to explore investment opportunities beyond traditional stock exchanges. Unlisted shares offer access to companies in their early stages or those yet to go public, presenting both high potential and risks. 

By leveraging platforms like Precize, you can easily buy and sell unlisted shares with a streamlined process. To get started, reserve your access today and take the first step towards adding unlisted shares to your investment portfolio.

Disclaimer

This information is for private use only and does not constitute investment advice. Recipients must assess risks and seek advice from financial, legal, and tax professionals. Private market investments carry risks, and there are no returns or capital protection guarantees. We are not liable for investment decisions.