What Regulations Affect Trading in NSE Unlisted Shares? What Investors Should Know

Trading in unlisted shares of NSE-linked companies can present significant opportunities, but it also comes with its own set of regulatory considerations. Unlike stocks listed on recognized exchanges, unlisted shares trade over‐the‐counter (OTC) and require adherence to various laws and compliance norms. In this blog, we’ll examine the key regulations—spanning the Companies Act, SEBI guidelines, tax laws, FEMA rules, ROC/MCA requirements, and KYC norms—that every investor should understand before entering the unlisted market.

1. Companies Act, 2013

The Companies Act, 2013 governs how unlisted companies issue and transfer shares, maintain records, and file necessary documents:

• Section 42 (Private Placement): Requires companies to comply with procedural norms when issuing shares to select investors—ensuring that unlisted equity isn’t offered publicly without compliance.
• Section 62 (Rights & Preferential Allotment): Governs the issuance of further shares to existing shareholders or select investors, impacting how unlisted firms can raise capital.
• Share Transfer Process: Any transfer of unlisted shares must be documented via Form SH-4 (Share Transfer Form) and approved by the company’s Board, with the transfer registered in the Register of Members.
• Annual ROC Filings: Unlisted companies must submit MGT-7 (Annual Return) and PAS-3 (Return of Allotment) to the Registrar of Companies (ROC) whenever shares are allotted or transferred. Failures can incur penalties under Section 92(5) and Section 93.

✅ Investor Tip: Always verify that the company has duly updated its Register of Members and filed necessary ROC returns when you purchase or sell unlisted shares.

2. SEBI Guidelines & Oversight

Although the Securities and Exchange Board of India (SEBI) primarily regulates listed securities, it indirectly impacts unlisted shares through:

• Pre-IPO Placement Rules: SEBI’s ICDR Regulations apply to private placements if the company is gearing up for an IPO. If retail investors are allowed to participate, the company must follow SEBI norms on disclosures and pricing.
• Alternative Investment Funds (AIFs): Unlisted shares often trade via AIFs (Category II and III). These funds must comply with SEBI (AIF) Regulations, 2012, which govern valuation norms, investor eligibility, and reporting requirements.
• Registered Intermediaries: Any platform or broker facilitating unlisted share trades must be registered with SEBI as a Category II AIF or as a stockbroking entity (where applicable). This ensures a layer of oversight, particularly during large pre-IPO transactions.

⚠️ Investor Caution: Verify that any platform or intermediary you use is SEBI-registered. Unregulated grey‐market dealers operating informally (e.g., WhatsApp groups) can expose you to significant legal and financial risks.

3. Income Tax Act, 1961

Taxation for unlisted shares differs from listed equity and requires special attention:

• Short-Term Capital Gains (STCG): If you sell unlisted shares within 24 months of acquisition, gains are added to your total income and taxed at slab rates (e.g., 5%, 20%, 30% depending on income bracket).
• Long-Term Capital Gains (LTCG): Shares held for over 24 months qualify for 12.5% without indexation benefit
• Fair Market Value (FMV) Assessment: When you acquire unlisted shares via gift or transfer at below FMV, the difference may be taxed as “Income from Other Sources” under Section 56(2)(x). A valuation certificate from a merchant banker or registered valuer becomes crucial for large transactions.
• Section 43CA / 50C Relevance: Though primarily for immovable property, analogous principles of property valuation can apply if a company’s net worth is used to assess FMV in certain transactions.

💡 Pro Tip: Always obtain a Valuation Certificate (from a SEBI-registered merchant banker) before investing sums above ₹10 lakhs in unlisted shares to avoid disputes over FMV and minimize tax exposure.

4. FEMA (Foreign Exchange Management Act), 1999

For Non-Resident Indians (NRIs) and foreign investors, the FEMA rules play a critical role:

• Pricing & Reporting: Any purchase or sale of unlisted shares by an NRI must comply with RBI’s pricing guidelines, which often reference recognized stock exchange valuations or valuation reports.
• Investment