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Unlisted shares Chennai Super Kings (CSK), the only sports franchise that can be traded in India, jumped 25 per cent to Rs 200-205 per share and pushed CSK’s valuation to Rs 6,300 crore just ahead of the Indian Premier League (IPL) season.
The emergence of many retail focused unlisted share investment online platforms has now made it easier for many retail investors to invest in listed shares. This was not possible a decade ago, says Vinay Bansal, founder and CEO, Inflection Point Ventures, a Gurgaon-based start-up and unlisted share trading firm.
“But now the unlisted share investment market is open for retail sale and the process can be done online,” he says.
Vijay Kuppa, co-founder and COO, Orowealth, a stock broking and alternative investment platform, says that the entire process and approval of buying unlisted shares now typically takes ‘T+3 days.’ There is a six-month lock-in for this but, there is no restriction on sale of shares before listing,” he added.
What is the process?
According to Prashant Narang, co-founder, Agility Ventures, a Haryana-based angel investment company, there is a multi-step process for buying shares. Unlisted start-ups And it starts with scouting, then shortlisting, industry research, evaluation discussions. After this the term sheet is signed and the due diligence process begins.
Finally the shareholder agreement is signed and the share certificate is given to the buyer. “It takes an average of 50-60 days to complete a startup investment,” says Narang
Apart from this process, one can also buy shares in the pre-IPO round. Most companies conduct a share sale pre-IPO round before launching an initial public offering (IPO) in the market. Retail investors can buy using a special set-up with some brokerage houses who interact with the company conducting the pre-IPO session. There are many fintech companies that do all these backend processes for a commission and retail investors can also use them to buy unlisted shares.
You have to check the compliances
You need to check the compliances here before investing in unlisted shares
Company Law-Related Compliance: Abhinay Sharma, managing partner, ASL Partners, a Delhi-based legal and tax consultancy firm, says that there are specific company law provisions with specific forms, which have to be filed. These are:
- Both the transferor and the transferee or anyone on their behalf shall execute an instrument of transfer of security in Form SH-4.
- One has to purchase a stamp of appropriate value and affix it and also get two witnesses who sign the instrument executed between the buyer and the seller of the shares.
- Within 60 days of the execution of such instrument, the company must send a copy of both the executed instrument and the share transfer certificate. A securities allotment letter is also sufficient if share transfer certificate is not available.
- Also, where an application is made by the transferee only and relates to shares partly paid up, the transfer shall not be registered, unless the company gives notice of application, in Form SH-5, to the transferee and the transferee gives a no. Objection to transfer within two weeks from receipt of notice.
Income Tax Law Compliance: Ankit Jain, partner, Ved Jain and Associates, a Delhi-based legal and tax advisory firm, says that while buying or selling unlisted shares, it is important to determine fair value as per tax laws.
“If you do not buy shares listed at less than such fair value, the difference between the fair value and the purchase price is taxed as income in the hands of the buyer,” said Jain.
“The fair value of unlisted equity shares is effectively calculated by deducting all liabilities from the total assets of the company and dividing by the number of shares in issue. If the company has any immovable assets, they should be valued at market. Value. Book value of all other assets as per the last audited statement. It has to be tailored,” added Jain.
As per Section 50CA of the Income Tax Act, 1961, this differential value of share price when compared with its fair value will be added to the seller’s income.
How is profit from sale of unlisted shares taxed?
If you trade in unlisted shares, the same tax laws applicable to listed shares will apply. But no one has to pay any security transaction tax (STT) on unlisted shares.
An unlisted share held for more than 24 months becomes a long-term capital asset. In such cases, the seller shall pay tax at the rate of 20 per cent calculated on the indexed cost of acquisition of the listed shares.
Should you buy unlisted shares?
Before listing unlisted shares you need to keep few things in mind.
Receiving information: Listed companies disclose their financial information to the Ministry of Corporate Affairs (MCA), which can be accessed by paying a nominal fee.
Liquidity: The market for listed shares is special and the kind of opportunities that a stock exchange provides for listed shares are not available for listed shares.
According to Kuppa, if investors are buying pre-IPO shares with the hope of cashing out after listing on the exchange, it can become challenging due to various factors such as delays in the listing process.
Investing in startups is a more specialized segment and so Narang says that new investors who are learning about startup investing, advise investing in smaller ticket sizes to reduce risk.
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