Share transfer restrictions: ROFR, drag-along and tag-along rights explained
Authored by - Souvik Das, Executive at Outsource360
Share transfer restrictions look like boilerplate when a shareholders' agreement is signed, drag-along and tag-along rights most of all. One Indian drag-along, triggered in 2014, set off a chain of defaults, arbitration and court orders that was still running in October 2026.
On 4 March 2010 Nine Rivers Capital Limited, a Mauritius company, agreed to invest Rs 300 million in Global Agrisystem Pvt Ltd, an Indian company. The agreement called for a "Qualified Exit", an IPO or a strategic sale valuing the company at Rs 400 crore or more, by 31 March 2014.
If that date passed, the investor could sell to any buyer free of the promoters' right of first refusal, or serve notice to "drag along all or a portion of the securities held by the Promoter(s)" on the same terms as its own. Within 21 days of a drag notice, the promoters could make a first offer for the investor's stake.
No exit came. The investor served its drag notice, and Katra Finance Ltd, a Mauritius co-promoter, made the first offer: a 2014 share purchase agreement priced the stake at Rs 30.25 crore plus further amounts. The purchase never completed, even after the payment terms were reworked in December 2015.
In December 2016 the investor turned to its put option, under which the promoters had to buy its securities "at a price per Share which will give an IRR of 25% per annum". The demand came to Rs 132.90 crore. On 24 June 2019 a Singapore-seated arbitrator ordered the promoter and Katra Finance to buy at that price, and a challenge in Singapore failed in November 2020.
On 2 May 2025 the Delhi High Court (O.M.P.(E.F.A.)(COMM.) 13/2019) enforced the award as a decree, directing both to buy 67,53,342 equity shares for Rs 132.90 crore. It held that a FEMA objection to the put's "assured return" didn't make the award contrary to India's public policy, and called regulatory approval for the remittance "a procedural issue".
The Supreme Court dismissed the promoter's special leave petition on 22 April 2026, yet in October 2026 execution was still pending in Delhi, with the promoter asking the court to add the Reserve Bank of India as a party. The drag-along worked exactly as drafted. Everything after it didn't.
That's the real lesson of share transfer restrictions. A ROFR, a tag-along or a drag-along is only as strong as the buyer, the price mechanics and the legal route behind it. In India that route runs through the articles, the Companies Act, 2013, FEMA, the Income-tax Act, 2025 and the stamp law.
Share transfer restrictions are terms in a company's articles or shareholders' agreement that limit when, to whom and on what terms shares can be sold: lock-ins, consent rights, rights of first refusal or first offer, drag-along and tag-along rights, and compulsory transfers. In India, a restriction on transfer binds the company and every shareholder only if the articles contain it.
Below: how each of these share transfer restrictions works, when Indian courts enforce it, what FEMA, the Income-tax Act, 2025 and stamp duty add to a sale under it, how US and UK law compare, and what to negotiate before signing.
On this page
What are share transfer restrictions, and where do they live?
How does a right of first refusal (ROFR) work on a share sale?
What are tag-along rights, and how do they protect minority shareholders?
What are drag-along rights, and can a minority shareholder be forced to sell?
Are share transfer restrictions enforceable in India?
What FEMA, tax and stamp duty rules apply to share transfers in India?
How do US and UK rules on ROFR, drag-along and tag-along rights compare?
Negotiating ROFR, drag-along and tag-along rights: founder asks, investor asks and red flags
Share transfer restrictions checklist: decision steps and drafting points
Frequently asked questions about share transfer restrictions
What are share transfer restrictions, and where do they live?
Share transfer restrictions are terms that limit whether a shareholder can sell, to whom, when and at what price. They live in the company's articles of association (in Delaware, the charter or bylaws) or in a shareholders' agreement, and each one protects someone: the founders, the investors, the minority or the company itself.
Eight share transfer restrictions at a glance
Here are the eight, with what each does, whom it protects and when it applies:
Restriction | What it does | Who it protects | When it applies |
Lock-in | Bars transfers for a set period or until an event | Investors relying on the founders | Any transfer during the lock-in |
Consent right | A transfer needs board or named investors' approval | Holders who want a say over newcomers | Any transfer the clause covers |
Right of first refusal (ROFR) | Holders or the company may match an outside buyer's price and terms | Existing holders | The seller has a buyer and a price |
Right of first offer (ROFO) | The seller must offer to holders before going to market | Existing holders, at less cost to the seller | The seller decides to sell |
Tag-along (co-sale) | Minority holders may join a sale on the same terms | Minority holders | Another holder sells, or control passes |
Drag-along (bring-along) | Holders above a threshold can make the other parties sell on the same terms | The dragging holders and their buyer | The agreed holders approve a sale |
Compulsory transfer | A holder must sell at a set price or formula | The company and the remaining holders | A set trigger, such as a founder leaving |
Permitted transfers | Lets shares pass to family, trusts or affiliates without the ROFR or consent steps | The holder making the transfer | A transfer to a transferee the clause names |
Permitted transfers make the rest workable: moves to relatives, family trusts, affiliates or related funds skip the ROFR and consent rules if the new holder signs up to the same terms. The US National Venture Capital Association (NVCA) model exempts bona fide estate-planning transfers to family members only where no consideration is paid.
