Regulating the Off-Market: Overhauling the Stringent Compliance Norms under NSDL’s New Circular

[Atharv and Mayank are students at Hidayatullah National Law University.]

The market for private unlisted securities has recently undergone a seismic overhaul in its compliance norms, marking a shift from a system of unregulated ease to one of strict, centralized control. On 11 August 2025, the National Securities Depository Limited (NSDL), issued a circular (Circular) amending its bye-laws, mandating a consent-first approach in the market for private unlisted shares, which effectively gives the issuer company authority to manage the transfer of its securities. This Circular provides clarification to the NSDL mandate dated 3 June 2025, which directed that every off-market transfer or pledge of dematerialized shares must require an explicit consent letter from the issuing company. 

While the aim remains to align the market realities with the theoretical structure of the Companies Act 2013 (Act), this overhaul also hinders the liquidity of the unlisted ecosystem by introducing red-tapism in the dematerialized securities market. Therefore, it becomes imperative to dissect the changes ushered by NSDL and analyze how the objective can be better realized by observing the global practices followed in different jurisdictions.

Through this blog, the authors explore the quandary around the Circular. First, this blog examines the changes introduced by the Circular. Second, it unveils the hidden cracks in the Circular. Lastly, it assesses and suggests further reforms that may be brought in to stabilize the unregulated regime by drawing insights from other regimes. 

From Seamless to Sanctioned: Dissecting the Circular

The Circular ushered in numerous beneficial changes in the regulatory landscape of the unlisted securities market by introducing Bye-laws 9.20 and 9.21. These changes can be dissected and understood through the following:

First, the Circular mandates a prior consent form to be procured from the issuer company before a transaction request can be placed with the depository participant (DP). Earlier, the sole compliance necessary was the submission of the delivery instruction slip to the DP. However, this completely bypassed the private company’s discretion over its membership, as it itself was oblivious of such a transaction and only came to know about it through its Registrar and Transfer Agent (RTA). However, the consent requisite restores the regulatory position of the company over its membership, which it enjoyed before the advent of the dematerialized market.

Secondly, the Circular formally empowers private companies to request that NSDL, through the RTA, impose or lift a lock on the transfer, pledging, or hypothecation of their unlisted securities. Further, it can block pledges at the source if the company requests it, which effectively curbs transfer of shares through any medium.

Lastly, the Circular further empowers the company to freeze or unfreeze all or any of its shares if it deems it necessary for the enforcement of its articles of association (AoA).

The aim of these changes is to enforce the limitations imposed upon private companies by Section 2(68) of the Act with respect to their membership. The Act required a private company to limit its membership to 200, but this was effectively bypassed through the digital transaction of shares through DP. Furthermore, the Circular aims to restore the company’s position as gatekeeper of its shareholding to prevent any hostile takeover, maintain shareholder stability, and enforce shareholders’ agreements. Hence, these changes align market realities with the limitations contained in the Act and also protect the organizational structure of private companies as envisioned in the Act.

When Regulation Becomes Restriction: The Hidden Pitfalls

While the Circular is a watershed reform and marks a significant step in regulating the unlisted securities market, it certainly is not without flaws and necessitates intense scrutiny in the coming period. The Circular, while enhancing compliance, unveils numerous practical hurdles that can be elucidated as follows:

First, the quandary lies with the silence of circular on postulating a defined timeline for the company to respond to shareholders’ requests and either issue or refuse the consent letter. This regulatory gap creates both legal and practical uncertainty as shareholders are left in limbo without any recourse against non-responsiveness. Companies could potentially exploit this ambiguity in control-sensitive scenarios by withholding consent to intentionally delay or frustrate a valid share transfer, making it a strategic tool. Such passive resistance may effectively operate as a “silent veto.”

Second, the power of a silent veto also directly opposes the rights of minority shareholders. While private companies’ AoA may restrict transferability, the Supreme Court in the case of Bajaj Auto Limited v. NK Firodia (Bajaj Auto case) has categorically held that such power is fiduciary and cannot be used for any collateral purpose. However, promoters or majority shareholders can now refuse to issue the mandatory consent letter or merely request NSDL to freeze the shares, blocking any exit for a minority shareholder. 

This manufactured illiquidity creates an ecosystem wherein minority shareholders can be pressured into selling their stake to a buyer preferred by management, often at an unfavorable, below-market valuation. Furthermore, in the small organizational structure of a private company, this also serves as a coercive tool to suppress dissent, silencing those who question the decision makers. 

Albeit such actions, in the normal course of business, would definitely form a textbook example of oppression and mismanagement for which a relief of approaching the National Company Law Tribunal (Tribunal) has been provided under Sections 241 and 242 of the Act. However, now the companies can readily take the defence of this circular, and under the garb of power conferred by this circular, legitimately oppress the minority shareholder. As the Circular only intends to give effect to the provisions of the Act, the Tribunal would face legislative resistance in its attempt to provide relief to the shareholder.

