Individual Strategies of investing in PE markets

One block at a time.

In the previous article, we discussed bulk strategies in practice for investing in private equities. We felt that it was a good fit for educational purposes, but we also believe that people should be educated more on those aspects they can access. Otherwise, what’s the point of knowing things if you cannot bring them into practice.

On that note, I would like to introduce you to individual strategies that can be brought into use by retail investors to invest in a company’s growth story.

Diving straight into the ocean of strategies, Leadoff brings you the three most accessible avenues for investing in private equity. Please do not leave us in the middle, as the real hero occupies the last section in this not so intricate piece.

  1. Employee Stock Option Plan (ESOP)

What is an ESOP?
ESOP is an investment avenue where an investor can buy shares of a private company that they are working in. They are offered at a fixed ‘predetermined’ price in the future, also referred to as ‘Exercise price’.

How are ESOPs taxed?
ESOPs are considered as a part of an incentive scheme that is offered to an employee. Thus, it is referred to as a ‘prerequisite’ which makes it eligible for a tax deduction at source as it is also considered a part of an employee’s salary income.

Let’s understand taxation in ESOP with an example:

Ramesh is an employee of XYZ Pvt. Ltd. His employer has offered him 50 shares under the ESOP scheme at INR 100 each when the market price is INR 150 apiece.

Stage (1) of taxation:
Since Ramesh had received these shares at a comparatively lower price than the market, the difference between the fair value of a share and the market price of a share is on what the tax is levied.

The fair value of a share is equal to the price at which Ramesh has received the shares under the ESOP scheme, i.e., INR 100. At the same time, the market value of a share is INR 150. Therefore, the taxable amount is calculated as following steps:

Total fair value of 50 shares allotted under ESOP = 50 * INR 100 = INR 5,000
Total market value of 50 shares = 50 * INR 150 = INR 7,500
Taxable amount = INR 7,500 — INR 5,000 = INR 2,500

Therefore, INR 2,500 is taxable in the hands of an employee who has received shares under the ESOP.

Stage (2) of taxation:
Allotment of shares at a comparatively lower price is not when an employee makes a profit. The profits are made when an employee sells these shares, and that’s when the second stage of taxation comes into the picture as there will be a capital gain.

LTCG -If the shares allotted under the ESOP are held for more than 12 months, then a tax rate of 20% is applicable along with the indexation benefit.
STCG -If the shares allotted under the ESOP are held for less than 12 months, then the capital gain (if any) is added to an employee’s salary, following which they are taxed as per the income tax slab rate they fall under.

2. Pre-IPO funds

We all have heard of different varieties of mutual funds ranging from equity to debt and with a hybrid category in the middle. However, most of us are unfortunately unaware of Pre-IPO funds.

What are Pre-IPO funds?
A pre-IPO fund is a pooled investment vehicle, like any other mutual fund out there. But unlike an equity mutual fund that invests in equity shares of listed companies, the Pre-IPO fund, as the name suggests, invests in those companies which are bound to go public in 3 to 5 years.

Who should invest in Pre-IPO funds?
Any HNI with a moderate to a high-risk profile can invest in Pre-IPO funds as per the funds’ investment approach. Generally, the investment approach of Pre-IPO funds is to invest in growth-oriented private companies that have an all-weather business model and are eyeing to go public in a few years down the lane.

What is the minimum investable amount for Pre-IPO funds in India?
The minimum investable amount is INR 1 crore per the SEBI guidelines.

Why should an investor invest in Pre-IPO funds?
No lock-in period. Here, investors can liquidate their holdings and enjoy listing gains when publicly listed a company. Unlike a six-month lock-in period for direct investment in private company shares, there is no such clause in a Pre-IPO fund.

3. Leadoff

What is Leadoff?
Leadoff is a holistically technology-driven vibrant investment platform that operates with a sense of purpose to democratize the private markets by amplifying its awareness. In addition to this, Leadoff offers universal entry price irrespective of the strata and prides itself as a platform that respects the privacy of its users by securitizing our client’s interests to instill trust and confidence in the private market of India.

How do we enable a seamless experience for investing in Indian private equities?
We make it easier for an investor to analyze the private listed companies by providing them with our offerings such as:

A. Companies Section —
We provide you with a curated deck of Indian private companies, the private equity shares of which are available for investment.

B. About the company section -

It is a section where an investor gets a quick overview of its sector, registration details, and core business operations.

C. Key Indicators section —

This section focuses on equipping an investor with financial information about a private company for better understanding.

D. Newscast Section —

This tab on our platform enables an investor to keep track of its corporate actions and global news related to it.

If you’d like to reserve access on Leadoff to acquire private shares — click the Reserve Access button below: