Can you invest in startups using a demat account? MintGenie answers

India's startup ecosystem is flourishing, positioning itself as one of the most vibrant and attractive markets for investors. This surge highlights the country's entrepreneurial spirit, innovative capabilities, and steadfast resolve. Indian startups encompass a wide range of sectors such as technology, healthcare, and green energy, showcasing the nation's adaptability to global trends and its ability to establish a distinctive place in the world of entrepreneurship.

India's booming startup scene offers numerous opportunities for investors but requires a strategic and thoughtful approach. To successfully navigate this dynamic landscape, it's essential to understand the market, key players, and emerging trends.

Read here: Demat Account: How to check transaction history? Here's a step-by-step guide

While all listed shares can be very easily bought by anyone who has a demat account, it is also possible, though not as easy, for investors to buy shares of firms that have not been listed yet. One can only invest in startups through their demat account if the firm has launched an initial public offering (IPO) like Paytm, Zomato, or Nykaa.

Listed shares are closely monitored by market regulator SEBI, but the same does not apply to unlisted shares. While these shares can provide great growth opportunities and have massive potential, they also have very high risks.

Read here: Demat Account: 7 resources you can use to educate yourself on stock market

A number of times these shares are not listed because they cannot fulfill one or more criteria for listing like fees or market capitalisation.

Apart from subscribing to IPOs, there is no way through a demat account for investors to invest in startups. However, there are some other ways through which you can invest in these.

Read here: Demat Account: What is electronic voting and how does it work?

Here's how you can buy unlisted or startup shares:

Direct Investment: Invest directly in startups without involving a third party such as a venture capital, debt, or private equity firm. Angel investing is a common form of direct investment.

Pre-IPO Firms: You can buy shares in pre-IPO firms through the grey market. Since these transactions are off-record, they do not involve exchanges, but the shares will appear in your demat account.

Employee Stock Options (ESOPs): Look for companies that offer ESOPs but are not listed. You can buy shares directly from their employees, often at a predetermined price after a certain period. This is a popular way to purchase unlisted shares.

Read here: Demat: 5 things to keep in mind before pledging shares from your account

Portfolio Management Systems (PMS): If you have sufficient funds, consider investing in professionally managed portfolios (PMS) to buy shares of unlisted firms. These portfolios are tailored to your financial goals and offer diversification to mitigate risk. Since they are professionally managed, you receive proper insight into the firms you invest in.

These methods offer various avenues for purchasing unlisted or startup shares, each with its own benefits and potential risks.

Now that you know where to buy unlisted shares, it's essential to understand the risks involved:

Low Liquidity: Unlisted shares are not traded on an exchange, making it challenging to find a buyer when you want to sell.

Read here: How does a demat account facilitate margin funding? MintGenie explains

Uncertain Outcomes: These companies may face bankruptcy or lose investments easily due to limited regulation, risking your capital and making it tough to recover your money.

Lack of Company Benefits: Investing in unlisted shares may not provide company benefits like dividends.

Transparency Concerns: Due to limited regulation and oversight, it can be challenging to conduct thorough research on such companies, which may lack transparency.

Read here: Demat Accounts: 12 key benefits of using auto pay facility

FAQs

What are unlisted companies?

Unlisted companies are firms that are not publicly traded on a stock exchange. Their shares are not available for buying and selling through the traditional market, making them less liquid.

How can I invest in unlisted companies?

You can invest directly in a startup or unlisted company - buy shares in the grey market, acquire shares from employees through Employee Stock Option Plans (ESOPs), or invest in a professionally managed portfolio (PMS) that includes unlisted companies.

What are the potential benefits?

Potential benefits include higher returns if the company performs well and possibly getting in early on a successful venture, such as a future unicorn.

Read here: How can a trust open a demat account? A step-by-step guide

How do I conduct due diligence on an unlisted company?

Research the company's business model, management team, financials, and growth prospects. Look for independent reviews or expert analysis.

Is there a minimum investment requirement for unlisted companies?

It varies depending on the investment route. Direct investments may have no minimum requirement, while portfolio management services or venture capital funds may require substantial initial investments.