Regulations pertaining to unlisted shares in India - Unlisted Investments
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Regulations pertaining to unlisted shares in India

It is important to know the regulations surrounding unlisted securities as an investor. Key aspects that an investor should know about relate to taxation and valuation. Given below are some important pointers that will be helpful.

  1. Taxation rules on profits:  Profit generated on the sale of unlisted shares is accounted as capital gains. Short term capital gain on sale of unlisted securities is currently taxable at as per the income slab of the individual. Unlisted shares held for less than 24 months qualify under short-term capital gains tax. If the shares are held over 24 months, then they are accounted under long-term capital gains (LTCG) tax and are taxable at 20% per annum. However, if the stocks have been held for long-term, then investors can benefit from indexation benefits.
  2. Adjustment of gains against basic exemption limits:  An investor can gain tax exemption against basic exemption limits only if the investor is a resident individual/HUF. Additionally, the investor has to first adjust income from all other sources other than LTCG against the exemption limit and then the remaining limit  (if any) can be adjusted against LTCG.
  3. Valuation guidelines of SEBI for unlisted shares:  Unlisted shares of a company will be valued based on the following approach mentioned below.
    • Step 1: Arriving at Net worth per share. Diluted net worth per share needs to be computed after accounting for outstanding warrants and options and taking into account convertible shares.
    • Step 2: 25% of the industry P/E ratio to be taken from comparable industry from BSE/NSE data.
    • Step 3: The value of the net worth per share multiplied by the industry capitalization rate to be further discounted by 15% for illiquidity.
  4. Lock-in period:  Investors who have purchased unlisted shares usually have a lock-in period of 1 year after the shares are listed in Initial Public Offering (IPO) on a stock exchange. However, before listing there is usually no lock-in period.