The compulsory-transfer row needs its own reading, because how leaver call options work when a founder exits decides what a departing founder is paid. Any of these share transfer restrictions can be written into the shareholders' agreement (SHA), the articles or both, and in India that choice decides who is bound.
Articles, shareholders' agreement or bylaws: why the document matters
In India the articles come first. A private company must "by its articles" restrict the right to transfer its shares (section 2(68) of the Companies Act, 2013), and shares are transferable "in the manner provided by the articles" (section 44).
What about an SHA-only restriction? The Supreme Court held in 1991 ((1992) 1 SCC 160) that a restriction on transfer not stated in the articles binds neither the company nor the shareholders. So investors copy the SHA's share transfer restrictions into the articles: Moneyview Ltd's articles, for one, carried them in a separate Part B that overrode the rest until the company listed on 1 October 2026.
In Delaware a restriction can sit in the certificate of incorporation, the bylaws or a holders' agreement (section 202 of the Delaware General Corporation Law). But it binds a buyer without actual knowledge only if noted conspicuously on the certificate or, for uncertificated shares, in the section 151(f) notice.
In the UK, shares are transferable "in accordance with the company's articles" (Companies Act 2006, section 544). The articles bind every member under section 33, while an SHA binds only those who sign it or a deed of adherence.
How does a right of first refusal (ROFR) work on a share sale?
A right of first refusal (ROFR) is a share transfer restriction letting existing holders, or the company, buy a seller's shares at the price and on the terms an outside buyer has offered. It's an option, not a duty: if they pass, the seller may sell to that buyer within a fixed window, on terms no better for the buyer.
The ROFR process step by step: notice, matching and closing
The NVCA's model Right of First Refusal and Co-Sale Agreement (April 2026) sets out the sequence; its periods are the model's defaults, which parties change, not a market norm:
Notice: the seller gives the company and investors the price, form of payment, buyer and date; the model's default is at least 45 days before the sale.
Company: within 15 days it may buy some or all of the shares on those terms.
Investors: each may take its pro rata share of what the company declines, within 10 more days.
Over-allotment: investors who took their full share may buy what is left, pro rata.
Non-cash offers: the board values the consideration in good faith, and the company or investors may pay its cash equivalent.
If holders pass: the seller may sell to the named buyer on terms no more favourable; if the sale is not completed within 60 days of the notice, the process restarts.
An optional forfeiture clause in the model makes the right all or nothing. Unless the company and investors together take every share, they lose the right, and the seller may sell all of them to the buyer within 45 days of the notice on terms no more favourable than those notified.
In an Indian company, giving the company itself the first right is awkward. On a plain reading, buying its own shares would be a buy-back, which section 68 of the Companies Act, 2013 confines to set routes and limits, so the right sits more comfortably with investors or a nominee. If only one side is non-resident, the matching price must also fit FEMA's pricing rule for that direction, which runs off a certified fair value; who can certify a fair value for unlisted shares is a question of its own.
ROFR vs ROFO vs pre-emption on transfer: which should you agree?
The two rights look alike but move bargaining power in opposite directions:
Question | Right of first refusal (ROFR) | Right of first offer (ROFO) |
When does it start? | After the seller agrees terms with an outside buyer | Before the seller goes to market |
Who sets the price? | The outside buyer | The holder or the seller, per the clause |
Which look do holders get? | The last look: they match a real deal | The first look: they bid before anyone else |
Effect on outside buyers | A buyer may hold back, knowing it can be matched | Little, once the holders have passed |
If holders pass | Sell to the named buyer within the window, on terms no better for the buyer | Sell to anyone within the window, not below the holders' offer if the clause says so |
Which side it suits | The holders | The seller |
Which right costs a seller more? Among share transfer restrictions, the ROFR: a buyer who knows it can be matched has less reason to spend on diligence, so sellers push for short windows, a small-sale carve-out or a ROFO. Holders can waive the right for one sale, and in employee secondary sales that waiver is the gate the buyer waits for.
