 "NSDL IPO")
Top depository firm National Securities Depository Ltd (NSDL), that holds and manages securities in electronic form, has tightened rules regarding unlisted shares, allowing private companies to restrict transfer, pledging, and hypothecation of their unlisted stocks in the market.
In a circular dated August 11, NSDL revised its bye-laws and business rules concerning restricted transferability and the freezing or unfreezing of unlisted shares.
Under the updated framework, companies can request NSDL to impose restrictions on transfers and control pledges of their shares. Upon verifying the request, the depository may grant approval for such restrictions.
Legal experts say these new norms will help such companies enforce share transfer restrictions, thereby reducing litigation risks.
The amendments come at a time of heightened activity in the unlisted market, where shares of multiple companies have been changing hands frequently at varying degrees of valuations. Industry insiders highlight that many companies had a substantial number of public shareholders prior to their IPOs, which delayed approval processes.
The market regulator subsequently clarified that if companies had not raised funds from the public through share issuances, a large public shareholder base would not be problematic. The issue largely arose from ESOP conversions and secondary trades in the unlisted market among IPO-bound companies.
“A company will now be able to restrict transfers. This will thus stop sales of equity shares of private limited companies by existing shareholders to retail investors or high-net-worth individuals (HNIs). And a market for such equity shares prior to the company becoming listed won't be created,” said Yash Ashar, senior partner, Cyril Amarchand Mangaldas.
Rishabh Gandhi, founder of Rishabh Gandhi and Advocates, added that these changes curb unauthorised transfers, enhance issuer control, and align depository practices with statutory intent.
“The reforms equip unlisted companies with better compliance tools, protect shareholders, enforce restrictions, and demand robust governance along with accurate record-keeping. The changes modernise depository systems while harmonising them with corporate law,” Gandhi added.
The amended norms also shift responsibility to the companies, indemnifying the depository against any actions arising from third parties.
Ashar added that companies that are already public will not be able to make use of this restriction and thus control who acquires their shares.
Additionally, employees in private limited companies who would sell these equity shares at the time of vesting of their ESOPs may now struggle. Such private companies may need to find alternate commercial solutions to help their employees, he said.
Saumya Ramakrishnan, partner at Bombay Law Chambers, expressed concerns that the changes may create hurdles for investors seeking to transfer shares, which were previously allowed under shareholders’ agreements.
“This circular may prompt investors to negotiate provisions in shareholders’ agreements concerning communication mechanisms between NSDL and the company,” she added.
