Between Articles, Agreements And Regulatory Whispers: Where Do Special Rights Truly Reside?

Some contracts are more than just commercial scaffolding, they are silent compacts of control, trust, and intention. In the corporate ecosystem, the SHA occupies this space. Negotiated in confidence but often omitted or neglected from the company's AoA, SHAs have grown to embody the aspirations of founders, the protections of investors, and the governance structures that sustain modern enterprises. Yet, their enforceability remains cloaked in tension.

Can a right exist outside the four corners of the AoA and still be called a right? That question is simple but has fractured judicial consensus, spurred regulatory interventions, and perplexed corporate practitioners for over three decades. At stake is not merely the hierarchy of documents but the soul of corporate jurisprudence between freedom of contract and the sanctity of statutory form.

The jurisprudential timeline where V.B. Rangaraj v. Gopalakrishnan once gave a view that any special rights or restrictions affecting share transferability must be embedded in the company's Articles of Association to be enforceable, joined later by cases like IL&FS Trust and World Phone that not only reinforced this view but also increased the scope of Rangaraj's ruling. Quite parallelly and thereafter there has been a judicial departure from this orthodoxy through more pragmatic views taken in Premier Hockey, Messer Holdings, Vodafone, and Bajaj Auto, which collectively reflect a contract-sensitive approach.

When the lenses of this doctrinal evolution applied on private arrangements in case of IPO bound companies and listed companies, SEBI applies additional lenses of public interest and market discipline on these papers. Lastly and notwithstanding structure of a company, even if such contracts are carefully drafted, must ultimately yield to the imperatives the demands of sectoral regulators whose oversight can override or reshape shareholders' autonomy.

Beyond case law, the dualism of enforceability: the civil enforceability of rights inter se shareholders and the corporate enforceability through charter incorporation also needs to be understood. As private commercial arrangements have become more complex and with sectoral oversight more pronounced, there is a need to reconcile shareholder autonomy with regulatory propriety. While, the enforceability of special rights lies not solely in the terms of the contract, but in their alignment with the regulatory imperatives of market integrity and public interest.

Thus, what needs to be checked is, what is the law willing to protect? When is it willing to protect? And in what facts and circumstances it does that? The enforceability of special rights, thus, rests not only on what is written but in what is reasoned, what is respected, and ultimately, what the law is willing to protect.

I. Can Special Rights Under Shareholders' Agreements (“SHA”) be Enforced in Private Companies Without Being Embedded in The Articles Of Association (“AoA”) of a Private Company?

The answer to this question often depends on the nature of the right that is sought to be enforced. Not all shareholder rights are created equal (particularly those arising from contracts). Some rights like restrictions on transferability of shares directly intersect with the statutory framework governing companies and are subject to a stricter lens of enforceability. Other rights such as board nomination rights, reserved matters (veto rights), observer rights, and information rights, operational rights or voting arrangements; operate more in the realm of private contract and may not require incorporation into the company's AoA to be enforced.

At the heart of this issue lies the interplay between contractual freedom and the corporate constitution. Indian courts have long wrestled with whether the AoA must reflect every term of a SHA in order for that term to be binding-not just inter se between the shareholders, but also vis-à-vis the company.

The enforceability of special rights under shareholder agreements in private companies has been an evolving area.

One of the major jurisprudential milestones in this regard has been rendered by Supreme Court in the case of V.B. Rangaraj v. V.B. Gopalakrishnan (decided on 28.11.1991).

In this case there was a family arrangement where the shareholders had executed a private agreement restricting the transfer of shares exclusively to family members of the same branch of the family. However, this restriction was not reflected in the company's AoA. The Court held that such a restriction, though mutually agreed upon, was unenforceable since it imposed an additional limitation on share transfer not contemplated under the AoA. The Court reasoned that rights relating to transferability must flow from the Act or be expressly incorporated into the AoA, failing which they cannot bind either the shareholders or the company.

