Sebi allows recording of NDUs in depository system

Markets regulator Sebi today allowed depositories to offer a system for capturing and recording the non-disposal undertaking (NDU).
An NDU typically involves shares being transferred to a new demat account without change in the beneficial ownership with an undertaking that the transferee would not sell those shares.
At times, special purpose vehicles are floated to such share transfers to avoid making any disclosures.
Currently, there is no framework to capture the details of NDU in the depository system as these happen outside the depository system and are not captured and reflected in the records of the depositories.
The decision has been taken after Sebi observed that some shareholders, primarily promoters, enter into non-disposal agreements/ non-disposal undertaking (NDU) for borrowing funds from various lenders.

"In order to enable the shareholders to record the NDUs in the depository system, it has been decided to permit the depositories to offer a system for capturing and recording the NDUs," the Securities and Exchange Board of India (Sebi) said in a circular.

It has asked depositories to develop a separate module/ transaction type in their system for recording NDUs.
Both parties to the NDU should have a demat account with the same depository and be KYC compliant.
"Pursuant to entering the NDU, the Beneficial Owner (BO) along with the other party shall make an application through the participant (where the BO holds his securities) to the depository, for the purpose of recording the NDU transaction," Sebi said.

The depository system provides a transparent mechanism for recording pledge transactions entered between lenders and borrowers.
The application should necessarily include details of BO ID, PAN, email-id, signature, name of the entity in whose favour such NDU is entered and the quantity of securities. Such
entity in whose favour NDU is entered would have to authorise the participant of the BO holding the shares, to access the signatures as recorded in that entity's demat account.
The participant after being satisfied that the securities are available for NDU would record the NDU and freeze for debit the requisite quantity of securities under NDU in the depository system.

The depositories would make suitable provisions for capturing the details of company/ promoters if they are part of the NDU. In case if the participant does not create the NDU, it would intimate the same to the parties of the NDU along with the reasons thereof.
"Once the freeze for debits is created under the NDU for a particular 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," the regulator said.

The entry of NDU may be cancelled by the depository/ participant of the BO through unfreeze of specified quantity if parties to the NDU jointly make such application to the depository through the participant of the BO.
On unfreeze of shares upon termination/ cancellation of NDU, the depository would inform both parties of the NDU.
"The unfreeze shall be effected in the depository system after a cooling period of two clear business days but no later than four clear business days. The freeze and unfreeze instructions executed by the participant for recording NDUs will be subject to 100 per cent concurrent audit," Sebi said.

The depository participants would not facilitate or be a party to any NDU outside the depository system.