UK documents call a ROFR or ROFO over existing shares "pre-emption on transfer"; no statute supplies it, so it exists only if the articles or an SHA create it. Statutory pre-emption under section 561 of the Companies Act 2006, like pre-emptive rights under section 62 of India's Companies Act, 2013, covers shares the company allots, not sales between holders.
What are tag-along rights, and how do they protect minority shareholders?
A tag-along right, called a co-sale right in US documents, lets a minority holder join a sale by the majority at the same price and on the same terms, so it isn't left behind under a new owner. The tag is the one share transfer restriction written for the minority, and it works only when someone else sells.
How a tag-along works: trigger, pro rata or full tag, and the cut-back
The trigger is a drafting choice: any sale by a founder, or only one that passes control. Moneyview Ltd's SHA, as its prospectus of 28 September 2026 describes it, showed both in one clause. Certain investors could tag pro rata into any founder sale, and could sell all their shares if the sale passed control or cut the founders' holding below 50% of their April 2023 level.
Does a tag mean the buyer takes everyone's shares? Only a full tag does. Take an illustrative company with 1,000,000 shares: a founder holds 60%, an investor 30% and an angel 10%, and a buyer wants exactly 51% at Rs 500 a share. If both minority holders tag pro rata, each holder sells 51% of its stake: 306,000, 153,000 and 51,000 shares, Rs 25.5 crore in all.
A full tag would mean the buyer taking 910,000 shares for Rs 45.5 crore. If the buyer won't take the tagging shares, the NVCA model stops the founder selling unless, at the same time, the founder buys those shares on the same terms; other clauses simply cut the seller back. Co-sale and tag-along are one right under two names.
Tag-along, ROFR and liquidation preferences: which comes first?
Order matters. In the NVCA model the tag applies only to shares the ROFR holders didn't buy, so the right of first refusal runs first and co-sale notices follow within 15 days after the company's 15-day deadline. And same terms doesn't always mean the same price per share. When a founder's sale passes control, the NVCA model splits the proceeds as if the sale were a liquidation under the charter, so preferred holders take their liquidation preference first, on whatever terms their shares carry.
Nothing stops one holder having both drag-along and tag-along rights: the tag protects it when others sell, and the drag lets it deliver the whole company when it sells.
What are drag-along rights, and can a minority shareholder be forced to sell?
A drag-along right lets holders above an agreed threshold require every other holder to sell to their buyer on the same terms, so the buyer can take 100% of the company. Of the drag-along and tag-along rights, this is the one that can force a minority out, and in India it works only as a contract.
Drag-along conditions: threshold, minimum price and limits on liability
So what percentage is normal? No public dataset shows a standard threshold, and the NVCA's model Voting Agreement leaves the number blank: holders of a stated percentage of the preferred shares, optionally joined by a majority of founder-held common and the board. Its commentary says the aim is "not generally to grant the investors the unilateral right to force a sale". One Indian company's terms show a time-and-exit gate: under Moneyview Ltd's SHA, investors holding at least 50.01% of investor shares (as converted) could drag only after five years from April 2023, and only if no exit came within 12 months of an exit request.
The model then protects dragged holders: warranties limited to authority, ownership and title, given severally and not jointly; no non-compete unless the holder is an officer, director or employee; liability capped at its share of an indemnity amount that never exceeds its proceeds, except for its own fraud; and the same form and per-share amount of consideration within each class. But the model has no minimum price. Founders should negotiate this clause harder than any other share transfer restriction: a valuation floor, a minimum price per ordinary share or a date before which no drag can run.
Illustratively, take 10,000,000 shares: a Series A investor paid Rs 40 crore for 20% with a 1x non-participating preference, founders hold 70% and an angel 10%. In a Rs 60 crore drag sale, the investor takes its Rs 40 crore first and the 8,000,000 ordinary shares share the other Rs 20 crore: Rs 25 each, against Rs 60 each pro rata. A floor of Rs 100 per ordinary share would block any drag below Rs 120 crore. A drag is one step in an exit, not the whole of it: the share purchase agreement, approvals and filings follow the legal sequence of selling an Indian startup.
Squeeze-outs and challenges: when a dragged minority can resist
In India a drag is a contract right, not a statutory one. If a dragged founder won't sign, the clause can name an attorney to sign instead. But whether that power survives the holder's objection is untested in reported Indian decisions, so the dependable route to completion is an arbitral award or a court decree. Those disputes go to arbitration where the SHA says so: on 22 June 2021 the National Company Law Appellate Tribunal (NCLAT) called a drag-along right and a conversion right "independent Arbitrable disputes" and set aside a lower tribunal's order that had frozen the arbitration.
