Introduction
The Securities and Exchange Board of India ("SEBI"), through its Nodal Co-ordination Cell, issued an Informal Guidance letter dated July 31, 2026 (Issue No. I/17888/2026) in response to an application filed by IDBI Bank Limited ("IDBI" or "the Bank") under the Securities and Exchange Board of India (Informal Guidance) Scheme, 2025 ("Informal Guidance Scheme"). The application sought an interpretive letter clarifying the regulatory position on the proposed sale of equity shares of various unlisted companies held by IDBI to non-QIB investors. This clarification carries significant relevance for banks, financial institutions, and other entities holding unlisted equity acquired through loan restructuring, pledge invocation, or exit distributions by Alternative Investment Funds (AIFs).
Background
IDBI's application, dated May 13, 2026, was prompted by an advisory dated January 15, 2026, issued by the Department of Financial Services ("DFS"), Ministry of Finance, to IDBI and other Public Sector Banks. The DFS advisory had suggested that sale of equity shares of unlisted companies by such banks may be restricted to Qualified Institutional Buyers ("QIBs") to ensure compliance with applicable regulatory provisions and to avoid unintended classification of such sales as public issues.
IDBI submitted that it holds equity shares of various unlisted companies, generally acquired through:
(a) Restructuring or resolution of loan accounts, or invocation of pledges;
(b) Direct acquisition of shares as investment; and
(c) In-specie distribution of non-exited equity shares by Venture Capital Funds ("VCFs") or AIFs at the end of their tenure.
IDBI proposed to sell such unlisted equity shares through bilateral or negotiated transactions to identified promoters, QIB investors, and non-QIB investors, without any public advertisement, Request for Proposal (RFP), Expression of Interest (EOI), or general solicitation. Importantly, such transactions were represented to be pure secondary transfers, involving no fresh issuance of securities by the underlying unlisted companies.
Queries Raised
IDBI sought clarification on three specific queries:
Query 1: Whether sale of unlisted equity shares through a non-advertised, privately negotiated transaction with identified investors — including non-QIB investors such as individuals, corporate entities, and the company's promoters — would be construed as a deemed public issue under the Companies Act, 2013 ("Companies Act"), and would not be in violation of the Companies Act and the Companies (Prospectus and Allotment of Securities) Rules, 2014 ("PAS Rules").
Query 2: Whether the Companies Act or any other applicable law mandates that such transactions be restricted exclusively to QIBs, or whether a non-advertised, privately negotiated transaction with identified investors, including non-QIB investors, can be carried out.
Query 3: Whether the Bank is entitled to transfer such unlisted equity shares to the company's promoters pursuant to contractual arrangements conferring a right of first refusal or a first right to purchase, in the event of a sale by the Bank.
SEBI's Analysis and Guidance
On the Deemed Public Issue Question (Query 1)
SEBI's response opened by noting a threshold ambiguity in IDBI's application — namely, that it did not specify whether the unlisted companies whose shares were proposed to be sold were private limited or public limited companies. This distinction is material, since Section 2(68) of the Companies Act, while defining a "private company," limits the number of members to two hundred and prohibits a private company from inviting the public to subscribe to its securities. Under Section 23(2)(b), a private company may issue securities only through private placement, in compliance with the relevant provisions of the Companies Act.
By contrast, a public company may issue securities to the public through a prospectus, including by way of an offer for sale of securities by an existing shareholder. Section 28(2) of the Companies Act provides that any document by which an offer of sale to the public is made shall itself be deemed to be a prospectus.
SEBI then turned to Explanation III to Section 42(3) of the Companies Act, which provides that where a company — whether listed or unlisted — makes an offer to allot, invites subscription, allots, or enters into an agreement to allot securities to more than a prescribed number of persons, such offer shall be deemed to be an offer to the public. The "prescribed number" is 200 persons in the aggregate in a financial year, as stipulated under Rule 14 of the PAS Rules. Section 42(2) further provides that offers or allotments made to QIBs, and to employees of the company under an employee stock option scheme, are excluded while calculating the number of persons for the purpose of determining whether an offer has been made to more than 200 persons.
Applying this framework, SEBI clarified that IDBI's proposed sale of unlisted shares through non-advertised, privately negotiated transactions to identified investors — including non-QIB investors — would not be construed as a deemed public issue, provided that the sale of shares of any given company is made up to the prescribed limit of 200 persons in a financial year, in terms of Section 42 read with Section 28 of the Companies Act.
On the Restriction to QIBs (Query 2)
On the second query, SEBI clarified that Section 42(2), read with Rule 14 of the PAS Rules, does not mandate or restrict the category of persons to whom a placement or transfer of securities may be made by a company. The provision instead restricts the number of persons to whom a private placement can be made in a financial year. While computing this numerical threshold, the statute permits placements made to QIBs to be excluded from the count.
Accordingly, SEBI held that a transfer can validly be made through a non-advertised, privately negotiated transaction to identified investors, including non-QIB investors such as individuals and corporate entities, provided the transfer remains within the prescribed limit of 200 persons in a financial year, so as not to be construed as a deemed public issue.
On Transfer to Promoters Pursuant to Contractual Rights (Query 3)
On the third query concerning transfers to promoters under a right of first refusal or first right to purchase, SEBI confirmed that such a transfer by IDBI to identified promoters may be made, subject to the same prescribed numerical limit in a financial year, so as not to be construed as a deemed public issue. SEBI further observed that the specific contractual terms governing such arrangements are a matter for the parties to determine, subject to compliance with applicable law.
Caveats Attached to the Guidance
Consistent with the standard practice under the Informal Guidance Scheme, SEBI's letter carries important qualifications. The guidance has been issued with the approval of the competent authority and is based strictly on the representations made in IDBI's application; different facts or conditions would warrant a different conclusion. The letter expresses only the relevant Department's position on enforcement action, and does not reflect a decision of the SEBI Board on the questions presented. It also does not preclude the applicant from adopting any other view, as may be deemed appropriate.
Key Takeaways
This Informal Guidance offers a useful clarificatory framework for entities — particularly banks, NBFCs, and financial institutions — that hold unlisted equity shares acquired incidentally through loan restructuring, invocation of pledges, or in-specie distribution by VCFs and AIFs, and are looking to divest such holdings through off-market, negotiated transactions.
The central principle emerging from this guidance is that the "deemed public issue" trigger under the Companies Act turns on the number of offerees in a financial year, not on the category or classification of the investor. So long as a transfer of unlisted shares through a non-advertised, privately negotiated route remains within the 200-person threshold prescribed under Rule 14 of the PAS Rules (with QIB allottees excluded from that count under Section 42(2)), such a transfer — whether to non-QIB individuals, corporate entities, or promoters exercising contractual pre-emption rights — should not, by itself, be treated as an offer to the public.
Entities structuring similar divestment transactions would nonetheless be well advised to independently verify the private or public character of the underlying unlisted company, track the aggregate number of offerees across the financial year, and ensure that no element of public solicitation — such as advertisement, RFP, or EOI — enters the transaction process.
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