Non Disposal Undertaking
Also written NDU · Non Disposal Undertaking (NDU)
An undertaking, typically by a promoter to a lender, not to transfer or alienate specified shares - a negative lien that can be recorded in the depository system as an encumbrance.
In plain language
Promoters often borrow against their shareholding without formally pledging the shares. Instead they promise the lender that they will not sell, transfer or otherwise dispose of those shares while the loan is outstanding. That promise is a Non Disposal Undertaking (NDU).
An NDU is weaker than a pledge - the lender has no right to take the shares - but it still ties up the shares, and investors in the company have a legitimate interest in knowing about it. SEBI's takeover regulations therefore treat NDUs as encumbrances that promoters must disclose.
To make them transparent, the depositories were permitted to record NDUs in the depository system, much as they record pledges.
How it works
From Chapter 9 (section 9.3):
Nature. NDUs are undertakings by a shareholder not to transfer or otherwise alienate the securities, and are in the nature of a negative lien given in favour of another party, usually a lender. They are entered into mainly by promoters through non-disposal agreements/undertakings for borrowing from lenders.
Why record them. The SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 require promoters to disclose details of their encumbered shares, including NDUs, which fall within the scope of disclosures of "encumbrances". The depository system provides a transparent mechanism for recording such transactions, so depositories were permitted to offer a system to capture and record NDUs.
Charges. DPs of clients on whose securities a hold is created for NDU are charged 0.01 percent of the value of securities upon creation of the hold, subject to a minimum of Rs 25.
All encumbrances. By circular dated July 24, 2020, SEBI advised depositories to record all types of encumbrances specified under Regulation 28(3) of the SAST Regulations, 2011. In CDSL, encumbrances other than NDU and lien are treated as "Other Encumbrances". The PAN of the ultimate lender must be mentioned on the form, and the NDU/lien/encumbrance reason is compulsory.
Lien, for contrast. The workbook defines lien as the right of a creditor in possession of the debtor's goods, securities or other assets to retain them until the debt is repaid, absent a contract to the contrary. An NDU gives no possession; it is a promise not to dispose.
A worked example
Illustrative figures; the charge rate is the workbook's.
Mr Rao, a promoter, borrows from a bank. Instead of pledging, he gives an NDU over 4,00,000 shares of his listed company, worth Rs 250 each. The bank wants it recorded in the depository.
- Value of shares under hold = 4,00,000 x Rs 250 = Rs 10,00,00,000 (Rs 10 crore)
- Charge to the DP on creating the hold = 0.01% x Rs 10 crore = Rs 1,00,000
The form carries the PAN of the ultimate lender (the bank) and the reason "NDU" - both compulsory.
Now a small case. A minority shareholder's NDU covers 800 shares worth Rs 150 each: value Rs 1,20,000; 0.01% of that is Rs 12 - below the floor, so the charge is Rs 25.
Rao's company must also treat the 4,00,000 shares as encumbered in the promoter disclosures required by the SAST Regulations. Had the undertaking been an unusual arrangement not called NDU or lien, CDSL would record it as "Other Encumbrances".
Why NISM asks about it
Chapter 9 (Special Services - Pledge and Hypothecation, 10% weightage) covers NDUs in section 9.3, right after pledge, closure and invocation. Questions test what an NDU is (a negative lien, not a pledge), why depositories record it (SAST encumbrance disclosure), the 0.01%/Rs 25 charge, and the July 24, 2020 extension to all encumbrances under Regulation 28(3).
Common exam traps
- An NDU is a negative lien - a promise not to dispose - not a pledge. The lender cannot invoke it to take the shares.
- Charge: 0.01% of value on creation of the hold, minimum Rs 25 - levied on the DP of the client.
- Disclosure driver: SAST Regulations, 2011, which treat NDUs as encumbrances.
- All encumbrances under Regulation 28(3) are to be recorded (SEBI, July 24, 2020).
- CDSL: anything other than NDU and lien is "Other Encumbrances".
- PAN of the ultimate lender and the reason are compulsory.
- Lien requires possession; an NDU does not.
Check yourself
1.What charge applies to the DP of a client on whose securities a hold is created for a Non Disposal Undertaking?
