Are we inadvertently opening the door for hostile takeovers in Private Companies?

[Gopi Kandle]

Let’s talk about an interesting paradox in the Companies Act, 2013 regarding the recent dematerialization mandate.

Here is the setup:

📌 The Essence of a Pvt. Co: As per Section 2(68), a defining characteristic of a Private Company is the strict restriction on the right to transfer its shares (usually governed by the AoA).

📌 The Mandate: Private companies (other than small companies) are now required to issue and hold shares entirely in Demat form.

📌 The Catalyst: Under Section 56, the transfer of shares held in dematerialized form does not require the traditional execution of an SH-4 or subsequent Board Approval.

Consider this scenario:
Imagine a Private Limited Company with 5 shareholders, all holding their shares in Demat. An unknown, wealthy investor identifies 4 of these shareholders and offers them a massive premium for their stake. Because the shares are in Demat, the transfer executes directly through the depository system without triggering the traditional Board approval process.

Just like that, the outsider becomes the majority shareholder, the remaining founder becomes a minority, and the ownership of the company changes hands completely.

The Question:
Does mandatory dematerialization and the provisions of Section 56 practically bypass the restriction on the transfer of shares meant to protect closely held companies? If the Board's power to refuse a transfer is neutralized by the depository system, is the fundamental restriction clause in the AoA now toothless?

How are you viewing this intersection of Section 2(68) and Section 56? Have you advised clients on structuring their AoA or coordinating with RTAs/Depositories to prevent this exact loophole?

Would love to hear the thoughts of fellow professionals on this!

Yours Professionally 

Gopi Kandle

Corporate Compliance & Secretarial Services

Linkdin | www.corpsection.com 

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[Vijaya Singh]

Yours is a valid point , would like to add the cost benefit angle too. Why put additional cost on small companies. On one hand removing audit but on the other pay to depositories .

This is mandatory for Sec 8 companies but most of them are operating at small scale mostly in losses, how are such companies expected to bear initial as well as annual cost

This will definitely make good money for parties involved in the process at the expense of common man in my opinion 

Warm Regards,

Vijaya Singh

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From: csmy...@googlegroups.com <csmy...@googlegroups.com> on behalf of Gopi Kandle <gopik...@gmail.com>
Sent: Friday, April 24, 2026 4:37 PM
To: csmy...@googlegroups.com <csmy...@googlegroups.com>
Subject: [CSMysore] Are we inadvertently opening the door for hostile takeovers in Private Companies?

 

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[Savishesh]

If 4 out of 5 shareholders in your case or majority shareholders change hand, there is an amicable transfer of power. 

Infact, if one out of five or a minority refuses to give power, that's a more stupid illogical case.

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[Gopi Kandle]

As per your concern the example might be illogical, can you share your views regarding the small company definition, section 56 and demat mandatory  Conflict. 

Yours Professionally 

Gopi Kandle

Corporate Compliance & Secretarial Services

Linkdin | www.corpsection.com 

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This message is for the intended recipient only and may contain privileged, confidential, or legally protected information. Unauthorized distribution is prohibited and may lead to legal proceedings. Please delete all copies and notify me immediately if you are not the concerned/intended receiver. The views expressed herein are solely those of the author.

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[Sonali Gupta]

Please refer to the NSDL circular, where it says:

 In addition to the DIS, the Participant is requested to obtain a consent/confirmation letter from the demat account holder(s) issued by the respective Private Limited Companies.

In my knowledge the RTA do asks for a consent letter before transfer of shares.

Sonali Gupta
ACS, B.Com
Mob. no- 9920110834

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[Gopi Kandle]

Thanks for the mail,

But we deal in with CDSL depository. 

Let me check any circular in same way by CDSL. 

Yours Professionally 

Gopi Kandle

Corporate Compliance & Secretarial Services

Linkdin | www.corpsection.com 

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[Ashish Gupta]

Dear Sonali

greetings

thanks a lot for the said circular, which, as per me, even RTA's are also not following.

this is indeed a well informed circular and very good initiative in right direction

once again thanks a lot

 
AKG & CO
COMPANY SECRETARIES
FCS Ashish Gupta

C.P. No.: 6859

Peer Review No.: 766

A-16 Jitar Nagar, Parwana Road

Near Preet Vihar Metro Station, Delhi - 110051

09312210264

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[Gopi Kandle]

The RTA replies that it's an individual transaction; company approval isn't required anywhere; they only need is the proof showing the consideration received. 

They are not considering the restriction on the transfer of shares of a private limited company.

Yours Professionally 

Gopi Kandle

Corporate Compliance & Secretarial Services

Linkdin | www.corpsection.com 

CONFIDENTIALITY

This message is for the intended recipient only and may contain privileged, confidential, or legally protected information. Unauthorized distribution is prohibited and may lead to legal proceedings. Please delete all copies and notify me immediately if you are not the concerned/intended receiver. The views expressed herein are solely those of the author.

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[Ashish Gupta]

Dear Mr. Gopi

greetings

if this has happened with you, I will request to try to send a letter to RTA for such action and then send NSDL the received reply with the said circular and then we can be certain what NSDL responds and would be a good case to pursue with MCA also

thanks

 
AKG & CO
COMPANY SECRETARIES
FCS Ashish Gupta

C.P. No.: 6859

Peer Review No.: 766

A-16 Jitar Nagar, Parwana Road

Near Preet Vihar Metro Station, Delhi - 110051

09312210264

# Stay Safe #Stay Healthy

Save Paper Save Trees

Switch off as you go |Recycle always |  Your child deserves better world
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The information contained in this communication is intended solely for the use of the individual/ entity to whom it is addressed and others authorized to receive it. It may contain confidential or legally privileged information. If you are not the intended recipient you are hereby notified that any disclosure, copying, distribution or taking any action in reliance on the contents of this information is strictly prohibited and may be unlawful. If you have received this communication in error, please notify us immediately by responding to this email and then delete it from your system. The sender is neither liable for the proper and complete transmission of the information contained in this communication nor for any delay in its receipt.

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