Strengthening Transfer Restrictions: NSDL Mandates Company Consent for Off-Market Share Transfers

Strengthening Transfer Restrictions: NSDL Mandates Company Consent for Off-Market Share Transfers

The National Securities Depository Limited (NSDL), through its circular dated June 3, 2025 (Circular, which can be viewed by clicking on this link), has introduced an additional compliance step for the off-market transfer of shares of private limited companies.

Effective immediately, any shareholder intending to transfer shares of a private company must, in addition to submitting the standard Delivery Instruction Slip (DIS), provide a formal consent and confirmation letter issued by the private company to their Depository Participant (DP). This move is aimed at operationally enforcing the statutory restriction on the transfer of shares as defined under Section 2(68) of the Companies Act, 2013.

The key aspects of this new requirement are as follows:

1. Addressing a Procedural Gap

Previously, a shareholder could execute an off-market transfer by simply submitting a DIS to their DP. This process created a gap where DPs had no mechanism to verify if the transfer complied with specific restrictions contained in the company’s articles of association or any shareholders’ agreements. Consequently, private companies were often unable to pre-emptively block non-compliant transfers and would only receive post-facto intimation. The Circular addresses this by mandating prior company approval, thereby aligning the depository process with the company’s own governance framework.

2. The New Process

Under the new process, a shareholder wishing to transfer shares must first obtain a consent letter from the private company, in a format prescribed by NSDL. This letter, to be issued on the company’s letterhead, confirms that the proposed transfer is in accordance with the Companies Act, 2013, and that the company has obtained all necessary internal approvals for the same. This letter must then be submitted to the DP along with the DIS to execute the transfer.

• Impact on Stakeholders
• For Private Companies: The Circular empowers private companies by reinstating their control over their shareholding structure. It provides them with a mechanism to review and reject proposed transfers that violate their articles of association or shareholder arrangements before the transfer is affected in the depository system.
• For Shareholders and Mergers & Acquisition (M&A) Transactions: This introduces an additional procedural step that may increase the time required to complete a share transfer. The Circular does not prescribe any timeline within which a company must provide or refuse the letter of consent, creating potential for delays.

3. Key Considerations and Limitations

• Lack of Timelines: The absence of a statutory timeline for processing consent requests is a significant concern. For physical share transfers, the Companies Act, 2013, provides a 30-day period for a company to act on a transfer request. A similar timeline for dematerialized shares would be a welcome clarification to prevent undue delays.
• Contractual Safeguards: Until such clarification is issued, shareholders involved in significant M&A transactions should consider entering into Share Purchase Agreements (SPAs) having a specific condition that contractually obligate the company to provide the consent form in a time-bound manner.
• Limited Applicability: It is crucial to note that this requirement is currently applicable only for off-market transfers processed through NSDL. No corresponding requirement has been prescribed by the Central Depository Services (India) Limited (CDSL) yet, and it remains to be seen if it will follow suit.

While the Circular is a welcome step in aligning depository processes with the legal framework governing private companies, stakeholders involved in M&A and other share transfer transactions must now factor in this additional procedural requirement and proactively address potential delays through contractual provisions in transaction documents like SPAs.