COMPANY LAW UPDATE: ADDITIONAL COMPLIANCE REQUIREMENT FOR SHARE TRANSFER IN PRIVATE LIMITED COMPANIES

The National Securities Depository Limited (NSDL), vide Circular No. NSDL/POLICY/2025/0071 dated 3 June 2025 , has brought about a significant procedural shift in the transfer of shares of private limited companies through the depository mode. The circular outlines the procedure and introduces a compliance step essential to fulfil the prohibitive conditions of private company shareholding under the Companies Act, 2013 (“Companies Act”).

Tighter Rules on Transfer of Shares in Private Companies

According to Section 2(68) of the Companies Act, a private company must have its share transfer restrictions as laid down in its Articles of Association (AoA). Considering the above requirement, NSDL recently inserted a mandate on Depository Participants (DPs) to obtain an additional confirmation from the concerned company before processing any off-market share transfer instructions.

Apart from the regular Delivery Instruction Slip (DIS) furnished by the demat account owner, the DPs must also obtain a letter from the private limited company stating that the transfer is valid, authorized, and under the Companies Act and its AoA. NSDL also has a prescribed format for the confirmation letter.

Such a procedural safeguard guarantees that any dematerialized transfer of private company shares beyond the market is only accomplished with the explicit agreement of the issuing company, thereby aligning the dematerialization process with the company's internal rules of transfer. It ensures against unauthorized or contentious transfers and preserves the integrity of private ownership arrangements.

Dematerialization of shares has made the transfer of securities easy; however, restrictions on the transfer of shares are still a characteristic of privately held companies. The new development ensures that such statutory and contractual restrictions continue to apply, even in a virtual setup, and is likely to reduce conflict, promote better governance, and provide compliance integrity, ultimately making the whole process easier.

MHCO Comments

NSDL's new circular is a firm reminder that compliance, governance, and systemic integrity are the same. By strengthening the process of off-market transfer in private companies and introducing tighter timelines for significant audits and disclosures, NSDL is raising regulatory compliance and reiterating market confidence. For participants, the message is no less clear: stay aligned, stay on time, and give each process the same gravitas as the financial system itself.

This update was released on 09 Jul 2025.

The views expressed in this update are personal and should not be construed as any legal advice. Please contact us directly on +91 22 40565252 or legalupdates@mhcolaw.com for any assistance.

Legal Update Team
MANSUKHLAL HIRALAL & COMPANY
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