Thirdly, the current framework is limited by its fragmented applicability. The new consent letter requirement applies predominantly to off-market transfers processed through NSDL, while Central Depository Services (India) Limited (CSDL) has not yet introduced a corresponding mandate, giving rise to a situation of regulatory arbitrage. A shareholder intent on bypassing the NSDL requirement could first execute an inter-depository transfer, shifting securities from an NSDL-linked demat account to one maintained with CDSL. Once the shares are parked in a CDSL account, the shareholder could potentially effectuate the off-market transfer to the intended buyer without obtaining prior company consent due to the lack of a mirroring mandate from CDSL’s side.

This regulatory arbitrage noticeably weakens the effectiveness of the reform and could be exploited in sensitive situations, such as those involving hostile takeovers and shareholder exits. The potential for such abuse is not merely theoretical, as the case of SEBI v. Jhaveri Securities Private Limited practically demonstrated how front-running schemes can be concealed by using off-market transfers to consolidate illicit profits from multiple demat accounts, thereby evading regulatory oversight. Relatedly, the Supreme Court’s directive in NSDL v. SEBI holds depositories accountable for such systemic failures even when they are not the originators, thereby shifting the burden upon these depositories.

Fourth, it brings in an added layer of risk for lenders accepting unlisted shares as collaterals, for example, if a borrower defaults and the lender seeks to invoke the pledge by transferring shares into its demat account, it may now be required to first obtain the company’s consent which can be deferred due to absence of defined timeline for issuing or refusing such consent giving power to companies to delay or even block invocation thus frustrating the lender’s recovery efforts. Courts have consistently insisted on the priority of secured creditors, lenders’ right to enforce pledges and that uncertainty in such enforcement undermines the sanctity of collateral, as in ICICI Bank v. Sidco Leathers Limited (ICICI Bank case) The gap could also end up affecting the pricing of credit, as banks may now treat unlisted securities as weaker collateral, leading to higher interest rates or even reluctance to extend credit against them.

Recalibrating the Framework: Towards Balance and Transparency

These regulatory lacunae pose a significant pitfall as they only establish a partial regulatory scheme, with a major chunk still remaining undefined. Thus, this necessitates filling in these cracks.

First, concerning the infirmity with the absence of a defined timeline that creates a silent veto risk, it is advisable to further amend the bye-laws and rules to mandate a statutory response window of 30 days for companies to respond to shareholders’ requests corresponding to the already existing obligation under Section 56(4)(c). Furthermore, non-responsiveness within the prescribed limit shall be presumed to be a “deemed consent” to prevent indefinite limbo. 

Second, regarding minority oppression due to the silent veto, NSDL could consider amending its bye-laws to explicitly state that consent cannot be withheld for collateral purposes such as forcing a sale at a discounted price or silencing dissent, aligning with the judicial precedent as set in the Bajaj Auto case. NSDL may further require companies to give written and reasoned orders when refusing consent, which should come under the ambit of judicial review. Enacting such procedural safeguards would result in proper conduct of business, alleviating concerns of the oppression of minority shareholders, and would also aid to the Tribunal in adjudging the intent of a company in its refusal.

Third, concerning the regulatory arbitrage created due to the absence of corresponding regulation by CDSL. It is advisable for CDSL to introduce mirror rules comparable to those of NSDL. Until such harmonization, NSDL may opt to flag inter-depository transfers involving unlisted shares and report them, which can be achieved through creating legends - a practice prevalent in the USA and Singapore. These legends act as a disclaimer attached directly to the security certificate delineating restrictions on transfer. Thus, by way of digitally tagging the AoA’s restrictions directly to its securities based on Section 202 of the Delaware General Corporation Law, such regulatory arbitrage can be effectively countered.

Fourth, concerning the issue of pledge and collateral enforcement risks, it is advisable to NSDL to insert a mandatory time-bound consent rule of 15 days for the invocation of pledges and also to clarify that in the event of borrowers (private companies) default, the lender’s rights should override the company’s discretion, making the same consistent with the Supreme Court's decision in the ICICI Bank case. NSDL should also consider issuing guidelines mandating automatic invocation rights for regulated lenders (banks/NBFCs) without requiring separate consent from the company. 

Conclusion and Way Forward

All things considered, the Circular marks an important shift in regulating off-market transfers of unlisted shares, aligning procedural norms with the mandates of the Companies Act 2013. However, its effectiveness is undermined by gaps that, if remaining unresolved, create red-tapism rather than pragmatism. Thus, a uniform and transparent consent framework is indispensable for reconciling corporate governance with market efficiency in India’s capital markets.