Consent Before Transfer- NSDL's Circular And Its Impact On Private Companies

On 3 June 2025, the National Securities Depository Limited [“NSDL”] issued Circular NSDL/POLICY/2025/0071, ordering that shareholders of private limited companies should acquire the company's prior written consent, via a no-objection certificate [“NOC”], to be allowed to perform any off-market transfer of dematerialised shares. Depository participants [“DPs”] are now required to reject transfer instructions that are not accompanied by such consent.

This seemingly procedural change significantly alters the regulatory architecture governing dematerialised securities. Dematerialisation was introduced to allow hassle-free and infrastructure-based share transfer with limited interference from the companies. The new NSDL circular reverses that logic, reintroducing company-level control over share transfers even after demat, and thereby reshaping the balance of power in private markets. Framed as a compliance safeguard, the circular opens up some deep doctrinal issues that shift the procedural apparatus back in line with transfer restrictions as allowed under the Companies Act, 2013, to the detriment of corporate discretion in an area hitherto governed by standardisation.

What the NSDL Circular Now Mandates

The NSDL circular introduces a clear procedural requirement- any shareholder wishing to transfer dematerialised shares of a private limited company through an off-market transaction must first obtain a NOC from the company itself. This consent must follow a prescribed format and be submitted along with the Delivery Instruction Slip [“DIS”] to the concerned depository participants.

Importantly, the DP is forbidden to process any such transfer without receipt of the NOC. This is in stark contrast to how depositories ordinarily worked with DPs being mostly ministerial in their role-i.e., in verifying a signature on a contract note, authenticating instructions, and cause the transfer to be executed without the involvement of the company once demat credit is complete. Now, unless the company explicitly approves the transaction, the depository system must treat the transfer request as non-executable.

To bring uniformity in compliance, NSDL issued a follow-up Issuer Interface Circular NSDL/CIR/II/17/2025 on June 5, 2025 addressed to issuers and registrar and share transfer agents [“R&T agents”], requiring them to inform all private client companies of this new compliance obligation. The two-pronged communication strategy embeds the compliance burden at the level of individual investors as well as the corporate framework itself, ensuring that companies are aware and accountable for their role in the new process.

Effectively, a regulatory design emerges, which makes the company-level consent- the linchpin of share transfer execution, fundamentally reshaping the interaction between shareholders, companies, and market infrastructure.

Bridging Statute and Infrastructure: A Doctrinal Alignment

Prima facie, NSDL's circular appears to be a procedural enhancement which is aimed at operational compliance. However, a closer reading reveals that it accomplishes something more significant, it harmonises the dematerialised shareholding framework with the legal architecture of the Companies Act, 2013, particularly as it applies to private companies.

Section 58(2) of the expressly empowers private companies to restrict share transfers through provisions embedded in their AoAs. This safeguard provides for a policy choice viz., private companies are allowed to maintain tight control over their capital structure, often to preserve the character of a closely held enterprise. Under the earlier physical share regime, such control was most commonly exercised through board-level refusals of transfer requests. However, the advent of dematerialisation, where securities exist only in electronic form, disrupted this balance by shifting control to depositories, and in doing so, often diluted the company's gatekeeping function.

The NSDL circular restores that control; by making corporate consent a precondition to the execution of off-market transfers, statutory protections have become embedded within the depository operations. The circular thus performs a doctrinal correction, ensuring that the procedural ease of demat transfers does not circumvent the substantive governance rights that the law confers on private companies.

In effect, the circular ends up collapsing what used to be a jurisdictional divide: company law was the domain of the Ministry of Corporate Affairs, while securities infrastructure was in the hands of depositories regulated by SEBI. This confluence represents a vendor perspective, whereby what is deemed a legal substance and appropriate means get put from opposite sides of untreated dichotomy into alignment in a principled manner.

Corporate Control versus Shareholder Autonomy: The Emerging Tension

While the circular merges procedural practice with statutory intent, it stirs back an endless quarrel within corporate law- the struggle between corporate authority and shareholder independence. By making dematerialised transfers of shares dependent upon a company's prior consent, the circular sets up a scenario whereby shareholders are no longer wielding their otherwise unconditional right of exit or transfer of the securities.

This development is particularly consequential in the context of family-owned businesses, startups, and joint ventures, were internal dynamics often complicate exit strategies. In other words, even where a company can technically refuse consent on proper grounds, this would open avenues for strategic refusal, delayed consent, and opaque consent. These risks become much more pronounced in cases of minority exits and where shareholders intend to transfer shares to outside investors, respectively.

The Companies Act, however, confers a statutory remedy through Section 58(3) whereby in cases of unreasonable refusal, the transferee can approach the National Company Law Tribunal [“NCLT”], unfortunately, this remedy is not bereft of shortcomings. Time-consuming, expensive, and procedure-intensive, it is almost impossible for most individual or small shareholders to implement. Thus, while the legal remedies exist in theory, actual enforceability of shareholder rights may be considerably weakened under the new regime.

Essentially, what this circular effectively does is rebalance the scale towards private companies. The dematerialised format, once thought to empower investors through speed and autonomy, now reverts to a more contractual and consent-based model, placing the boardroom once again at the centre of ownership transitions.

Depository Participants as New Gatekeepers of Legality

Adopting the NSDL circular caused the most substantial operational change by redefining the operations of DPs. DPs are particularly no longer conduits for such transactions; they have been vested with a gatekeeping function. In requiring a check on whether company consent actually exists before executing an off-market transfer, the circular effectively turns the DPs into enforcers of compliance with corporate law.

