Companies registered in India are categorised as listed and unlisted, based on the listing of securities. For investors, both options hold distinct potential, catering to diverse investment goals and risk appetites. While listed companies gather funds from multiple investors, unlisted companies often have a limited set of investors.
In this article, we delve into the comparison of listed and unlisted shares to help you make an informed investment decision.
What is a listed company?
According to the Companies Act, 2013, any company with securities listed on a recognised Indian stock exchange is a listed company. To be listed, a company has to comply with the listing requirements and rules of a stock exchange. A listed company’s shares are publicly accessible, and their prices are determined through the interaction of supply and demand on the exchange platform.
What is an unlisted company?
A company that doesn’t have its securities listed on a recognised Indian stock exchange is an unlisted company. These are privately-held companies, as opposed to public companies listed on an exchange. While they present a distinct set of advantages and challenges, they can offer unique opportunities for investors.
Let’s take a look at the differences between listed and unlisted shares.
Listed shares
Unlisted shares
Liquidity
The key advantage of listed shares is their high liquidity. Investors can easily buy or sell their shares on the stock exchange during trading hours, ensuring immediate access to funds when they require it.
Unlisted shares lack the liquidity of listed shares. Unlike the stock market, the market for private companies doesn’t always have ready buyers. Investors might find it challenging to exit their investment quickly, which could impact their access to funds.
Transparency
Listed companies are subject to strict regulatory and reporting requirements. This level of transparency provides investors with comprehensive information about the financial health, performance, and governance practices of the companies.
Compared to listed companies, unlisted companies provide limited public information. Investors might need to rely on private sources or conduct thorough due diligence to assess the company’s potential.
Regulatory Oversight
Listed companies are regulated by entities such as the Securities and Exchange Board of India (SEBI), ensuring investor protection and market integrity.
Unlisted companies face less stringent regulatory requirements compared to listed ones. This can mean a more flexible operating environment for the company but also raises concerns about transparency and governance.
Market Volatility
The stock market is inherently volatile. Prices can fluctuate significantly based on economic conditions, geopolitical events, and company-specific news.
Unlisted shares are shielded from the rapid price fluctuations of the stock market and, thus, suffer less short-term volatility. This can be appealing to investors looking for more stable, long-term growth.
Return Predictability
Return predictability is relatively high.
Return predictability is relatively low.
Taxation
Long-Term Capital Gains (LTCG) on shares are taxed at 10% if they reach more than Rs. 1 lakh in a fiscal year. Short-term capital gains are taxable at 15%.
LTCG is taxed at 20% after indexation. STCG is taxed at the applicable slab rate.
High Entry Barriers
For companies to be listed, they must meet specific criteria, which might exclude smaller businesses. As a result, certain potential investment opportunities might remain untapped.
Unlisted shares offer significant potential for early entry. Investing in unlisted shares allows investors to enter a company before it goes public. This can potentially lead to significant gains once the company becomes publicly listed.
Price Discovery
The stock exchange acts as a platform for price discovery. The real-time nature of stock prices reflects the consensus of market participants, making it easier for investors to make informed decisions.
In the private market, investors have no means of price discovery and must rely on individual judgment to make an informed decision.
Listed vs. Unlisted Shares: Balancing Risk and Reward
For investors, the choice between listed and unlisted shares ultimately hinges on their risk appetite, investment horizon, and financial goals. Listed shares offer transparency, liquidity, and a diversified range of options, making them suitable for investors seeking regular trading and exposure to the broader market.
Unlisted shares, on the other hand, provide the opportunity to invest early in potentially promising companies. While they offer potentially lucrative returns, they come with limited liquidity and require a higher degree of due diligence.
As with any investment decision, diversification is key. A well-balanced portfolio might include a combination of listed and unlisted shares, leveraging the strengths of both options while mitigating their respective weaknesses.
For investors looking to grow their wealth over the long run, Tata Capital Wealth offers bespoke investment solutions. Contact us for the most rewarding investment opportunities, customized to fit your unique profile and goals.
11 September 2023
4 mins read
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