This is probably the most common question we get: "Is buying unlisted shares even legal in India?" If you've been hesitant to explore the unlisted market because you're worried about legality, you're not alone. The grey market, informal transactions, and lack of exchange oversight can make it seem sketchy. But here's the truth – and it might surprise you.
YES, It's 100% Legal
Buying and selling unlisted shares is completely legal in India.
It's governed by the Companies Act, 2013 and regulated transfer procedures. While less regulated than listed markets, unlisted share transactions are a legitimate investment activity.
Understanding the Legal Framework
Let's break down exactly what makes unlisted share trading legal and what regulations govern it:
1. Companies Act, 2013
Primary governing law for all company shares (listed and unlisted)
Section 56: Deals with transfer and transmission of securities
Section 58: Covers restrictions on transfer of shares
Allows private limited companies to have shares that can be transferred
Requires proper documentation and company approval for transfersKey Point: The law explicitly allows share transfers of private companies, making unlisted trading legal.
2. SEBI (Securities and Exchange Board of India)
Regulatory oversight for securities markets
SEBI primarily regulates listed securities on recognized exchanges
Unlisted shares fall outside SEBI's direct regulatory purview
However, SEBI does regulate certain unlisted activities:
- Private placement of securities (ICDR Regulations)
- Insider trading even in unlisted companies
- Fraud and manipulation in securities
Key Point: Less SEBI oversight doesn't mean illegal – it means different regulatory framework.
3. RBI (Reserve Bank of India)
Foreign exchange and NRI investment regulations
FEMA (Foreign Exchange Management Act) governs NRI investments
NRIs can invest in unlisted shares under automatic route for most sectors
Important: Certain sectors like defense, media, banking, insurance, telecom, and aviation have restrictions or require government approval
Repatriation rules apply for NRI investmentsKey Point: NRIs can legally invest in unlisted shares with proper compliance, but must verify sector-specific restrictions before investing.
4. Income Tax Act, 1961
Tax treatment of unlisted shares
Capital gains from unlisted shares are taxable (confirms legality)
Proper tax laws exist for unlisted share transactions
Both short-term and long-term gains have defined tax treatmentKey Point: The government taxes unlisted share gains, which inherently confirms it's a legal activity.
Why the Confusion? Common Misconceptions
MYTH: "It's called the 'grey market' so it must be illegal or semi-legal"
REALITY: "Grey market" just means informal/OTC market. It's perfectly legal, just less regulated than stock exchanges.
MYTH: "SEBI doesn't regulate it, so it must be illegal"
REALITY: Many legal activities aren't SEBI-regulated. Real estate, gold, private equity – all legal, not all SEBI-regulated.
MYTH: "Banks don't finance it, so government doesn't approve"
REALITY: Banks avoid unlisted shares due to illiquidity risk, not illegality. Same reason they don't finance art or collectibles.
MYTH: "Companies can prevent share transfers, so it's restricted"
REALITY: Companies can have transfer restrictions (right of first refusal, board approval) but can't arbitrarily block legal transfers.
What IS Legal vs. What IS NOT Legal
Legal Activities:
Buying unlisted shares through proper channels
Selling your unlisted shares to willing buyers
Using brokers/intermediaries for transactions
Negotiating prices between buyer and seller
Transferring shares with proper documentation
Paying taxes on capital gains
Selling ESOP shares after vesting
NRIs investing under FEMA guidelinesIllegal Activities:
Insider trading in unlisted companies
Creating fake share certificates
Selling shares you don't own (fraud)
Price manipulation and market rigging
Bypassing mandatory company approval processes
Evading taxes on unlisted share gains
Selling ESOP shares before vesting period
Foreign nationals investing illegallyLegal Requirements for Valid Transactions
For an unlisted share transaction to be legally valid, it must meet these requirements:
Share Transfer Deed: Properly executed document transferring ownership
Board Approval: Most private companies require board approval for transfers
Stamp Duty Payment: Transfer deed must have appropriate stamp duty paid
Updated Share Register: Company must update its register of members
Share Certificate: New certificate issued in buyer's name (or demat transfer)
PAN Card Details: Both parties must provide PAN for tax compliance
Payment Trail: Legitimate banking channels (no cash transactions above limits)
Compliance with Articles: Transaction must follow company's Articles of AssociationHow to Ensure Your Transaction is Legal
Legal Compliance Checklist:
Verify seller actually owns the shares (check with company's RTA)
Ensure share certificates are genuine (not forged)
Check if shares have any lock-in or transfer restrictions
Execute proper share transfer deed with adequate stamp duty
Obtain board approval if required by company's Articles
Use banking channels for payment (maintain proper trail)
Get shares transferred in company's records officially
Obtain new share certificate or demat credit in your name
Report capital gains in income tax returns
Keep all documentation (purchase proof, transfer deed, payment receipts)What If Something Goes Wrong?
While unlisted trading is legal, if you face issues, here's your recourse:
Legal Recourse Options:
Company-Level Resolution:
Approach company's compliance officer
Request intervention from board of directors
File complaint with company's registrarRegulatory Complaints:
SEBI (if fraud or misrepresentation involved)
Ministry of Corporate Affairs (for Companies Act violations)
Economic Offences Wing (for financial fraud)Legal Action:
Civil suit for breach of contract
Criminal complaint for cheating/fraud (IPC sections 415-420)
National Company Law Tribunal (NCLT) for company-related disputesArbitration:
If purchase agreement has arbitration clause
Faster resolution than courtsKey Takeaways
Buying and selling unlisted shares is 100% legal in India
Governed primarily by Companies Act, 2013 and related regulations
Less SEBI oversight ≠ illegal; different regulatory framework applies
Proper documentation and company approval are mandatory for legal validity
Tax on capital gains confirms government recognition of this activity
NRIs can legally invest with FEMA compliance
Fraud, fake certificates, and insider trading are illegal (same as listed markets)
Always use banking channels and maintain proper transaction trail
Legal recourse exists through NCLT, civil courts, and regulatory bodies