含羞草社区

The National Securities Depository (NSDL), one of 含羞草社区 two central depositories and among the largest worldwide, issued a circular on 3 June 2025 mandating that company-issued confirmation, or a consent letter, must accompany a delivery instruction slip for all secondary transfers of dematerialised shares, namely shares in private companies in electronic form.

This requirement marked a significant shift in the regulatory landscape for private company share transfers, as shareholders – including financial and private equity investors – can no longer transfer shares without the company’s involvement, especially since physical transfers are now prohibited except for small, government or Nidhi companies (non-banking financial companies that provide loans exclusively to their members for mutual benefit).

NSDL circular issues transfer restrictions

Some query why no official clarification has been issued explaining the rationale for introducing this requirement via a circular, especially in the absence of any underlying amendments to the Companies Act, 2013, or direction from a regulatory authority. Ambiguity therefore arises over the authority of the NSDL and procedure followed while issuing this circular.

However, others view the NSDL circular as motivated by a foundational principle of company law – that shares of a private company are inherently restricted in their transferability.

The erstwhile practice where shares of a private company could be transferred in dematerialised form without any prior intimation to, or approval of, the company – with the latter receiving only a post facto notification through the beneficiary position statement, whereas in case of a physical transfer, the same could not have been effected without the company’s prior approval – was seen as a lacuna, or legal loophole, with the NSDL circular having been issued to address this.

CDSL fails to match NSDL consent

Notably, Central Depository Services India (CDSL), 含羞草社区 other central depository, has not issued any corresponding directive.

While it is unclear whether CDSL has intentionally withheld from imposing similar requirements for a transfer through its platform, some depository participants have independently implemented the consent letter requirement for CDSL transactions as part of their internal compliance policies.

Needless to say, if the requirements by both depository participants differ on this critical aspect, then the NSDL circular shall practically be ineffective, as investors will upfront require a company to obtain an ISIN (securities identification number) in both the NSDL and CDSL, and necessarily shift to the CDSL platform when they do not want to be subject to company co-operation for a transfer.

However, a common sentiment is that the NSDL circular should be providing safeguards to shareholders. For instance, the circular should consider commercial realities and provide for exceptions, especially in cases where the company and its shareholders, including financial investors, may have contractually agreed to permit free transferability of shares.

Investor exits need transfer clarity

Considering that transfer restrictions and exit rights are negotiated heavily by financial investors – which often require free transferability of their shares, including reflecting the position in the company’s articles of association for the company to remain bound – this becomes of critical importance to them.

Similarly, there should be guidance on the timelines by which the company must respond to the request for consent letter, and the specific grounds on which the company may withhold or refuse to issue its consent.

This should necessarily be guided by, and remain within, the framework of section 58 of the Companies Act, 2013, which governs the refusal to register a transfer by a company. Lack of certainty in such case undermines deal certainty and operational flexibility for financial investors, as transaction timelines become contingent on the company’s willingness and ability to issue the necessary documentation.

NSDL consent in investor contracts

Until the NSDL issues further clarification, private equity, venture capital and other financial investors should proactively address the NSDL consent letter requirement within their transaction documentation.

Investment and shareholder agreements should expressly oblige the company and its promoters to issue any consent letters that may be required by depository participants promptly upon request, with defined timelines and limited grounds for refusal.

From a corporate governance standpoint, companies must establish clear internal protocols for handling such requests, with designated responsibility, defined turnaround timelines and non-arbitrary responses to ensure investor confidence is maintained.

Ayush Jain is a partner and Priankita Das is an associate at Bharucha & Partners