Variation of Shareholder’s Rights

The rights associated with a company’s share capital vary depending on the type of share. According to Section 48[i] of the Companies Act, 2013, the rights associated with one class of shares of the business can be changed from the rights associated with the other class of shares with the written approval of the shareholders. Shareholders holding more than three-quarters of the issued shares of a certain class of the company’s stock can change the rights linked to those shares by passing a resolution to that effect. The company’s share capital is divided into equity shares and preference shares. Classification is often based on the unique privileges associated with each type of share. Shareholder rights associated with one share class might differ significantly from those associated with another share class. It was determined that a shareholder who had been granted the pre-emptive right to acquire the company’s shares was part of a distinct group from shareholders who had not been granted this right, and that this pre-emptive right could not be revoked without the shareholder’s permission.

In addition, it can be changed by a special resolution approved at a separate meeting of the class of shareholders whose shares are outstanding. However, a class of shares may have its rights modified by a special resolution or with the approval of the class’s owners in the following situations:

1. The company’s Memorandum of Association (MoA) or Articles of Association (AoA) contain a clause allowing for such changes. Even if such a provision is not included in the MoA or AoA, the issue terms of the shares of that class do not prevent such a change.

2. It is necessary to acquire the approval of three-fourths of the other class of shareholders if a change in the rights connected to one class of shareholders has an effect on the rights of another class of shareholders. [ii]

There are also certain requirements which must be fulfilled in order to have variation of shareholders’ rights. These are

  1. At least 75% of the voting shares in issue must agree.
  2. If the rights of other classes of shareholders are affected by the change by one class of shareholders, then the consent of three-fourths of the other classes of shareholders is required.
  3. If there are more than 200 shareholders in an unlisted public corporation, that firm must use postal ballots to adopt the special resolution.
  4. If a company wants to amend its shareholders’ rights, it must first adopt a special resolution and then notify the stock market where it is listed.

If these requirements are complete then a person can move on to the process which has been listed below:

  1. Examine the MoA or AoA to see if there is a provision for changing the rights associated with a certain class of shares.
  2. Verify that the issue conditions of the shares of that class do not forbid the variation of rights, even if the MoA or AoA does not specifically allow for such variation.
  3. If the conditions of issue or the Memorandum of Agreement (MoA) do not permit modification of the rights linked to a particular class of shares, then the terms of issue or the MoA must be amended to permit variation.
  4. Shareholder rights may be changed with the approval of at least 3/4 of the shareholders holding issued shares of that class, or by a special resolution passed at a separate meeting of the shareholders holding issued shares of that class.
  5. The shareholders’ rights amendment must be approved in a special meeting of the shareholders.
  6. Within 30 days of the special resolution being passed at the general meeting, a copy must be filed with the Registrar of Companies using Form MGT-14.

However, this variation is also subject to cancellation on some valid grounds. If shareholders holding at least 10% of a class of issued shares do not vote in favour of the special resolution or consent to such variation, the owners may seek revocation of the variation from the National Company Law Tribunal (NCLT). Unless the NCLT acknowledges such variation of shareholders’ rights, the shareholders’ application to revoke the variation will be filed with the NCLT and the variation will be null and void. However, stockholders must petition the NCLT to reverse the change of their rights within 21 days of the date on which permission was provided or the special resolution was enacted. Shareholders must abide with the NCLT’s ruling. Within 30 days after the order date, the firm must submit a copy of the NCLT’s ruling to the Registrar of Companies.

Specifically, it was determined in the landmark case of In Re Hindustan General Electrical Corporation [iii]that “a variation which affects merely the enjoyment of a right without amending the rights itself does not fall within the jurisdiction of Section 106 of the Companies Act 1956[iv].” Once the variation is affected in exact consonance with the terms of the act, it is complete and no further step is necessary to accept it, as was also stated in the case of In Re Ramuria Cotton Mills Ltd.[v]

When a company’s management wants to alter shareholders’ rights, they must follow the correct method to protect the company’s reputation and the public’s trust. A new issue of preference shares ranking pari passu[vi] with the existing shares does not constitute a variation and thus does not require the consent of preference shareholders, and this is just one example of an exception to the rule that any change to a class right requires the approval of all class members. This was held in the case of White-Bristol Aeroplane Company, Limited[vii]. Despite the impact on shareholders’ voting rights, the court found that an ex-loan-to-shares director’s conversion did not violate class rights. The strategy was legitimate and proper protocol was followed. As the Court explained in Essar Steel Ltd.[viii], the elimination of shares or a decrease in capital does not constitute a “variation of class rights.”

In the case of Girish Kumar Kharia v. Industrial Forge and Engineering[ix], an increase in the number of shares for raising capital or otherwise does not constitute a variation of the voting power of existing members even though it reduces the number of votes they can cast.
To conclude, when a company’s share capital is split into multiple classes of shares and only the rights related to a subset of those classes are changed, the provisions of Section 48 of the Act apply. Either a special resolution or unanimous assent from the members will do, but both are required. When a class of shareholders’ rights are affected by a change made by another class, the latter class must approve the change. If a group of members is negatively impacted by a change in their rights, they can file an objection with the court and ask for the change to be reversed under this section. It is imperative in such instances to adhere to the specific procedure laid forth in the Act and the NCLT Rules, 2016. If a challenge is made to the variation, the Tribunal must first validate it before it goes into effect.

[i] Companies Act, 2013, §48, No.18, Acts of Parliament, 2013 (India)



[iii]Re Hindustan General Electrical Corporation AIR 190 Cul. 672.

[iv] Companies Act, 1956, §106, No.1, Acts of Parliament, 1956(India)

[v]Re Ramuria Cotton Mills Ltd. 53 C.W.N II

[vi] Pari-passu is a Latin phrase meaning “equal footing.”

[vii] White v. Bristol (1953) 2 WLR 144

[viii] Essar Steel Ltd. v. Unknown, (2005) 59 SCL 457 (Guj).

[ix] Girish Kumar Kharia v. Industrial Forge and Engineering, 1999 (47) BLJR 1755

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