The Companies Act, 2013's own forced-sale routes are narrower. Section 235 lets a transferee company buy out dissenters once holders of nine-tenths in value of the shares involved approve its offer within four months. Section 236 lets a 90% holder buy out the minority at a registered valuer's price, a power the NCLAT read strictly on 9 July 2019. And holders of 75% can make a takeover offer through a Tribunal-sanctioned scheme (section 230(11)).
The minority's weapon is an oppression petition under section 241, but it isn't a veto. On 26 March 2021 the Supreme Court refused to neutralise Tata Sons' Article 75, which let the company, by special resolution, require a holder of ordinary shares to transfer, because the minority had accepted it and it had never been invoked.
Where only one side is non-resident, any drag or buy-out must also meet FEMA's pricing rule for that direction.
Are share transfer restrictions enforceable in India?
Yes, share transfer restrictions are enforceable in India, but their reach depends on where they're written and what kind of company it is. In a private company the articles bind the company and every member, while an SHA binds its signatories as a contract; in a public company shares are freely transferable, yet contracts about a transfer still bind the parties.
Private and public companies: section 58, the articles and SEBI's 2013 notification
For a private company, the Supreme Court's 1991 rule (share transfer restrictions bind only through the articles) has a counterweight. An agreement between particular shareholders about specified shares binds them and can be specifically enforced (Supreme Court, (2004) 9 SCC 204). The Delhi High Court has given effect to SHA terms where the company itself signed the SHA, most recently in an interim order of 18 September 2025 in a dispute that later settled. Below the Supreme Court, the position is unsettled.
For a public company, section 58(2) of the Companies Act, 2013 makes shares "freely transferable". But its proviso says a contract between two or more persons about a transfer "shall be enforceable as a contract". Citing it, the Bombay High Court upheld a pre-emption agreement over a listed company's shares on 8 May 2015, and the Supreme Court declined to interfere in 2019, though it raised the price to Rs 232 a share.
SEBI's notification of 3 October 2013 permits "contracts for pre-emption including right of first refusal, or tag-along or drag-along rights" in SHAs or articles. Options need more: the selling party must have held the shares continuously for a year, the price must comply with the law and the contract must settle by delivery, and every such contract must follow FEMA. That cover may move into statute: the Securities Markets Code, 2025, pending in Parliament since 18 December 2025, would replace the Securities Contracts (Regulation) Act, 1956 and exempt the same rights in shareholders' agreements "or any investor agreement".
Listed companies must re-approve shareholders' special rights by special resolution every five years (regulation 31B of SEBI's listing regulations, from 15 July 2023), so IPO-bound companies may end them by contract. Zetwerk, preparing to list, records in its red herring prospectus of 11 October 2026 a waiver of "share transfer restrictions, right of first refusal and tag along rights" for its offer for sale, and an SHA that ends on listing approval.
How a company enforces them: refusal to register, appeals and court orders
How does refusal work? A private company that refuses to register a transfer must send notice with reasons to both parties within 30 days of receiving the transfer instrument (section 58(1)). The transferee may appeal to the National Company Law Tribunal (NCLT) within 30 days of that notice, or 60 days from delivery if none came, and the Tribunal can order registration within 10 days or rectification with damages.
The refusal needs a ground in the articles. Table F, the model articles, gives the board only two substantive refusal grounds: a partly paid share to an unapproved person, or shares under a lien. So a company on unamended model articles can't refuse a transfer that breaks an SHA-only ROFR.
A ROFR holder can seek an injunction or specific performance, but it must show it can pay. On 1 July 2019 the Delhi High Court refused interim relief to the holder of a ROFR over a 13.5% stake in Mumbai International Airport Ltd because it hadn't shown the funds to complete. If a transfer the articles forbid has been registered, the Tribunal can rectify the register (section 59), and on 2 September 2025 the Supreme Court set aside a gift of private-company shares that the articles didn't permit (2025 INSC 1065).
What FEMA, tax and stamp duty rules apply to share transfers in India?
When shares move under a ROFR, tag, drag or other share transfer restriction in an Indian company, three regimes sit on top of the contract. The Foreign Exchange Management Act, 1999 (FEMA) asks who is resident on each side, the Income-tax Act, 2025 asks whether the price is below fair market value, and the Indian Stamp Act, 1899 takes 0.015% of the consideration.
