SEBI Institutes A Formal Depository Mechanism For Recording NDUs

Introduction

The Securities and Exchange Board of India (SEBI) has issued an important circular (Circular) dated 14 June 2017 relating to recording of non-disposal undertakings (NDUs) with a depository. Currently, depositories do not offer a mechanism for implementing NDUs unlike pledge transactions. An NDU, often referred to as a 'negative lien', constitutes a contractual lock in on shares provided by shareholders or promoters, in favour of lenders, without involving any actual alienation of securities or transfer of the beneficial interest such as in the case of a pledge of shares. The NDU provider retains all title and interest in the shares which are subject to the NDU and in the event of a transfer of title or interest in such shares to a third party (having no knowledge of such restriction), the rights of the lender under the NDU would be limited to the right to claim damages from the NDU provider for breach of the contractual provisions of the NDU. Under the