While Rangaraj was decided specifically in the context of share transfer restrictions, its principle was subsequently extended by the Bombay High Court in IL&FS Trust Co. Ltd. v. Birla Perucchini Ltd. (decided on 10.10.2002), where the dispute arose from a subscription-cum-shareholders' agreement that mandated the continuance of a particular director on the board for the duration of the agreement. The company, despite being a party to the agreement, had not amended its AoA to reflect this stipulation. In this case, the Court held that even rights concerning board management such as the continuance of a particular director must be embedded in the AoA to be enforceable, regardless of whether the company was a party to the agreement. The ruling indicated that enforceability under company law hinges not only on the nature of the right but also on its inclusion in the charter documents. Thus, IL&FS marks a judicial step: the principle in Rangaraj was no longer confined to share transfer restrictions, but extended to governance rights, such as director appointments and management control.

Interestingly, the Delhi High Court in the case of Premier Hockey Development Pvt. Ltd. v. Indian Hockey Federation (decided on 06.06.2011) drew a distinction from Rangaraj, underscoring that in Rangaraj, the company was not a party to the agreement. In Premier Hockey, however, the private company was itself a signatory to the Subscription and Shareholders Agreement (“SSHA”), which explicitly required an Extraordinary General Meeting to amend the Articles of Association in line with agreed terms. The Court held that since the company had committed to amending its AoA and the SSHA formed part of a wider contractual framework essential to the functioning of the Premier Hockey League, it could not be treated as a mere private arrangement. Rather, the obligations under the SSHA including corporate governance standards like board meeting notice periods and agenda transparency were deemed enforceable against the company. Notably, the Court acknowledged that even where the AoA remains silent, such covenants may still bind the contracting parties so long as they are not inconsistent with the Companies Act or contrary to public policy. In Premier Hockey, there was no conflict between the SSHA provisions and the existing Articles or any statutory mandate. Therefore, the agreement binds not only the shareholders but also the company. This judgment is significant because it shows a court recognizing shareholder autonomy and contractual freedom in a closely held company, without subordinating every SHA to the AoA. The case demonstrates that where the company is a party and the agreement is foundational to the business arrangement, courts may enforce such terms even in the absence of their incorporation into the AoA, thus softening the stance taken in Rangaraj and IL&FS.

However, on the contrary in World Phone India Pvt. Ltd. v. WPI Group Inc., USA (decided on 15.03.2013), the Delhi High Court advanced the Rangaraj line of reasoning to a stricter plane. In this case the Court declined to enforce a purely inter se shareholder agreement that was neither repugnant to the Act nor inconsistent with the AoA. The reasoning being that non-inclusion in the AoA itself was sufficient to render the clause unenforceable.

The orthodox view in cases like Rangaraj, IL&FS and World Phone (“Earlier Cases”) posed a problem and fails to consider the real-world complexities of business transactions. Let's consider a scenario where promoters of a private company pledge their shares to a financial institution and, as part of the agreement, agree not to transfer those shares without the lender's consent. However, this restriction is not mirrored in the AoA of the company. Under the orthodox view adopted in Rangaraj, IL&FS and World Phone this would render the agreement unenforceable, as it would not be in line with the AoA. This could lead to an outcome where a valid and commercially sensible restriction, necessary for the lender's security, would have no enforceability simply because it wasn't reflected in the company's charter documents. Therefore, the later judgements (like Messers, Premiere Hockey and Bajaj Auto) take a pragmatic view to resolve these problems.

A. A Shift in Judicial Thinking: Recognizing Shareholder Autonomy

The rulings in Rangaraj and subsequently in IL&FS Trust and World Phone represent a strict approach. However, the judicial landscape has seen conflicting judgments over time, with early rulings like Rangaraj and IL&FS adhering to the rigid view that examine the enforceability of SHA's from a narrow perspective, focusing largely on restrictions affecting corporate structure or share transferability. This lens did not fully accommodate the contractual autonomy of shareholders to govern their mutual rights and obligations, particularly where such arrangements neither impinge on the rights of non-signatory shareholders nor contradict statutory prescriptions.