Foreign investors: pricing by direction, no assured exit and Press Note 3 (2020)
Under rule 21 of the Foreign Exchange Management (Non-debt Instruments) Rules, 2019, the price rule for a sale under share transfer restrictions in an unlisted company depends on direction:
Direction of the sale | FEMA price rule (unlisted company) | What it means for a ROFR, tag or drag |
Resident seller to non-resident buyer | Not less than fair value | A resident cannot lawfully be dragged or called to a foreign buyer below fair value |
Non-resident seller to resident buyer | Not more than fair value | A resident ROFR holder cannot match an offer above fair value; a non-resident tagging into a resident buyer's premium is capped |
Non-resident seller to non-resident buyer | No price rule (repatriable holdings) | Approval only where the sector or Press Note 3 (2020) requires it |
Fair value means an arm's length valuation certified by a chartered accountant, a SEBI-registered merchant banker or a practising cost accountant, and the rule's guiding principle is that a non-resident "is not guaranteed any assured exit price". So a non-resident dragged below fair value to a resident buyer breaches nothing in FEMA; its exposure is tax. A resident made to sell to a foreign buyer below fair value does breach rule 21. But the Supreme Court held on 13 February 2020 (Civil Appeal No. 1544 of 2020) that the breach is rectifiable: the Reserve Bank can insist on fair value or condone it, and it doesn't bar enforcing a foreign award.
Put options and buy-back obligations are "optionality clauses", needing a one-year lock-in and no assured exit price; on a reading of the rules, ROFR, tag and drag clauses aren't, unless a tag makes the seller buy shares the buyer refuses. A transfer that moves beneficial ownership to a person from a country sharing a land border with India needs prior Government approval under Press Note 3 (2020), now in rule 6(a) of the same rules. Build that approval time into any drag's long-stop date.
Up to 25% of the price on a sale between a resident and a non-resident can be deferred, escrowed or indemnified for up to 18 months (rule 9(6)). The resident party files Form FC-TRS within 60 days of the transfer or of receipt or remittance of funds, whichever is earlier; the FC-TRS filing and the land-border approval route work as for any foreign investment.
Income tax and stamp duty on a ROFR, tag-along or drag-along sale
If an unlisted share goes for less than its fair market value under rules 56 and 57 of the Income-tax Rules, 2026, section 79 of the Income-tax Act, 2025 taxes the seller as if it had received that value. Section 92(2)(m) of the Income-tax Act, 2025 taxes the buyer on the shortfall once it exceeds Rs 50,000. Neither exempts a drag, a ROFR formula price or a statutory buy-out.
Illustratively, a non-resident angel with 10,000 shares is dragged into a sale to a resident Indian buyer at Rs 25 a share when the rule 57 value is Rs 60. The result? FEMA has no objection, but the angel is taxed as if paid Rs 6 lakh, and the buyer on the Rs 3.5 lakh shortfall.
Any buyer paying a non-resident seller, foreign buyers included, must deduct tax under section 393 of the Income-tax Act, 2025. A gift of shares from an individual to a relative is neither a capital-gains transfer nor taxable for the relative (Income-tax Act, 2025, sections 70(1)(b) and 92(3)(a)).
Stamp duty on a transfer for consideration is 0.015% of the consideration (Indian Stamp Act, 1899, Schedule I, Article 56A(b)); the depository collects it from the transferor on an off-market demat transfer, and the seller pays on a paper one. In a private company that isn't a small company and is past its compliance date, a holder must dematerialise before transferring (rule 9B of the Companies (Prospectus and Allotment of Securities) Rules, 2014).
How do US and UK rules on ROFR, drag-along and tag-along rights compare?
The same share transfer restrictions appear in US and UK deals, but the law around them differs. Delaware lets a restriction bind an unaware buyer only if it's properly noted, the UK runs everything through the articles, and each has its own statutory route for buying out holdouts.
The main differences, side by side:
Issue | India | US (Delaware) | UK |
Where a restriction binds every holder | The articles (s.2(68), s.44) | Charter, bylaws or agreement, noted on the certificate or s.151(f) notice; earlier-issued shares need holder consent (s.202) | The articles (s.544, s.33); an SHA binds its signatories |
Refusing to register | Private company: reasons within 30 days; NCLT appeal (s.58) | No statutory refusal procedure | Register, or give reasons within two months (s.771) |
Making a dragged holder sign | Contract only: signature, untested power of attorney, award or decree | Irrevocable proxy and power of attorney (NVCA Voting Agreement) | An article appointing someone to sign the transfer |
Statutory squeeze-out | 90% (ss.235, 236); 75% via an NCLT scheme (s.230(11)) | None by share purchase; a cash-out merger with appraisal | 90% of the shares the offer relates to (s.979) |
Minority's main remedy | Oppression petition (s.241) | Appraisal (s.262), waivable in advance | Unfair prejudice petition (s.994) |
Model documents | Table F has no ROFR, tag or drag | NVCA ROFR and Co-Sale Agreement; Voting Agreement | Model Articles have no ROFR, tag or drag |
Sources: Companies Act, 2013; Delaware General Corporation Law; NVCA model documents; UK Companies Act 2006; the UK Model Articles.
