In the intricate realm of finance, where loans and investments constitute the foundation of economic activities, ensuring the protection of both creditors and debtors holds paramount importance. In response to this imperative, Non-Disposal Undertakings (NDUs) have emerged as a pivotal instrument, fortifying financial agreements while elevating transparency and accountability.
NDUs, commonly established between debtors and lenders, serve as essential safeguards within loan obligations. Fundamentally, they entail commitments made by shareholders, often corporate promoters, undertaking to refrain from transferring or encumbering the securities they hold. This construct, akin to a negative lien, bolsters the lender's position – frequently a financial institution – by forestalling unforeseen loss of access to vital debtor assets.
An illustrative instance of NDUs unfolds when banks extend loans to corporate entities. In a prudent practice, banks require corporate promoters to commit to upholding their shareholding in the company. This commitment, structured as an NDU, serves as a bulwark against dilution of share ownership without the lender's assent. This practice not only solidifies the lender's standing but also instills confidence in the financial ecosystem.
However, to ensure the efficacy of NDUs, technological advancements and regulatory backing are imperative. The National Securities Depository Limited (NSDL) plays a pivotal role in this arena. NSDL has developed a dedicated module for recording NDUs, seamlessly integrating them into the depository system. This innovative stride empowers shareholders to document these undertakings with transparency and efficiency.
The regulatory framework has also stepped up to amplify the significance of NDUs. The Securities and Exchange Board of India (SEBI) mandates the mandatory recording of NDUs pertaining to shares held by promoters in the depository system. This regulatory involvement further underscores the role of NDUs in upholding the financial integrity of such transactions.
From a banking perspective, the recording of NDUs in the depository system yields multifaceted advantages. Firstly, it enforces the commitments made by corporate entities and promoters to lenders, ensuring the preservation of critical assets. Additionally, it curbs promoters from transferring or otherwise alienating the shares held under the NDU without the lender's endorsement, introducing an added layer of control. Moreover, this approach eliminates the necessity for separate dematerialized accounts for NDU-encumbered shares, streamlining the process. The scope of this mechanism extends to all listed companies and can also be applied to shares of unlisted companies. The result is a seamless, transparent, and accountable process of recording and cancelling NDUs that bolsters stakeholder confidence.
The implications extend far and wide. NSDL's system now enables the recording of NDUs for both listed and unlisted companies, paving the way for banks to consider this prerequisite for all loan facilities extended to corporate entities. The emphasis on transparency, accountability, and autonomous records not only reflects prudence but also underscores the need to safeguard creditor interests.
In a world where financial transactions often assume complex layers, mechanisms like NDUs, buttressed by modern technology and thoughtful regulations, emerge as pillars of trust and integrity. As financial systems continue to evolve, these innovations hold the promise of fostering a more secure and resilient economic landscape for all stakeholders involved.
The article is authored by Samar Banwat, Executive Director, NSDL
