In addition to investing in the 5,000-odd listed stocks, investors can invest in unlisted stocks, either pre-IPO or delisted stocks.
The CFA Society India organised a webinar on this topic –
The webinar discusses what unlisted stocks are, their types, valuation, how to invest.
Unlisted securities are not listed on stock exchange and those securities can be traded over-the-counter (OTC). Earlier unlisted securities could be traded in both physical and dematerialised form, but on 10th September 2018, SEBI made demat form mandatory. Securities can be in unlisted space either if they are newly established or if they have been listed and then got delisted.
Companies not listed on any registered stock exchanges will be treated as an unlisted company and moved to the Dissemination board (DB).
Investors can invest in pre–IPO funds, or directly by approaching the shareholder via dealer or broker. They can sell when the company gets listed, transfer to another private party or participate in buy-back offer. However there are some exit “pricing” risks –
- Increase in Face Value
- Listing in stock Exchange with little or no activity
- Compulsory buy back by company
- Valuation by Merchant Banker
Tax on compulsory buy back
General tax implications – As per section2(22) (d) of the income tax act, the consideration paid by the company to the public shareholders out of the accumulated profits of the company, pursuant to a scheme of selective capital reduction in accordance with section 66 of the Act is regarded as deemed dividend distribution and accordingly as per section 115-O of the Income Tax Act, DDT is payable by the company on the consideration paid to the shareholders.
Accordingly, the company will pay DDT at the rate of 20.56%(inclusive of surcharge of 12% and cess of 4%) on the consideration paid to the public shareholders. Kindly note that the appropriate DDT amount will be deducted from the offer price mentioned above and will be borne separately by the company.
Sale/transfer of unquoted shares
When an owner of unquoted share in a company transfers the shares to any person, he is required to pay capital gain tax on the difference between the sale consideration received by him and the cost of acquisition of such shares (or the inflation indexed cost, wherever applicable).
It is important to check if “ sale consideration” that he receives from the buyer is at least equal to or more than the “ Fair Market Value” (‘FMV”) as defined under rule 11UA of The income Tax Rules , of the shares sought to be transferred.
As defined under Rule 11UA, the fair market value of unquoted equity shares shall be the value, on the valuation date, of such unquoted equity shares as determined in the following manner under (a) or (b), at the option of the assesse namely;-
The fair market value of unquoted equity shares shall be calculated simply by ascertaining “ book value of assets (less) book value of liabilities.”
The fair market value of the unquoted equity shares as determined by a Merchant Banker as per discounted free cash Flow Method.
Tax on seller- section 50CA
“50CA,special provision for full value of consideration for transfer of share other than quoted share-where the consideration received or accruing as a result of the transfer by an assesse of a capital asset , being share of a company other than a quoted share, is less than the fair market value of such share determined in such manner as may be prescribed, the value so determined shall, for the purposes of section 48,be deemed to be the full value of consideration received or accruing as a result of such transfer.
Tax on buyer-section 56(2)(x):
If the buyer acquires unquoted equity shares from a seller which is less than the FMV of such shares, the difference between the FMV of the shares and actual price paid by the buyer will be taxable in the hands of the buyer under the head” income from other sources.”
These sections are applicable only when the seller or the buyer holds the shares as capital Asset. This is not applicable when the shares are held as stock in trade.
In case of unlisted shares, if shares are transferred after 24 months, any gains from such transfer are considered as long-term capital gains (LTCG).
LTCG from unlisted shares is taxed at 20.8% with indexation.
STCG from unlisted shares is taxed at normal tax rates
Conclusion is one can invest in unlisted space and can grow their investment but with it certain risks should also be kept in mind as mentioned above.
Prepared by – Janhavi Poojary