US: Delaware section 202, NVCA model documents and appraisal waivers
Section 202(c) lists five share transfer restrictions Delaware permits: a prior opportunity to buy, "to be exercised within a reasonable time"; a duty to buy; a consent requirement; an obligation "to sell or transfer" to the corporation, other holders "or to any other person", which on a natural reading covers a drag; and bans on transferees whose designation is "not manifestly unreasonable". The NVCA's models put the ROFR and co-sale in an agreement that ends just before an IPO, and the drag in a Voting Agreement backed by an irrevocable proxy and power of attorney. Chime Financial's 2025 IPO prospectus says its right of first refusal "will terminate upon completion of this offering".
Appraisal, a dragged holder's main remedy, can be signed away: in Manti Holdings v Authentix Acquisition Co (13 September 2021), the Delaware Supreme Court enforced an advance waiver by "sophisticated and informed stockholders, who were represented by counsel and had bargaining power". Common holders got "little to no consideration", and as the sale was a merger, the same-terms protection never applied.
Does timing matter? Yes: a 2015 Court of Chancery decision (C.A. No. 9796-VCG) held that a drag drafted for a proposed deal couldn't be used a week after the merger closed, so the minority kept appraisal.
UK: the articles, pre-emption on transfer and the 90% squeeze-out
Statute covers both ends of a takeover offer. A bidder with 90% in value of the shares its offer relates to can buy out the rest (Companies Act 2006, section 979). But a holdout may apply to court within six weeks and get more if it shows the offer value "would be unfair" (section 986). And once the bidder holds 90% of all voting shares, a holdout can make it buy (section 983).
Majorities can add or tighten a drag by amending the articles in good faith in the company's interests. In Re Charterhouse Capital Ltd [2015] EWCA Civ 536, the Court of Appeal upheld amendments used to buy out a retired founder's 8.9% at GBP 1,500 a share, including authority for someone to sign the holder's transfer.
Negotiating ROFR, drag-along and tag-along rights: founder asks, investor asks and red flags
Negotiating share transfer restrictions mostly means negotiating drag-along and tag-along rights: who can trigger them, at what price and with what protection. Founders want liquidity and a veto over a cheap sale; investors want a route to exit and a seat in any sale that would leave them behind.
Founder asks vs investor asks, clause by clause
The opening positions, clause by clause:
Clause | Founders push for | Investors push for |
ROFR | Short windows, a ROFO instead, a carve-out for small sales | Cover for every founder sale, with investor over-allotment |
Tag-along | A pro rata tag, triggered only by a change of control | A tag on any founder sale, rising to a full tag on a change of control |
Drag-along trigger | Founder or common approval, a minimum price and an earliest date | Investor approval alone, after an exit deadline |
Dragged holders' terms | Title-only warranties, several liability capped at proceeds, no non-compete | Shared escrow and indemnity, and a power of attorney to sign |
Lock-in | Short, ending on an exit or a set date | Until an exit, for founders only |
Permitted transfers | Family, trusts and holding companies, without consent | Transferees bound by the SHA, and no competitors |
Share transfer restrictions are one chapter of the wider shareholders' agreement, from deadlock to leaver terms, and every concession here gets traded against those. Where should a first-time founder with little leverage spend it? In our view, on three asks: a drag floor or start date, NVCA-style limits on a dragged holder's liability, and a tag for the founders if investors ever sell control.
Red flags in a ROFR, tag-along or drag-along clause
Before signing, check the ROFR and the drag-along and tag-along rights for these eight problems:
A drag with no minimum price, no earliest date and no founder or common-holder approval.
A drag that lets the dragging holders take a different form of consideration from everyone else.
Joint or uncapped liability for dragged holders, or non-competes for passive investors.
A ROFR or consent right with no deadline, or no rule for valuing a non-cash offer.
A tag that protects investors but not founders or employees.
Rights the majority can amend away without the affected class's consent.
Restrictions that sit only in the SHA, not in an Indian company's articles.
An exit clause that promises a non-resident investor an assured price.