Yet, as the legal terrain evolved, progressive views began to emerge. A notable shift occurred with the Messer Holdings case, which became one of the first judgments to challenge the orthodox stance. However, the timeline is marked by a continuing tension between the older, more rigid judgments and the newer, more progressive outlook

Courts in Messer Holdings Ltd. v. Shyam Madanmohan Ruia (decide on 01.09.2010), Premier Hockey (Supra) and Bajaj Auto Ltd. v. Western Maharashtra Development Corporation Ltd. (08.05.2015) (“Later Cases”) acknowledged that shareholders are entitled to enter into contractual arrangements in respect of their shareholding without necessarily embedding them in the AoA. In Bajaj Auto, the Bombay High Court recognised that such arrangements are an exercise of a shareholder's property rights and that, while they may not bind the company, they remain valid and enforceable as between the parties.

This line of reasoning was reinforced in Vodafone International Holdings B.V. v. Union of India (decided on 20.01.2012), where the Supreme Court took the considered view that it does not subscribe to the position that shareholders' rights under a SHA even if consistent with company law must be reflected in the AoA in order to be enforceable (as was held in Rangaraj Case). The Court stated that it does not subscribe to the Rangaraj's view, noting that the shareholders can enter into any agreement in the best interest of the company. The essential purpose of the SHA is to make provisions for proper and effective internal management of the company not only for the best interest of the shareholders, but also for the company as a whole.

B. Must Every Right Be in the AoA of the Private Company?

These Later Cases which gave a pragmatic view raise a compelling question:

If SHAs relating to governance or voting are recognised and enforced in the context of public companies, why should they be held unenforceable in private companies simply because they are not reflected in the AoA, especially when they are not repugnant to company law or the existing AoA?

Apart from restrictions on the transfer of shares which courts have historically held must be enshrined in the AoA to be enforceable contractual rights pertaining to governance, voting alignments, and management control may yet find enforceability in civil courts. Especially where the company has been a party to such arrangements or has acted in furtherance of them, courts have signaled a willingness to uphold such provisions under general contract law. The absence of codification in the AoA does not, in itself, invalidate such rights, provided they do not conflict with statutory mandates or the existing charter.

C. The Hidden Wiring of Corporate Power: Where the AoA Sleeps, Contractual Control Governs

The rigid stance taken in Earlier Cases overlooked a practical truth: in closely held companies, decisive control often flows not from charter documents but from how the dominant shareholders align themselves. The Delhi High Court's interim order dated 23 December 2021 (the matter is not being named as the matter is sub-judice) provides some interesting notings on this subject matter. In this case it is stand of one of the contesting parties that the company (a closely held entity) was not formally a party to an arbitration agreement. Yet the arbitrator's interim directions operated qua said company. The Court observed this because the real lever of power lays not with corporate form but with its constituents i.e., principal shareholders and management. Together, the parties who had submitted themselves to arbitration proceedings held a percentage resulting in de facto control, enough to bind the company's decisions in substance, even if not in form. The Court rightly reasoned that in a closely held company, control is not merely a matter of formal party status, but a function of where decisive voting power actually sits.

D. Control: Not Just a Boardroom Seat, but the Power to Steer

How Indian law quietly accepts that control lives in contracts too

This pragmatic reading sits comfortably within the Companies Act, 2013. Under Section 2(27) of the Companies Act 2013, control means far more than a headcount of directors, it includes the power to steer policy “by virtue of shareholding or management rights or shareholders agreements or voting agreements.”

So, when a contract or voting pact puts real levers in the hands of certain shareholders, the law already admits that this is control - AoA or no AoA.

E. A Quick Thought Experiment: The 75% Pact- Two Hands, One Steering Wheel

Scenario : Shareholder A holds 30% and Shareholder B holds 45% of the voting rights. They enter into a voting agreement to act jointly, giving them a 75% voting power. This enables them to:

1. Pass special resolutions (and ordinary resolutions)

2. Amend the AoA

3. Alter capital structure

4. Remove or appoint directors under Section 169

5. Control key policy decisions at shareholder level

6. Approve mergers or other strategic decisions;

7. Reorganize share capital

8. Influence dividend policy

9. Change the registered office or business objects of the company

By statute, this is control, not theoretical, but operational. And if the law says such control can arise from a voting agreement, then older excuses that “the AoA does not say so” feel increasingly thin.

