What Are Unquoted Shares? Meaning, Uses, Benefits, and Risks for Investors

Most people begin their investment journey with listed shares because they’re easy to buy, well-regulated, and visible on exchanges like NSE and BSE. But there’s another segment of the market that doesn’t get the same spotlight. It’s quieter, more private, and requires a closer look to understand properly. These are unquoted shares, also called unlisted or privately held shares.

These shares belong to companies that have not been listed on any stock exchange. That includes early-stage businesses, long-standing private firms, subsidiaries that operate independently, and sometimes high-growth startups preparing for an IPO later. Even though they don’t appear on public markets, unquoted shares play a significant role in private investing and long-term wealth building.

Meaning of Unquoted Shares

Unquoted shares represent ownership in a company that has chosen not to list publicly. Since there is no exchange involved, pricing does not come from daily trading activity. Instead, valuations are usually decided through private discussions, recent funding rounds, or financial models.

Common methods investors or intermediaries use include: Comparing earnings with similar companies.

●     discounted cash flow estimates

●     book value assessments

●     previous private-market valuations

Because of this approach, there is no single "market price." A buyer and seller must agree on what the share is worth, which makes research even more important.

How Unquoted Shares Are Traded

Buying these shares isn’t as simple as using a stockbroker app. There’s no order book or live ticker. Instead, trades happen through:

●     Unlisted share dealers

●     private equity firms

●     venture capital networks

●     investment banks

●     specialized private market platforms

Each transaction requires documentation, identity checks, and approval from the company in many cases. This means waiting times are longer and liquidity is much lower compared to listed stocks.

Some investors see this as a drawback. Others view it as an opportunity because limited access often means limited competition.

Difference Between Quoted and Unquoted Shares

Understanding both helps investors decide where each type fits into their strategy.

1. Liquidity and Access

Quoted shares are available to anyone with a demat account. You can buy or sell them instantly at transparent prices.

Unquoted shares require finding a counterparty. Exiting may take days, weeks, or even months. Sometimes sellers need to offer a discount to complete a deal.

2. Valuation Information

Public companies disclose results regularly. Investors get earnings reports, board updates, and detailed statements.

Private companies share far less information. Values depend on selective disclosures, demand amonginvestorsrs and major business developments.

3. Regulations

Listed companies operate under strong oversight from SEBI and stock exchanges. There are reporting rules, governance requirements, and strict penalties.

Unquoted shares are governed mainly by the Companies Act and limited SEBI rules for private placements. This reduces compliance costs for companies but means investors must be more cautious.

4. Investor Type

Public markets attract retail investors, mutual funds, banks, and institutions.

Unquoted shares attract venture funds, private equity firms, and individuals comfortable with higher risk and longer holding periods. Retail investors can participate, but the process is more involved.

5. Growth Expectations

Listed companies often have stable businesses and predictable earnings.

Unquoted companies may still be expanding or experimenting. If they succeed, the returns at the time of an IPO or acquisition can be far higher than listed stocks with slower growth.

Why Companies Issue Unquoted Shares

Companies choose private ownership for different reasons. The most common include:

1. Raising Early Capital

Startups and new ventures depend on private investors for their initial funding. Selling unquoted shares lets them raise capital without the disclosure requirements of an IPO.

2. Strategic Investments

Large companies sometimes acquire stakes in young startups privately. This gives them early access to new technology or markets without public announcements.

3. Employee Stock Options

Private companies often issue ESOPs or restricted stock to retain key employees. These shares usually remain unlisted until a liquidity event occurs.

4. Preparing for a Future IPO

High-growth companies often raise multiple rounds before going public. Each round sets a valuation benchmark. When the IPO eventually happens, these earlier valuations help determine pricing.

Why Unquoted Shares Matter to Investors

Even with their limitations, unquoted shares are valuable to portfolios for several reasons.

1. Early Entry Into Promising Businesses

Investors get the chance to participate before a company reaches the public market. If the business does well, the value may increase meaningfully over time.

2. Diversification

Most portfolios depend heavily on listed equities, bonds, and mutual funds. Adding private investments can reduce reliance on daily market movements.

3. Lower Influence of Market Fluctuations

Unquoted shares do not react to sudden news, temporary volatility, or speculative trading. Their value changes only when there is meaningful business progress.

4. Access to Sectors That Stay Private Longer

Fields like biotech, deep-tech, and specialized fintech often remain private for years. Unquoted shares provide early exposure to these areas.

Risks and Challenges of Investing in Unquoted Shares

These opportunities come with risks that must be acknowledged.

1. Very Low Liquidity

There is no guarantee of a quick exit. You often must wait for an IPO, acquisition, or a secondary buyer.

2. Limited Financial Information

Private companies are not required to publish detailed reports. Assessing their financial strength requires more effort and careful questioning.

3. Uncertain Valuations

Prices depend on negotiations and assumptions. Without frequent market testing, valuations can be optimistic or outdated.

4. Legal and Regulatory Steps

Transferring unquoted shares involves approvals, stamp duty, documentation, a nd sometimes board consent. This adds time and cost.

5. Tax Treatment

Unlisted shares follow different capital gains rules in India. Holding periods and fair market value assessments affect final returns.

6. Possibility of Misleading Information

Because the market is less regulated, investors should always verify documents and rely on trusted intermediaries.

Frequently Asked Questions

1. Are unquoted shares legal to buy in India?

Yes. Investors can buy them through approved intermediaries and complete demat transfers legally.

2. Do retail investors participate in unquoted shares?

Yes, but the process is more complex than buying listed stocks and requires proper documentation.

3. How long does it take to sell unquoted shares?

There is no fixed time. It depends on demand, company performance, and the availability of a buyer.

4. How are unquoted shares valued?

Valuations use methods like DCF, earnings multiples, and recent funding benchmarks rather than market prices.

5. Are returns guaranteed?

No. Private companies can grow or struggle. Due diligence is essential.

6. Why do unquoted shares seem attractive despite the risks?

They offer early access to potential growth stories, sector diversification, and long-term wealth opportunities.

Conclusion

Unquoted shares provide a window into private markets that are usually hidden from general investors. They offer early access, unique diversification, and the potential for meaningful long-term gains. At the same time, they require patience, careful analysis, and a clear understanding of the company and the risks involved.

When approached with steady research and the right intermediary, unquoted shares can become a valuable addition to a long-term investment strategy.