- a)0.01 percent of the value of securities, subject to a minimum of ₹25
- b)0.1 percent of the value of securities, subject to a minimum of ₹100
- c)A flat fee of ₹25 irrespective of value
- d)No charge, as an NDU involves no movement of securities
Show the answer
Answer: (a) 0.01 percent of the value of securities, subject to a minimum of ₹25
DPs of clients on whose securities a hold is created for NDU shall be charged @ 0.01 percent of the value of securities upon creation of hold, subject to a minimum of ₹25.
Option C is tempting because the ₹25 is real — but it is a floor, not the charge itself. On securities worth ₹50 lakh the charge is 0.01% = ₹500, not ₹25.
Option D reasons from the nature of an NDU, and the reasoning is sound but the conclusion is wrong. It is quite true that NDUs are undertakings given by a shareholder not to transfer or otherwise alienate the securities, in the nature of a negative lien — nothing moves. But the depository still records a hold, and recording is chargeable.
Two further NDU requirements are commonly tested alongside: the PAN of the ultimate lender is required to be mentioned on the form, and the NDU / lien / encumbrance reason is compulsory.
2.By its circular dated July 24, 2020, what did SEBI advise the depositories to record?
- a)Only pledges created against bank loans
- b)Only Non Disposal Undertakings given by promoters
- c)Margin pledges created in favour of trading members
- d)All types of encumbrances specified under Regulation 28(3) of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011
Show the answer
Answer: (d) All types of encumbrances specified under Regulation 28(3) of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011
The workbook: "SEBI vide its circular dated July 24, 2020 advised the Depositories to record all types of encumbrances, which are specified under Regulation 28(3) of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011."
The context: the SAST Regulations, 2011 require promoters to disclose details of their encumbered shares, including NDUs, which fall within the scope of "Encumbrances".
- A and B are too narrow. The depositories were separately permitted to offer a system for recording NDUs, but the July 2020 circular covers all types of encumbrances under Regulation 28(3).
- C is a different circular. Margin pledge came from SEBI's circular dated February 25, 2020, effective August 1, 2020.
In CDSL, all other encumbrances are treated as "Other Encumbrances".
3.Which body has powers to register and regulate all market intermediaries in the securities market and also to penalise them?
- a)RBI
- b)The depositories
- c)SEBI
- d)IRDAI
Show the answer
Answer: (c) SEBI
It has powers to register and regulate all market intermediaries and also to penalise them in case of violations of the provisions of the SEBI Act, Rules and Regulations.
The source of that power: the SEBI Act, 1992 vests SEBI with statutory powers for (a) protecting the interests of investors in securities market, (b) promoting the development of the securities market, and (c) regulating the securities market.
Three functions — protect, promote, regulate.
The reach of its jurisdiction: its regulatory jurisdiction extends over corporates in the issuance of capital and transfer of securities and all intermediaries and persons associated with securities market. It can conduct enquiries, audits and inspection of all concerned and adjudicate offences under the Act.
And its standing: SEBI has full autonomy and authority to regulate and develop an orderly securities market.
RBI does have a role in the securities market, but a narrower one — the powers in respect of the contracts for sale and purchase of securities, gold related securities, money market securities and securities derived from these securities and ready forward contracts in debt securities are exercised concurrently by RBI.
Regulation is shared across four bodies: the responsibility for regulating the securities market is shared by the Securities and Exchange Board of India (SEBI), the Reserve Bank of India (RBI), the Department of Economic Affairs (DEA) of the Ministry of Finance, Ministry of Corporate Affairs (MCA).
And SEBI's decisions are reviewable: the orders of SEBI under the securities laws are appealable before a Securities Appellate Tribunal.
Where this is taught
Free preparation for NISM Series VIRelated terms
- LienA creditor's right to keep possession of a debtor's goods or securities until the debt is repaid, unless a contract says otherwise; in the depository, liens are recorded as encumbrances.
- PledgeA charge created over demat securities in favour of a lender who may appropriate them unilaterally on default — created by book entry under section 12 of the Depositories Act, not by handing over anything.
- EncumbranceAny charge or restriction over securities in favour of another party - a pledge, lien, non-disposal undertaking or similar - which the depository records and which stops the securities being freely transferred.
- HypothecationA charge over demat securities where the lender needs the borrower's concurrence to appropriate them — the same book entries as a pledge, with one extra confirmation, and a term used only in NSDL.
- PledgeeThe lender in a pledge or hypothecation — the party who confirms the pledgor's request through its own DP, and who is recorded as beneficial owner of the securities only on invocation.