F. Inter Se Agreements: Valid, Unless Prohibited by Law

Can a Silent AoA Still Co-Exist with Binding Private Rights?

So, does silence in the AoA always doom shareholder bargains? Not necessarily, while prudence dictates that key SHA rights, especially relating to share transfers, be incorporated in the AoA, the developing jurisprudence suggests that rights may require enforcement without such codification. Like the five elements that sustain life, special rights (like governance rights, voting agreements, or other shareholder arrangements) remain enforceable under the Contract Act if they satisfy the following five essential conditions (apart from the general conditions that should be fulfilled as per the Contract Act):

1. Not in conflict with the Companies Act or any other law;

2. Not in conflict with the AoA;

3. Entered into by competent parties;

4. Directed towards the effective internal management of the company; and

5. Not contrary to public policy.

G. A Matter of Perspective: The Nature of Company Law

Company law is primarily an enabling legislation. It defines what a company is, how it should be run, and lays down the minimum corporate governance standards. It does not and cannot prescribe what shareholders may or may not agree upon inter se. To do so would be commercially and practically regressive, especially in a regime designed to cater to varied corporate forms.

Judgements such as Vodafone International Holdings, Messer Holdings, and Bajaj Auto reaffirm the principle that Indian company law neither explicitly nor implicitly bars shareholders from entering into agreements governing the manner in which they exercise voting rights or other rights attached to their shares except in cases where such rights relate to restrictions on the transferability of shares.

H. Enforceability is a question of Forum, Not Always Validity

It is important to distinguish between where a right may be enforced and whether it is enforceable at all. A clause not enforceable before company law tribunals may still be valid and enforceable in a civil court as a matter of contract. Section 10 and 23 of the Contract Act stipulates the requirements for an agreement to be considered a valid contract and that the object and consideration of the contract must not be forbidden by law, defeat the provisions of any law, or be opposed to public policy.

Accordingly, the enforceability of rights under SHA also depends on the legality of their subject matter under all the applicable laws, including company law. Rights that attempt to override statutory requirements or bypass AoA prescribed procedures may be struck down. But where SHA clauses operate within the legal framework, civil courts remain open forums for their enforcement.

II. Can Special Rights Provided to Shareholders Under SHA's be Enforced in Public Companies Without Being Incorporated in the AoA?

When it comes to public companies, the enforceability of shareholder agreements poses a nuanced challenge, particularly because of the foundational principle of free transferability of shares. Unlike private companies, wherein there is an inherent restriction on transferability of shares while the default rule for public companies is the opposite: shares must remain freely transferable to protect market liquidity and shareholder democracy. Public companies cannot enforce transfer restrictions, especially on new members/shareholders i.e. public companies cannot impose blanket restrictions on the transferability of shares, especially not in a way that binds new or non-signatory shareholders.

The central question remains: can shareholders of public companies enforce contractual rights that are not captured in the AoA? This question can be answered by analyzing the following judicial precedents.

The Gujarat High Court in Mafatlal Industries Ltd. v. Gujarat Gas Co. Ltd. (decided on 24.10.1997) noted that the Rangaraj precedent (which emphasized the need to incorporate restrictions in the AoA) may not apply with the same force in the case of public companies. Since public company AoAs are, by law, prohibited from restricting share transferability, enforcing a pre-emption right or restriction solely based on a private agreement would run contrary to the nature of public companies. Nonetheless, the Court clarified that civil courts retain jurisdiction to entertain claims arising from pre-emption rights. It drew a subtle but important distinction between validity of rights and jurisdiction to enforce them highlighting that enforceability must still be judged on the merits of the case.

