ISIN and transfer of shares

[Nidhii Parrekh]

Dear All

One of private company's shares are in demat form. Company is intending to enter into Shareholders agreement for issue of new shares.

In draft Shareholders agreement there are few clauses related to restriction on transfer of shares and permitted transfer.

Please guide how can company's shareholders go ahead with transfer of shares in future if they are willing incase shares are in demat form.

Whether it will become mandatory on company's part to keep the status of ISIN of company in frozen for debit for transfer of shares as per SHA?

Regards,

CS Nidhi Parekh

[Rinki Goyal]

have to compulsorily follow SHA terms, otherwise transfer would ne null and void

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Regards,

Rinki Goyal,

Rinki Goyal & Associates.

PCS

Mumbai

[Nidhii Parrekh]

Hi

So we inform the depository to change the status of ISIN to frozen for debit?

Regards,

CS Nidhi Parekh

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[Hiren Shah]

When a private company has shares in demat form and is entering into a Shareholders’ Agreement (SHA) that includes restrictions on transfer of shares, it is important to understand how these restrictions align with the demat system and legal requirements. Here's a clear guide:

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1. Transfer of Shares in Demat Form

Even though shares are in demat form, transfer restrictions under SHA are enforceable as a matter of contractual obligation, not via depository system controls.

In demat form, transfers occur through Depository Participants (DPs), and the depository (NSDL/CDSL) has no visibility of the SHA.

Hence, even if the SHA restricts transfer, the depository cannot stop a shareholder from initiating a transfer unless additional safeguards are in place.

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2. How to Enforce Transfer Restrictions in Demat Shares

There are two main methods:

a. Contractual Enforcement via SHA

Parties agree contractually to not transfer shares in violation of SHA.

If someone violates it, the aggrieved party can seek legal remedy (injunction or damages).

This is after the transfer happens — hence not preventative.

b. ISIN Freezing (Debit Freeze)

The company may request NSDL/CDSL to freeze the ISIN for debits, which prevents any share transfer.

This ensures that no shareholder can transfer shares unless the company lifts the freeze based on compliance with SHA.

This is proactive control, but should be used with shareholder consent and disclosed in the SHA.

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3. Whether It’s Mandatory to Freeze ISIN for Transfers

No, it is not mandatory by law to freeze the ISIN. However:

It is a practical tool for private companies to enforce transfer restrictions in demat shares.

If the SHA includes detailed restriction and permitted transfer clauses, the company may choose to keep ISIN frozen for debits, lifting it only after checking compliance with the SHA.

This step is optional but advisable to prevent unauthorized transfers.

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4. Best Practice

To align with SHA and demat mechanics:

1. In SHA: Clearly state the restrictions, permitted transfers, and that transfers are subject to company’s prior approval.

2. Company Action: Request depository to freeze ISIN for debits, and lift the freeze upon submission of required approvals and documents.

3. Board Process: Ensure that every transfer goes through board approval, as required under the Companies Act for private companies.

Regards,

CA Hiren A. Shah

(Proprietor) 

MB: 8329356899  

H. A. Shah & Associates, Chartered Accountants

(Also, Partner at Shah & Jaiswal, Chartered Accountants)

 

Virar : Office No.02, Ground Floor, Mona Apartment, Opp. Science Garden, Jakat Naka, Virar (W)- 401 303.

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[Hiren Shah]

A Shareholders' Agreement (SHA) can be amended — even if it contains restricted transfer clauses, as long as all required parties agree. Here's how you can do it legally and properly:

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1. Check the Amendment Clause in the Existing SHA

Most SHAs have a clause that outlines how the agreement can be amended. Usually, it requires:

Unanimous consent of all shareholders, or

Consent of a specified majority (e.g., 75%).

If the SHA does not mention how it can be amended, then as a matter of contract law, all parties must agree.

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2. Draft an Amendment Agreement

To modify any clause (like a restriction on share transfers), prepare an Amendment to Shareholders’ Agreement. It should include:

Reference to the original SHA (date and parties).

Specific clauses being amended.

The new agreed text of the clause (e.g., changing from “no transfer without ROFR” to allowing certain transfers).

An effective date of amendment.

A confirmation that all other provisions of the SHA remain unchanged.

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3. Obtain Approval

Circulate the draft amendment to all shareholders who are party to the SHA.

Obtain written consent/signature from the required number of shareholders (as per SHA).

If unanimity is required, get signatures from all parties.

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4. Update Company Records (If Needed)

If the SHA is linked to:

Articles of Association (AoA): Any conflicting AoA clause must also be amended via special resolution (75% shareholders) at a general meeting and filed with ROC (Form MGT-14).

This ensures legal enforceability and avoids conflict.

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5. Optional – Inform Depository

If the change allows freer transfers (e.g., removing restriction), and ISIN was previously frozen, you can:

Amend SHA,

Unfreeze ISIN permanently or conditionally (based on new terms),

Inform NSDL/CDSL via proper resolution/documentation.

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Template Summary for Amendment Process

Document Name: Amendment to Shareholders’ Agreement

Signatories: All shareholders or as per amendment clause

Effective Date: Mentioned clearly

Attachment (if necessary): Board Resolution, updated SHA

Regards,

CA Hiren A. Shah

(Proprietor) 

MB: 8329356899  

H. A. Shah & Associates, Chartered Accountants

(Also, Partner at Shah & Jaiswal, Chartered Accountants)

 

Virar : Office No.02, Ground Floor, Mona Apartment, Opp. Science Garden, Jakat Naka, Virar (W)- 401 303.

This message contains confidential information and is intended only for the individual or entity to whom it is addressed. If you are not the named addressee, you should not disseminate, distribute or copy this email. Please notify the sender immediately if you have received this email by mistake and delete this email from your system. Finally, the recipient should check this email and any attachments for the presence of viruses. The organization accepts no liability for any damage caused by any virus transmitted by this email. Save the environment, please print only if essential.

[Nidhii Parrekh]

Hi

if we keep freeze option and we will can keep ROFR.

So now transferor will have to give SH-4 also to company and after company takes note of it in board meeting then transferor can start with process of transfer of shares in demat?

Regards,

CS Nidhi Parekh

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