Amendment clauses deserve the same scrutiny. On 30 April 2025 the Delaware Court of Chancery (C.A. No. 2024-0523-LWW) dismissed claims by minority members whose tag-along right had been removed by an amendment their own class approved, and the Delaware Supreme Court affirmed on 9 December 2025.
Share transfer restrictions checklist: decision steps and drafting points
Use this share transfer restrictions checklist twice. Why twice? Once when a holder wants to sell, so the rights run in the right order, and once when drafting, so the drag-along and tag-along rights work when they're needed.
When a shareholder wants to sell: the order the rights run in
Run a proposed sale through these eight steps, in this order:
Check the lock-in and any consent right in the articles and the SHA.
Check whether it is a permitted transfer; if so, skip to step 7.
Offer the shares under the ROFR or ROFO: the holders named first, then investors pro rata, then any over-allotment.
If the holders pass, sell within the window, on terms no better for the buyer.
Take tag-along elections; cut the seller back, or buy the tagging shares, if the buyer refuses them.
If the buyer wants 100% and holders above the threshold approve, serve the drag-along notice.
Check FEMA pricing and approvals, tax, stamp duty and demat before completion.
The company or depository records the transfer; a private company that refuses must send notice with reasons within 30 days of receiving the instrument.
Drafting checklist for the articles and shareholders' agreement
When drafting, cover these ten points:
Repeat every share transfer restriction in the articles and bar registering a transfer that breaks one.
Define "transfer" to include a change of control of a corporate holder, if it should count.
Set the notice contents, each holder's period, a closing window, an all-or-nothing choice and a rule for non-cash offers.
Say whether the tag is pro rata or full, and what happens if the buyer refuses the tagging shares.
Fix the drag threshold by class, with any founder approval, minimum price and earliest date.
Limit dragged holders to title warranties and several liability capped at their proceeds.
Define the protected "sale" to include mergers and schemes.
List the permitted transferees and require each to sign a deed of adherence.
Make completion conditional on FEMA pricing, any Press Note 3 (2020) approval, withholding and stamp duty.
Give every right an end date, such as listing, and protect it from amendment without its holders' consent.
Frequently asked questions about share transfer restrictions
Can an Indian private company refuse to register a transfer that breaks its share transfer restrictions?
Yes, if its articles give a ground: Table F's only substantive grounds are partly paid shares to an unapproved person and shares under a lien. The company must send reasoned notice within 30 days of receiving the instrument, and the transferee can appeal to the NCLT.
Are drag-along rights enforceable in India?
Yes, as a contract, and SEBI's 2013 notification permits them. An SHA binds only its signatories, so like other share transfer restrictions a drag must also sit in the articles to bind every holder. Completion needs a signature, an arbitral award or a decree.
Can minority shareholders be squeezed out without a drag-along clause?
Sometimes, by statute. In India: section 235 (nine-tenths in value of the shares involved), section 236 (a 90% holder, at a registered valuer's price) or a 75% holders' takeover offer through an NCLT scheme. The UK uses 90% (section 979); Delaware, a cash-out merger.
Is there a standard drag-along threshold?
No public dataset shows one. The NVCA's model Voting Agreement leaves the percentage blank, while Moneyview Ltd's SHA let investors holding at least 50.01% of investor shares drag only after five years and an exit request left unmet for 12 months.
Is a right of first refusal bad for a shareholder who wants to sell?
It can be: a buyer who knows it can be matched has less reason to spend on diligence. Sellers push for short windows, a small-sale carve-out, an all-or-nothing rule or a ROFO, and holders can waive the right for one sale.
Which is better for an investor, a ROFR or a ROFO?
For the investor holding the right, a ROFR: it gets the last look at a real, priced deal and can match it. A ROFO gives holders the first look instead and suits the seller, who can run a clean sale once they pass.
Can a shareholder hold both drag-along and tag-along rights?
Yes. Nothing stops one holder having both drag-along and tag-along rights: the tag protects it when others sell, and the drag lets it deliver the whole company to its buyer when it sells, on the agreed threshold and conditions.
What happens if the buyer will not buy the tagging shareholders' shares?
It depends on the drafting. In the NVCA model, the founder can't sell unless, at the same time, the founder buys the tagging holders' shares on the same terms. Other clauses cut the seller back so the buyer takes no more than it wanted.
Is a co-sale right the same as a tag-along right?
Yes in substance: co-sale and tag-along are one right under two names. US documents such as the NVCA model say co-sale, while Moneyview Ltd's SHA in India said tag-along. The trigger and scope still depend on the drafting.
Can share transfer restrictions stop a transfer to a family member?