In Pushpa Katoch v. Manu Maharani Hotels Ltd. (decided on 04.07.2005), the Delhi High Court took a more rigid view, holding that restrictions on transferability imposed through private agreements, if not mirrored in the AoA are unenforceable. Relying on Rangaraj, the Court rejected the argument that privately agreed restrictions between shareholders could override or supplement the Articles.

However, a more nuanced and commercially pragmatic approach began to emerge with the Bombay High Court's decision in Messer Holdings Ltd. v. Shyam Madanmohan Ruia (decided on 01.09.2010). The Court drew a critical distinction: while Rangaraj invalidated blanket restrictions affecting all shareholders (present and future), it should not be extended to specific, consensual arrangements between particular shareholders regarding their own shareholding.

The Division Bench in this case underlined that free transferability, though a defining feature for public companies, does not mean that an individual shareholder loses the right to bind themselves contractually. Shares, like any other form of property, can be pledged, encumbered, or voluntarily made subject to transfer restrictions, provided such restrictions are not forced universally on all shareholders through private arrangement alone without AoA incorporation.

Notably, the Bench departed from the earlier single-judge decision given in this case, which had assumed that a share's inherent free transferability was so fundamental that even voluntarily assumed restrictions were unenforceable. The Division Bench rejected this view, clarifying that while company law ensures public company shares are freely transferable as a sacrosanct, this does not prevent an individual shareholder from consenting to reasonable contractual limits over their own shares.

The Court further emphasized that such inter se agreements do not amount to restrictions on free transferability in the statutory sense and need not be included in the AoA to be enforceable. Importantly, Messer Holdings held that contractual rights voluntarily assumed between parties over specific shares were more akin to property rights, enforceable under general principles of contract law

This shift gained further strength in the landmark Supreme Court judgment in Vodafone International Holdings B.V. v. Union of India (decided on 20.01.2012). The five-judge bench declined to subscribe the view taken in Rangaraj that required SHA terms to be incorporated into the AoA to be enforceable. The Court held that so long as shareholder agreements are consistent with Company's Act 2013, does not contravene public policy and is made for proper and effective internal management of the company and not only for the best interest of the shareholders, they are valid and enforceable between the contracting parties.

Surprisingly, moving forward two High Courts took different views-

The Delhi High Court in HTA Employees Union v. Hindustan Thompson Associates Ltd. (decided on 05.08.2013) reiterated that the terms of a SSHA which are inconsistent with the company's amended AoA cannot be enforced, particularly where the company and all the affected shareholders are not parties to such agreement. Distinguishing the Supreme Court's ruling in VB Rangaraj, the Court clarified that rights conferred under an SHA may be enforceable even if not incorporated in the AoA, provided they are not inconsistent with it and do not impose obligations on non-signatory shareholders. The Court emphasized that where the SHA attempts to impose blanket restrictions on all shareholders without the company and those shareholders being party to such agreement, such restrictions are unenforceable in the absence of corresponding provisions in the AoA. While the Bombay High Court in Bajaj Auto Ltd. v. Western Maharashtra Development Corporation Ltd. (decided on 08.05.2015), relied on Messer Holdings and Vodafone, reaffirmed the enforceability of SHA provisions between shareholders even when they were not reflected in the AoA. The Court recognized shares as movable property and reinforced the idea that the right to enter into private contracts regarding shareholding is an extension of the shareholder's proprietary rights. Importantly, the Court concluded that such agreements do not restrict transferability in the statutory sense and remain binding on the parties inter se. Even where the Articles are silent, such SHA-based arrangements retain validity under general contract law.

A. Statutory Reinforcement: Section 58 of the Companies Act, 2013

Adding legislative weight to the judicial evolution, Section 58(2) of the Companies Act, 2013 states that “Provided that any contract or arrangement between two or more persons in respect of transfer of securities shall be enforceable as a contract.” This provision clarifies that while the AoA governs corporate structure and shareholder-company relations, private arrangements between shareholders, so long as they do not contravene company law are legally enforceable.