This delegation of functions carries heavy regulatory implications. With times, the DPs operated under a mechanistic framework of compliance- making sure the DIS were duly filled out and matched with client holdings. At the present time, however, they must consider whether the legal sufficiency, namely, whether the no objection from the company satisfies the intent and form as laid down in the circular.

The shift adds to the administrative burden on DPs and presents the risk of inconsistent implementation. Unlike judicial or quasi-judicial agencies, DPs lack the institutional competence to adjudicate the issue of the validity of consent or its bona fide quality, placing them in a somewhat precarious position: if they fail to act, they are going to be subject to regulatory review; if they act excessively, they may prevent genuine share transfers.

On the other hand, elevating the Depositories to the status of quasi-regulatory intermediaries changes the securities law regime into one that attempts to blend the contractual depository function with corporate law enforcement. This overlap blurs the demarcation between record-keeping duties and legal adjudication, raising pressing questions about the proper limits of delegated responsibilities in financial infrastructure.

Regulatory Intent and Institutional Ambiguity

The NSDL stands, prima facie, as an effort in curbing dematerialised share transfers under the framework of corporate governance as constituted under the Companies Act, 2013. This framework is perhaps for internal ownership restrictions by way of requiring prior written consent from private companies, preserving shareholder agreements and barring unauthorised or unwanted third-party transfers.

However, the circular also reflects great intern ambiguities. Enforcement lies at an uneasy crossroads between the internal governance norms of company law and the infrastructural compliance toolbox of securities law. Building a requirement that private company approval shall precede the demat share transfer introduces a new stage of pre-clearance into a realm that has hitherto remained the pristine preserve of automated infrastructure-based finality. In this way, the circular collates substantive corporate discretion into a process that has always remained formally validated.

These two aspects of regulatory layering raise some deep concerns. First, the circular is unclear as to what qualifies as "consent". It prescribes a format, but leaves the contours of company discretion, including the grounds for refusal or delay, largely undefined. Second, it fails to specify the remedial recourse available to a shareholder whose transfer is stalled by a company's inaction or a DP's refusal. In the absence of statutory integration or appellate guidance, stakeholders are left navigating a hybrid compliance obligation without clear institutional channels for resolution.

It then gives rise to a system where intent surpasses infrastructure, which, if achieved, would be normatively correct for aligning corporate control with the securities process, yet procedurally uncertain. The circular marks a regulatory pivot but does so without embedding its mandate within a clear adjudicatory framework or issuing clarificatory guidance, thereby risking fragmented application.

Harmonising Company Law and Depository Practice

At the root of the NSDL circular's lies the conflict between company law's acceptance of internal approvals and depository law's rationale of unfettered transferability. While Section 2(68) read with Section 58(2) of the Companies Act, 2013 permits private companies to restrict share transfers in their Articles of Association, depositories under Section 26(1)(b) of the Depositories Act, 1996 are obligated to facilitate prompt and secure dematerialised transactions without adjudicating the substantive validity of transfer instructions. The circular, in effect, seeks to superimpose corporate governance checks into a domain traditionally driven by mechanical compliance.

DPs being intermediaries under the SEBI (Depositories and Participants) Regulations, 2018, cannot adjudicate decisions of private companies. The moment you require DPs to check for a company's approval to transfers or hold transfers because no approval has been communicated, one starts to blur the distinction between infrastructure enabler and gatekeeper. Such a situation would put DPs in a possible position of liability in disputes, in addition to causing delays with respect to the transactions as a result of company-side bureaucracy or deny consent of bona fide intent.

A sustainable regulatory solution must therefore aim for institutional harmonisation. One pathway could be the incorporation of such consent mechanisms into the Companies (Share Capital and Debentures) Rules, or an enabling amendment to Rule 19 of the Companies (Prospectus and Allotment of Securities) Rules, to synchronise both frameworks. Concurrently, SEBI or MCA can issue joint guidance specifying the extent of DP responsibilities, timelines for company approvals, and processes to redress shareholders in instances of delay or outright refusal.

It will only be when these matters align doctrinally that regulatory clarity will result and thus that corporate governance objectives will be met with reservations against efficiency, reliability, and neutrality being the hallmark of India's dematerialised securities regime.

While the NSDL circular is aimed at integrating shareholder consent in dematerialised transfer and is well-meaning, it opens up the deeper tension between substantive company law norms and procedural securities infrastructure. In attempting to insert a corporate discretion into depository work flows, this circular negates a founding principle of finality and certainty attached to demat transactions, which was a hallmark of post-Depositories Act, 1996 securities architecture in India.

As it stands, the circular builds a split stereotypical compliance regime wherein private companies must issue consents, the consent must be interpreted by Depository Participants and shareholders pay the price as delay or denial is borne by them, with no clear adjudicatory or appellate mechanism to exist. Such regulatory dynamics can lead to outright inefficiency and even open it up to court challenges on grounds of ultra vires and lack of any statutory support.

For the regime to evolve in a legally coherent direction, what is needed is legislative integration, institutional clarity, and procedural safeguards. Aligning the circular's objectives with clear rules under the Companies Act, 2013, or through a coordinated SEBI–MCA framework, would provide the requisite legal foundation. Further, preserving the sanctity of depository neutrality would come through entrusting the DPs with the pure ministerial role with no power of interpretative discretion.

In any case, the governance of private company shares in a dematerialised world cannot be solely the result of regulatory improvisation. It must rest on statutory consonance and infrastructural certainty, ensuring that the rights of shareholders, the autonomy of companies, and the integrity of capital markets are held in careful balance.

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