Introduction
National Securities Depository Limited ("NSDL") vide circular no. NSDL/POLICY/2025/0071 dated June 03, 2025 ("Circular"), has introduced a significant change in the share transfer process for private limited companies. Prior to the Circular, any shareholder in a private limited company desirous of transferring their securities was only required to submit a delivery instruction slip (DIS) to their depository participant (DP), providing the details of the securities being transferred, the consideration payable and the transferee receiving the securities. While the transfer was subject to restrictions under the articles of association of the company, a shareholders' agreement or any other inter-se shareholder arrangements, as may have been applicable to the transferor, there was no mechanism for the DP to verify that the transferor was making the transaction in compliance with these restrictions. This led to a potentially inadvertent scenario where private companies were also unable to pre-emptively ensure that their shareholders were transferring shares in accordance with the articles of association, as in several instances they only received a post facto intimation of the transaction.
The Circular has seemingly sought to address this concern by introducing an additional requirement in the share transfer process- obtaining a formal prior consent letter from the concerned company, confirming approval of the transfer. The format of the consent is set out in the Annexure to the Circular, and includes disclosure of details of the transferor, transferee, shares being transferred and the reason for the transfer.
Rationale for the Circular and its Impact on Stakeholders
The Circular stems from the fundamental nature of, and the definition of a 'private limited company' under Section 2(68) of the Companies Act, 2013 ("Act"), which provides that a private limited company is one which restricts the right to transfer shares. By creating a mechanism for allowing private companies to consent to the transfer of securities by its shareholders, the Circular has operationalized this legal restriction.
For private companies, this Circular reinstates their control over their shareholding structure and empowers them to reject transfers that are not in accordance with their articles of association or shareholder arrangements. On the other hand, it creates an additional requirement for shareholders wanting to transfer shares which may potentially increase the timeline for completing share transfers, particularly considering that there seems to be no formal process or time limit prescribed for companies to render this consent.
Concluding Thoughts
While the procurement of the company's consent is a positive step to prevent unauthorized transfers by shareholders, a clarification under the Act on timelines for processing such consent requests may be helpful so as to ensure that companies do not unnecessarily delay the right of shareholders to deal with their securities. Commensurate with Section 56 and Section 58 of the Act which, in relation to a transfer of physical shares, require the Company to object to a transfer or deliver share certificates to the transferee within 30 (thirty) days from the receipt of a share transfer form, defined timelines could be prescribed to approve or reject a transfer of dematerialized shares. Until then, shareholders can ensure timely completion of share transfers (particularly in significant transactions) by entering into share purchase agreements that obligate the company to provide the consent form to the DP in a time bound manner.
It is pertinent to note that the Circular is only applicable to off-market transfers on NSDL. No such requirement has been prescribed for transfer of securities on Central Depository Services (India) Limited (CDSL), and it remains to be seen whether any corresponding process will be adopted by CDSL as well in this regard.
Please find attached a copy of the circular.
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