Introduction

There’s hardly anyone who hasn’t heard of companies like Ola, Cred, or Byjus. These giants have a huge market cap and they cater to millions of customers across the country. 

Looking at the growth of such companies one might be tempted to invest in them but there’s a catch. Unlike Reliance Industries or any Tata Group company where you can invest by buying their shares on the stock exchanges, it is not the same with unlisted companies. 

Ola, Cred, Byjus, and Lenskart are some of the most prominent unlisted companies in India. But what exactly are unlisted companies?

What are unlisted shares/companies?

In simple words, unlisted companies are those which are not listed on the stock exchanges. These are the companies that haven’t yet offered their shares to the general public. 

Trading in unlisted shares happens over-the-counter (OTC) where buyers and sellers are connected with each other through some intermediary. 

The major difference between listed shares and unlisted shares is that only a few individuals or institutional investors have access to unlisted companies whereas any individual with a Demat account can invest in listed companies with minimum investment. 

Unlisted companies are riskier to invest in as there is no regulator which may result in a default by the counterparty. Listed companies are more transparent as they are regulated by the Securities Exchanges Board of India (SEBI). 

Most Valuable Unlisted Companies in India (2021)

Source: Inshorts (Hurun List)

How to invest in unlisted companies?

  1.Investing in Pre-IPO companies & startups

Pre-IPO companies are those which intend to get listed on the stock exchange in the near future. Though there is no involvement of the exchange, the shares of the Pre-IPO companies directly come into your Demat account but it takes place off the record. 

Since there is no involvement of the exchange, the investor must look for a trusted intermediary who can ensure that there is no risk of illiquidity or default by the counterparty. 

Investment firms like Unlistedkart and Analah capital provide platforms for investors to buy unlisted shares.

Another method is to invest in startups at early stages that have the potential to become large companies in the future. The minimum investment in startups usually starts from Rs 50,000. The shares are then transferred to the Demat account. 

  2. Buying ESOPs from employees

There are many brokers or intermediaries who help in connecting with the employees of unlisted companies who are interested in selling their stake in the company. 

This is one of the easiest ways to invest in unlisted companies.

  3. Private placements 

This method is available only for institutional investors or some chosen few investors. Here the investor can approach an investment bank or a wealth manager to purchase unlisted shares directly from the promoters of the company. 

The promoters usually prefer selling their stake to their family members or friends.

  4. Invest in PMS & AIF schemes

PMS (Professionally Managed Systems) are investment portfolios managed by professionals. These professionals pick unlisted shares as a part of their investment strategy to maximize the investor’s returns. 

This is better than direct investing because it is managed by professionals who diversify the risk and add or cut stocks on a regular basis based on their performance.

AIF stands for Alternative Investment Funds. These funds invest in asset classes other than stocks, bonds, and cash. They raise funds from institutional investors and HIN (High Net Worth Individuals). 

The minimum investment for PMS is Rs 50 lakh and Rs 1 Cr for AIF. 

  5. Invest in Private Equity Funds

This is the most preferred mode of investing when it comes to investing in unlisted companies. The investments are made for a fixed period of time and cannot be recouped before that time. 

The reputation of the fund manager is the key to success in private equity funds because the partners of the fund have very little knowledge of the company where the funds are being invested. 

Blackstone Group has one of the largest private equity funds in the world.

Pros of investing in unlisted companies

1. High Returns: Most of the unlisted companies are either startups or small businesses that have huge growth potential. They provide attractive returns once their IPO hits the market.
2. Low volatility: The price of unlisted shares does not fluctuate like listed shares every second nor does the investor have to worry about significant price changes as the unlisted shares cannot be easily bought and sold. This will provide good long terms returns along with the peace of mind to investors.

3. Participation in Management: Institutional investors and High Net Worth (HNI) individuals often directly participate in management by acquiring a large stake in the unlisted company.

Cons of investing in unlisted companies

1. No liquidity: Since the buyers and sellers of unlisted shares are limited, investments in such companies cannot be easily liquidated. The investor has to wait until he finds a suitable counteroffer.

2. No regulation: No protection is provided to investors investing in unlisted companies. Since the transactions take place privately between two parties there is always counterparty risk involved.

3. Risky Investment: Unlisted companies are usually small businesses or startups that have a high failure rate. These companies may run out of business anytime soon unlike well-established corporates. This makes them a risky investment.

Conclusion

Earlier, access to invest in unlisted companies was only available to a few selected investors and large institutional investors. 

However, in today’s world, the stage is open even for small investors who are willing to take risks and participate in the growth of unlisted companies. 

However, there is no doubt about the fact that investing in unlisted companies is a game of high risk and high reward.