India: SEBI Institutes A Formal Depository Mechanism For Recording NDUs

Last Updated: 3 July 2017
Article by Manisha Shroff, Madhuparna Dasgupta and Oindrila Bhowmik

Most Read Contributor in India, December 2017


The Securities and Exchange Board of India (SEBI) has issued an important circular (Circular) dated 14 June 2017 relating to recording of non-disposal undertakings (NDUs) with a depository. Currently, depositories do not offer a mechanism for implementing NDUs unlike pledge transactions. An NDU, often referred to as a 'negative lien', constitutes a contractual lock in on shares provided by shareholders or promoters, in favour of lenders, without involving any actual alienation of securities or transfer of the beneficial interest such as in the case of a pledge of shares. The NDU provider retains all title and interest in the shares which are subject to the NDU and in the event of a transfer of title or interest in such shares to a third party (having no knowledge of such restriction), the rights of the lender under the NDU would be limited to the right to claim damages from the NDU provider for breach of the contractual provisions of the NDU. Under the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (Takeover Regulations) an NDU is covered within the scope of disclosures required to be made for 'encumbrances' on shares.

Salient Features

The Circular acknowledges the lack of a framework that captures the details of NDUs in the depository system and accordingly creates an investor-friendly enabling mechanism whereby depositories can capture and record NDUs, as an extension to the existing disclosure requirements under the Takeover Regulations. For this purpose, the following procedures and compliances have been prescribed for depositories and/or the parties to the NDU:

Procedure for recording of NDU

  • The depositories would have to develop a separate module/transaction type in their system for recording the NDUs.
  • Both parties to the NDU (i.e. the promoter/beneficial owner and the lender/trustee) will have to open separate demat accounts with the same depository and be compliant with the extant KYC norms.
  • Further to execution of the NDU agreement, the parties are required to make an application through the depository participant (where the beneficial owner holds his shares) to the relevant depository for the purpose of recording the NDU. This application is required to include details of the beneficial owner (such as the ID number, PAN, email address, signature, name of the entity) in whose favour the NDU is being created along with quantity of the securities.
  • The beneficiary entity in whose favour the NDU is being created is required to authorize the depository participant to access the signatures as recorded in that entity's demat account.
  • The depository participant is required to satisfy itself that the shares are available for the NDU (i.e. are not subject to other encumbrances) and thereafter record the NDU and freeze for debit the requisite quantity of securities in the depository system. Once the freeze is created, the depository/participant is required to inform both parties of the NDU regarding the freeze of the NDU shares.
  • The depositories are required to make suitable provisions for capturing the BO ID and PAN of the beneficiary of the NDU and to make available to the relevant depository participant, the details of the authorized signatories recorded in the beneficiary entity's demat account.
  • All freeze and unfreeze instructions for recording of the NDUs would be subject to 100% concurrent audits.
  • No depository participant shall be allowed to facilitate or be party to any NDU outside of the depository system.

Effect of the freeze on NDU Shares

The Circular provides that once the freeze for debits is created under the NDU for a given quantity of shares, the depository shall not facilitate or effect any transfer, pledge, hypothecation, lending, rematerialisation or in any manner alienate or otherwise allow dealing in the shares held under NDU till receipt of instructions from both parties for the cancellation of NDU.

Procedure to unfreeze NDU Shares

To 'unfreeze' or terminate the NDU arrangement, the parties are required to make a joint application to the depository through the depository participant of the beneficial owner. Upon such unfreeze of the shares, the depository is required to inform both the parties in the form and manner agreed upon at the time of creating the freeze. The unfreeze is effected in the depository system after a cooling period of 2 business days from the date of cancellation which may extend to a maximum of 4 business days.

Timeframe for implementation

A timeframe of 4 months has been given to the depositories to implement the provisions of the Circular, i.e. by 14 October 2017. The depositories are required to make all suitable amendments to all relevant bye laws, rules/regulations, carry out necessary systemic changes, disseminate the provisions of the Circular on their websites and so forth. Further, the depositories are required to communicate to the SEBI the status of implementation of the Circular as a part of their monthly development reports.


The Circular reflects the intent of the regulator to eliminate existing loopholes in recording of NDUs which allowed promoters and shareholders to self-regulate their obligations under a NDU in the absence of a watertight legal mechanism to ensure actual compliance of the NDU. This Circular will be welcomed by investors for offering a mechanism which significantly mitigates a possible risk of breach of NDUs and therefore transforms this hitherto contractual arrangement into a transparent and viable security arrangement monitored by independent depositories.

It would now be possible to record NDUs in the depository system like a pledge, once the depositories put in the necessary mechanisms in line with the Circular. Practically, most investors and lenders are likely to insist on adopting this recording mechanism for all prospective NDU arrangements and the existing practices of executing merely contractual NDUs will definitely dwindle as a consequence. For listed shares, the mechanism of disclosures to stock exchanges was already in place and following the Circular, this would now extend to dematerialized shares as well. In that sense, the Circular is likely to impact all holding company financing structures involving dematerialized shares. This is favourable for lenders who would be able to exercise greater effective control than the prevalent practice of lock-box arrangements without requiring RBI approval. However, if the contracting parties prefer to keep the NDU arrangement out of the public domain, then a contractual NDU or dealing in physical shares may be the only option to implement such financing structures.

However, certain clarifications may be required for implementing the Circular; for instance, there is presently no format of application prescribed for recording an NDU and presumably the task of formulating a suitable format has been left to the relevant depositories. The Circular also contemplates an increased role for the depository participants, who are inter alia required to satisfy themselves regarding the availability of shares for NDU – it is not clear to what extent this obligation needs to be performed and if there is any liability for negligence or oversight by the depository participants regarding any existing encumbrances on the NDU shares.

It would also be interesting to see if, in the backdrop of this formalized mechanism for the recording of NDUs, the RBI revises its stance on requirement of its prior approval for NDUs in the context of offshore financing structures.

Whilst the exact manner in which the depositories implement this direction of the SEBI remains to be seen, the Circular is not expected to affect legacy trades. Whilst the proposed recording system is intended to strengthen contractual NDU arrangements, the SEBI direction does not appear to create an approval based framework whereby regulatory approval is required for non-adherence to the proposed system, in which the enforceability of the NDU is called into question. This makes it crucial that the Circular does not affect legacy trades. Further, in prospective NDU arrangements where the parties opt out of adopting this depository recording approach to an NDU, the only downside will be the lack of an effective controlling mechanism without adversely impacting the underlying non-disposal arrangement.

The content of this document do not necessarily reflect the views/position of Khaitan & Co but remain solely those of the author(s). For any further queries or follow up please contact Khaitan & Co at

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Events from this Firm
10 Feb 2018, Video/ Audio, Mumbai, India
Contact Event Organizer: Khaitan & Co Funds Team
This is to remind you that we will be hosting an audio-conference tomorrow, 10 January 2018, titled “SEBI’s Year End Bonanza to Investors and Fund Managers”, which is dedicated to fund managers and investors.
In association with
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions