Difference Between Listed And Unlisted Companies: From small startups to major corporations, every company needs to make a choice – stay private or go public. But what exactly does that mean and how does it affect the way a business operates?
Think of it as a game of poker – a listed company is all-in with its cards on the table for the public to see, while an unlisted company plays its cards close to the chest. Both can come out as winners, but the rules and regulations for each are vastly different.
In this article, we’ll explore the fundamental difference between listed and unlisted companies and how they can impact a business’s decisions and future prospects.
What Is A Listed Company?
A listed company is a business that has issued shares of stock that are traded on a public stock exchange. It allows members of the public to purchase ownership in the company by buying its shares on the open market, and shares in the company’s potential profits.
Listed companies are required to disclose financial and other information to the public on a regular basis and are subject to regulatory oversight to ensure investors have access to accurate information to make informed decisions.
This also allows the company to raise capital through the sale of its shares. They carry prestige and can boost the reputation of a company.
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What Is An Unlisted Company?
An unlisted company, also known as a private company, is a business that has not issued shares of stock that are traded on a public stock exchange.
Instead, the ownership of the company is held by a small group of shareholders, such as the founders, management team, or private equity investors.
These companies are not subject to the same level of regulatory oversight and transparency as listed companies and do not have to disclose financial information to the public on a regular basis.
However, in a certain jurisdiction, they are still subject to some company laws and regulations, unlike listed companies which have more stringent regulations to follow.
Benefits Of Investing In Listed Shares
Investing in listed shares, also known as publicly traded shares, can offer several advantages over investing in unlisted shares:
- Liquidity: Listed shares can be easily bought and sold on a public stock exchange, which means that investors can buy or sell shares quickly and easily.
- Diversification: By investing in a variety of listed shares, investors can spread their risk and diversify their portfolios. This can help to reduce the overall risk of the portfolio and increase the chances of a positive return.
- Transparency: Listed companies are required to disclose financial and other information to the public on a regular basis. This allows investors to make informed decisions about whether to buy, hold, or sell the company’s shares.
- Potential for Growth: Investing in listed shares can provide the potential for significant returns if the company performs well and its share price increases. This can also provide a steady source of income through dividends if the company distributes them.
- Professional management: Listed companies have professional management teams that are responsible for the day-to-day running of the business, making it an easier form of investment compared to starting a business.
- Regulated market: Listed companies are subject to regulatory oversight to ensure fair and transparent trading, which gives protection to the investors.
- Greater Public Information: Listed companies are required to file regular financial reports and other information with regulators and make it public, which allows investors to have access to more information about the company’s performance, financials, and future plans.
- Greater access to funds: Listed companies have access to a wider pool of investors and can raise funds through stock offerings, bond offerings, and other forms of debt and equity.
It’s important to note that investing in listed shares does come with some level of risk, and investors should always conduct thorough research and seek professional advice before making any investment decisions.
Benefits Of Investing In Unlisted Shares
Investing in unlisted shares, also known as private equity, can offer a number of benefits over investing in listed shares. Here are a few examples:
- Potential for higher returns: Unlisted companies are not publicly traded, which means they are not subject to the same level of volatility and market fluctuations as listed companies. This can provide the potential for higher returns for investors.
- Greater control: Investors in unlisted shares may have the opportunity to have a greater level of control over the company’s operations and strategy, through serving on the board of directors or through other means.
- Access to exclusive deals: Unlisted shares can provide access to exclusive investment opportunities that are not available to the general public.
- Tax Advantages: In certain jurisdictions, investing in unlisted shares can provide tax advantages compared to investing in listed shares.
- Potential for ownership: Investing in unlisted shares can provide the potential for significant returns if the company performs well and goes public or gets acquired. It also gives the potential of ownership in the company.
- Potentially greater privacy: As unlisted companies are not publicly traded, they may not be subject to the same level of public scrutiny as listed companies, which can provide greater privacy for both the company and its shareholders.
It’s worth noting that investing in unlisted shares is often considered riskier and more complex than investing in listed shares due to the lack of liquidity and transparency.
Additionally, these investments are generally less regulated than listed shares and investors should be prepared for a longer investment horizon.
Also, due to limited information, it is harder for investors to evaluate the risk involved in these types of investments.
Difference Between Listed And Unlisted Companies
Here is a table summarizing some key difference between listed and unlisted companies:
|Feature||Listed Companies||Unlisted Companies|
|Publicly traded||Yes, on the stock exchange||No, traded privately|
|Disclosure and Transparency||High, required to disclose financial and other information to the public, regular filings to SEBI and other regulatory agencies||Low, not required to disclose as much information to the public|
|Number of shareholders||Large, dispersed ownership||Small, concentrated ownership|
|Valuation and Capital raising||Easier, can raise capital through issuing new shares or bonds||More difficult, may rely on private funding or retained earnings|
|Cost of compliance and regulations||High, subject to strict regulations and oversight||Low, not subject to the same level of regulatory oversight|
Ways To Invest In Unlisted Share
- Primary Market: In the primary market, investors have the opportunity to purchase shares directly from the company in a private placement or pre-IPO round. These rounds are typically only open to accredited investors, and the shares are not publicly traded.
- Secondary Market: The secondary market is a platform where existing shareholders can sell their shares to other investors. These shares are not traded on a public exchange and are typically more illiquid than publicly traded shares. Secondary market exchanges and online marketplaces are some examples of platforms where you can purchase unlisted shares from existing shareholders.
- P2P lending platforms: P2P lending platforms allow individuals to lend money to companies that are unlisted. These platforms typically connect borrowers with investors and offer a higher rate of return than traditional investments.
- Direct Investment: Direct investment refers to investing in a private company by becoming an angel investor or a venture capital investor. This type of investment typically requires a significant amount of capital and carries a high level of risk.
- Employee Stock Ownership Plan (ESOP): Some private companies offer an Employee Stock Ownership Plan (ESOP) which allows employees to purchase shares in the company at a discounted price. These shares are typically unlisted and are not publicly traded.
- Family and friends investment: Some private companies may allow family and friends of existing shareholders to invest in the company. This type of investment is typically done through a private placement or a pre-IPO round.
It’s important to note that unlisted shares are generally more illiquid than listed shares, and their value may be more volatile. Before investing in unlisted shares, it’s essential to conduct thorough research on the company and consider the level of risk that you are comfortable with.
Taxation On Unlisted Shares (Private Shares)
Taxation on unlisted shares, also known as privately held shares, is different from publicly traded shares as they are not listed on any approved stock exchange. The holding period for determining the tax rate is 24 months.
Long-term capital gains (gains made from selling shares held for more than 24 months) are taxed at a lower rate than short-term capital gains (gains made from selling shares held for less than 24 months).
In addition to capital gains tax, unlisted shares may also be subject to income tax, the rate of which is similar to other financial assets.
It’s important to consult with a tax professional or the relevant tax authority for detailed information regarding unlisted shares’ tax treatment in your jurisdiction.
To summarize, Listed companies and Unlisted companies are fundamentally different in the way they are traded and regulated.
Listed companies have their shares traded publicly on stock exchanges, which makes them accountable to a larger number of shareholders and regulators, and thereby have to comply with the regulations of listing and disclosing their financial information to the public.
On the other hand, unlisted companies have their shares traded privately, which means they have a smaller number of shareholders and are not accountable to regulators in the same way, thus they have more flexibility but less transparency.
Both types of companies have their own set of advantages and disadvantages, and the choice between them depends on the goals and priorities of the company and its shareholders.
We’ve discussed the difference between listed and unlisted companies. We hope you found it informative. Happy investing!
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