Section 48 of Companies Act. Variation of shareholders’ rights.

“(1) Where a share capital of the company is divided into different classes of shares, the rights attached to the shares of any class may be varied with the consent in writing of the holders of not less than three-fourths of the issued shares of that class or by means of a special resolution passed at a separate meeting of the holders of the issued shares of that class, — 

(a) if provision with respect to such variation is contained in the memorandum or articles of the company; or 

(b) in the absence of any such provision in the memorandum or articles, if such variation is not prohibited by the terms of issue of the shares of that class: 

Provided that if variation by one class of shareholders affects the rights of any other class of shareholders, the consent of three-fourths of such other class of shareholders shall also be obtained and the provisions of this section shall apply to such variation. 

(2) Where the holders of not less than ten per cent. of the issued shares of a class did not consent to such variation or vote in favour of the special resolution for the variation, they may apply to the Tribunal to have the variation cancelled, and where any such application is made, the variation shall not have effect unless and until it is confirmed by the Tribunal: 

Provided that an application under this section shall be made within twenty-one days after the date on which the consent was given or the resolution was passed, as the case may be, and may be made on behalf of the shareholders entitled to make the application by such one or more of their number as they may appoint in writing for the purpose. 

(3) The decision of the Tribunal on any application under sub-section (2) shall be binding on the shareholders. 

(4) The company shall, within thirty days of the date of the order of the Tribunal, file a copy thereof with the Registrar.”

(5) **

(Where any default is made in complying with the provisions of this section, the company shall be punishable with fine which shall not be less than twenty-five thousand rupees but which may extend to five lakh rupees and every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to six months or with fine which shall not be less than twenty-five thousand rupees but which may extend to five lakh rupees, or with both.)

Simplifying the Section 48 of Companies Act

The section 48 of Companies Act 2013 talks about the variations that are possible in the rights of shareholders in accordance with their different types of class. All the possibilities and obstacles are expressly provided under this Act.

The share capital of the company can be divided into various other classes of shares. However, the rights of the shareholders of any class may be varied only with the consent in following cases: –

• Consent should be in writing.
• Consent should be of shareholders having not less than three-fourths of the issued shares of that class.
• Special resolution passed at a separate meeting of the holders of the issued shares of that class.

Condition required for variation

1. The provision relating to variation should be expressly provided in the memorandum of association or articles of association of the company.

2. If the provision relating to variation is not provided under the memorandum or article then, there should not be any prohibition on the variation in terms of issue of the shares of that class.
3. If on variation of one class of shareholders, the rights of any other class of shareholders get affected then the consent of three-fourths of such other class of shareholders will also be required for variation.

Beyond Pre-requisites

The section 48 of the Act also provides for the additional conditions that relates to the variation of the shareholders right such as: –

1. If the variation of shareholders right has taken place but at least 10 percent of the shareholders does not agree with the variation then they may apply to the tribunal to cancel the variations made to the rights of shareholders.

2. If the dispute relating to the variation has been made to the tribunal then until the tribunal decides the matter the variations made will not come into effect.

3. The limitation period for raising the disagreement regarding variation is 21 days from the day when consent was given or the resolution was passed.

Powers of the Tribunal under Section 48 of Companies Act

Following are the powers conferred to the tribunal under Section 48 of Companies Act 2013-

1. The jurisdiction of hearing the dispute on the disagreement on the variations of the shareholders right.
2. Till the pendency of the case in the tribunal the variations will not come into effect.
3. The Section 48(3) shows the binding effect of the decision of the tribunal. It states that the decisions of the tribunal are binding on the shareholders.

The Company has to file a copy of the order of the tribunal with the registrar withing 30 days of the date of the order.

The Heart of the Matter: Enabling Change with Safeguards

The modification in the rights attached to the shareholders helps them in numerous ways. This modification allows them to: –

1. Adapt to Changing Needs:

Companies may need to modify shareholder rights as their business models change in order to draw in new investors or undertake restructuring initiatives.

2. Accommodate Diverse Interests:

To accommodate distinct investor preferences, distinct share classes with differing rights (such as dividend payouts and voting rights) may be issued.

3. Facilitate Mergers and Acquisitions:

Mergers can be facilitated by modifying rights by providing certain shareholder groups with favorable terms.

1. Consent or Special Resolution:

If on variation of one class of shareholders, the rights of any other class of shareholders get affected then the consent of three-fourths of such other class of shareholders will also be required for variation.

2. Protecting Minority Shareholders:

If the variation of shareholders right has taken place but at least 10 percent of the shareholders does not agree with the variation then they may apply to the tribunal to cancel the variations made to the rights of shareholders.

3. Clear Communication:

Companies are required to notify all impacted shareholders in advance of any planned changes and their consequences.

The Amendment in Section 48 of Companies Act

The Section 48(5) of the companies act was omitted with an amendment by Act 29 of 2020. The section previously provided the punishment for the company and the employee in case of non-compliance with this section. The punishment for the company was: –

• A fine which shall not be less than 25 thousand rupees but which may extend to 5 lakhs rupees.

Also, the punishment for the office bearer who has committed the default was: –

• Imprisonment for a term which may extend to six months or,
• Fine which shall not be less than 25 thousand rupees but which may extend to 5 lakhs rupees.
• Or, Both.

FAQs

Q1) What do you mean by variation of shares?

The share capital of the company can be divided into various other classes of shares. However, the rights of the shareholders of any class may be varied only with the consent in following cases: –

• Consent should be in writing.
• Consent should be of shareholders having not less than three-fourths of the issued shares of that class.
• Special resolution passed at a separate meeting of the holders of the issued shares of that class.

Q2) What is variation of class rights company law?

The company has various classes of shares, The rights of shareholders of one type of share varies the right of shareholders of other type of share. It is known as variation of class rights.

For example: The right of shareholders of equity shares holders will differ from the rights of shareholders of preference shares.

Q3) What is the 10-shareholder rule?

The section 48 of the Act also provides for the additional conditions that relates to the variation of the shareholders right such as: –

• If the variation of shareholders right has taken place but at least 10 percent of the shareholders does not agree with the variation then they may apply to the tribunal to cancel the variations made to the rights of shareholders.

Q4) Which are different rights of individual shareholders under Companies Act, 2013?

The different rights that are available to the shareholders provided under the Companies Act, 2013 are: –

• Voting Rights
• Right to speak in the meting
• The right to move a resolution
• The right to appoint proxy for voting
• The right to inspect.

Q5) What are the two major types of shareholders?

The two major types of shareholders are namely: –

1. Equity or Common Stock Shareholders.
2. Preference shareholders.

Q6) What are the liabilities of shareholders?

The Corporate Veil Theory is a legal concept which separates the identity of the company from its members.

The corporate veil shields the members from the liabilities arising out of company’s action. Therefore, if company suffers ‘debt’ or violate any laws, then the members are not liable for those errors. It shows that the shareholders have limited liability.

Q7) Is a shareholder an owner?

The shareholders invest money in the company by purchasing the shares of the company. This makes them the owner of the company.

Q8) Are shareholders private?

There is no restriction as such provided under the Companies Act, 2013 about shareholders being public or private therefore, it can be made out that shareholders can be either public or private.