Introduction
Under the Companies Act, 2013, the transferability of shares in a private limited company is primarily governed by its articles of association. However, when it comes to dematerialized securities, the process takes a different route.
Traditional Share Transfer Protocols
Before recent regulatory changes, companies holding securities in physical form required board approval for transfers, providing a level of control.
The Changing Face of Share Transfers
With dematerialized securities, board approval is no longer necessary. Transfers can occur seamlessly bypassing the need for board approval through depository instructions, potentially bypassing contractual and regulatory provisions.
Restrictions in Venture Capital and Private Equity Backed Companies
Venture capital and private equity-backed companies often impose additional restrictions on share transfers through shareholders’ agreements. These restrictions, such as consent requirements and rights of first refusal, tag-along rights, bars on transfers to competitors etc are incorporated into the articles of association.
These provisions, integrated into the Articles of Association, serve as a dual enforcement mechanism, safeguarding rights contractually and legally.
Challenges of Unnoticed Transfers
Despite robust agreements and Articles of Association provisions, instances of non-compliant transfers persist. Notably, issuer companies may remain unaware until notified by the depository, underscoring the need for proactive measures.
The Role of Demat Enabling Provisions
To mitigate risks, private companies must fortify their Articles of Association with demat enabling provisions. Serving as a shield against unauthorized transfers, these provisions uphold compliance standards and facilitate smooth dematerialization and electronic transfer of shares.
In an era of digital transformation, understanding and implementing demat enabling provisions are paramount for private companies.
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About Author: Author is a Qualified Company Secretary, with over five years of comprehensive experience and knowledge in navigating complex Act, Rules and Regulations, including but not limited to The Companies Act, 2013, FEMA, LODR, PIT, SEBI ICDR and more. With a strong passion for law and ongoing pursuit of an LLB degree, possess a comprehensive understanding of legal principles and practices. Author can be connected at malhotrabhuvesh@gmail.com.
Disclaimer: The information provided in this article is for general informational purposes only and does not constitute legal advice. For legal advice, please consult with a Qualified Company Secretary familiar with the relevant laws and regulations. I make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability, or availability with respect to the article or the information contained in it.
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