Only if the articles and SHA don't carve out permitted transfers to relatives or family trusts. A gift of shares from an individual to a relative isn't a capital-gains transfer or taxable for the relative (Income-tax Act, 2025, sections 70(1)(b) and 92(3)(a)).
Do share transfer restrictions survive an IPO?
IPO-bound companies can end them by contract: Zetwerk's SHA ends on listing approval, and Chime's prospectus said its ROFR would end on completion of the offering. Once listed in India, special rights need a special resolution every five years under regulation 31B of SEBI's listing regulations.
Can a drag-along force a foreign investor to sell below fair value?
To a resident buyer, yes as far as FEMA goes: rule 21 only caps that price at fair value. But the Income-tax Act, 2025 can tax the seller on fair market value (section 79) and the buyer on the shortfall (section 92(2)(m)).
Is stamp duty payable on a transfer under a ROFR, tag or drag?
Yes: 0.015% of the consideration on a transfer for consideration (Indian Stamp Act, 1899, Schedule I, Article 56A(b)). The depository collects it from the transferor on an off-market demat transfer, and the seller pays on a paper transfer.
What happens if shares are sold in breach of a ROFR?
If the ROFR is in the articles, the company can refuse registration or the Tribunal can rectify the register (section 59). The holder can seek an injunction but must show it can pay. A ROFR only in the SHA gives contract remedies.
What is the difference between pre-emptive rights and a right of first refusal?
Pre-emptive rights cover shares a company allots: section 62 of India's Companies Act, 2013 and section 561 of the UK Companies Act 2006 give existing holders first call on an allotment. A right of first refusal covers shares an existing holder sells.
What is a lock-in clause in a shareholders' agreement?
A bar on transfers for a set period or until an event, such as an exit, subject to any permitted transfers. To bind the company and every holder it must also sit in the articles, since an SHA binds only its signatories.
References
India: Parliament and Ministry of Corporate Affairs (India Code unless stated)
India: SEBI and SEBI-filed offer documents
India: RBI, Ministry of Finance and Income Tax Department
Foreign Exchange Management (Non-debt Instruments) Rules, 2019 (RBI)
RBI Master Direction - Reporting under FEMA (updated 1 October 2026)
S.O. 2174(E), 1 May 2026 (Gazette of India)
Indian Stamp Act, 1899, Schedule I (India Code)
India: courts and tribunals
Supreme Court, 28 November 1991, (1992) 1 SCC 160 (no link)
Supreme Court, 1 August 2003, (2004) 9 SCC 204 (no link)
Supreme Court, 9 January 2019, SLP (C) Nos. 27194-27195/2015 (no link)
Supreme Court, 13 February 2020, Civil Appeal No. 1544 of 2020 (no link)
Supreme Court, 26 March 2021, Civil Appeal Nos. 440-441 of 2020 (Tata Sons)
Supreme Court, 2 September 2025, 2025 INSC 1065 (no link)
Supreme Court, 22 April 2026, SLP (C) No. 21109/2025 (no link)
Bombay High Court, 8 May 2015, Bajaj Auto Ltd v Western Maharashtra Development Corporation Ltd
Delhi High Court, 1 July 2019, GVK Airport Holdings Ltd v Bid Services Division (Mauritius) Ltd
Delhi High Court, 2 May 2025, O.M.P.(E.F.A.)(COMM.) 13/2019 (no link)
Delhi High Court, 18 September 2025, ARB. A. (COMM.) 50/2025
NCLAT, 9 July 2019, Company Appeal (AT) No. 272 of 2018 (no link)
NCLAT Chennai, 22 June 2021, Company Appeal (AT)(CH) No. 01 of 2021 (no link)
United States
Delaware General Corporation Law, section 151 (Delaware Code)
Delaware General Corporation Law, section 202 (Delaware Code)
Manti Holdings, LLC v Authentix Acquisition Co., Delaware Supreme Court, 13 September 2021
Delaware Court of Chancery, 26 February 2015, C.A. No. 9796-VCG (no link)
Delaware Court of Chancery, 30 April 2025, C.A. No. 2024-0523-LWW, affirmed 9 December 2025 (no link)
Chime Financial, Inc., prospectus (Form 424B4), filed 12 June 2025 (SEC)
United Kingdom (legislation.gov.uk unless stated)
Re Charterhouse Capital Ltd [2015] EWCA Civ 536 (no link)
Disclaimer
This article is general business information on share transfer restrictions as at October 2026, not legal, financial or tax advice. Company law, FEMA, income-tax and stamp rules change, and every outcome depends on the company's articles, its agreements and the facts, so consult a qualified lawyer, company secretary or chartered accountant, and US or UK counsel where relevant, before acting.
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