This statutory formulation aligns with the reasoning in Bajaj Auto, where the Court affirmed that Section 58 codifies the pre-existing position that inter se agreements governing share transfers and voting arrangements are not inherently void simply because they are not incorporated in the AoA.

B. Key Takeaways

If there is one clear signal from Mafatlal, Pushpa Katoch, Messer Holdings, Vodafone, HTA, and Bajaj Auto, it is this: the days of treating Rangaraj as a blunt rule for every scenario are behind us, but its core caution still holds. Courts now look for a finer balance: they will uphold shareholder bargains when they respect the DNA of public company law, but not if they try to rewrite it through the back door.

In practice, the judicial red lines are becoming clearer:

1. No Blanket Restrictions: Courts will strike down blanket restrictions on free transferability. The mischief lies in locking all shareholders including future or non-signatory members.

2. Consent Rules: Targeted, inter se agreements between consenting parties are not the same as statutory restrictions. When shareholders willingly bind themselves, courts see this as an exercise of their property rights not as an infringement of the statutory guarantee of liquidity.

3. Company Charter Still matters: An SHA must not contradict the AoA or the Companies Act. If the arrangement tries to sidestep mandatory company law, courts will intervene.

4. Civil Enforceability Lives on: Section 58(2) of Companies Act 2013 confirms that private deals between shareholders can still stand as contracts, even if they don't become part of the AoA. So long as they don't cross the line into imposing obligations on non-signatories, they remain enforceable inter se.

5. The Rangaraj Principle is no Wrecking Ball: Instead, courts use it like a filter: Does this SHA upset the statutory promise of free transferability for public companies? If not, the contract stands within its own limits.

The shift is not absolute, judicial scrutiny remains high where SHAs seek to override statutory requirements or affect third-party rights. However, civil enforceability of SHA provisions has increasingly been upheld in cases where they are neither ultra vires the Companies Act nor inconsistent with the AoA.

C. The Role of Severability and Commercial Certainty

Here's where smart drafting earns its fee. A single overreaching clause shouldn't sink an entire shareholder agreement. This is where severability clauses prove their quiet power.

Even where certain SHA clauses are declared unenforceable perhaps due to inconsistency with company law or public policy, the broader agreement may survive. Courts have generally upheld the principle that the unenforceability of one clause does not render the entire contract void, thereby protecting commercial certainty and ensuring the enforceability of lawful provisions.

In sum, the legal position today reflects a dual track: while corporate enforceability may require embedding certain rights in the AoA, contractual enforceability remains open to SHA terms that are valid under Contracts Act and consistent with public company principles.

Having examined the enforceability of special rights in private companies, and the judicial trajectory governing such rights in public unlisted companies, it is relevant to analyze their treatment in IPO-bound and listed entities where the commercial ethos of shareholder autonomy is tempered by regulatory obligations rooted in public interest and market integrity. In the unlisted sphere, special rights find life in contracts and/or AoA; in listed sphere, these rights face a reconfiguration under SEBI's watchful gaze. The transition from a privately negotiated governance regime to a public market framework demands a rebalancing wherein the private bargains of founders and investors must yield to the imperatives of transparency, equal treatment, and shareholder democracy.

III. The Turning Tide: When Private Arrangements Enter the Public Arena

While the special rights provided under an Agreement operates as a private arrangement defining inter-se rights, obligations, and governance expectations. This undergoes fundamental transformation when a company transitions into a listed entity i.e. becoming an IPO-bound company, and when it gets listed. This transformation is neither merely procedural nor semantic, it is a metamorphosis; it arises from the change in regulatory character from negotiated contract to public interest-oriented regime.

Special rights granted to pre-IPO investors and founders are critical for protecting their interests until a company scales significantly. However, as companies prepare for an IPO, SEBI mandates a reassessment of these rights to ensure equity between pre-IPO and post-IPO shareholders. Under the SEBI (ICDR) Regulations, 2018 (“ICDR”), IPO-bound companies are required to ensure that the shares offered to the public are equal in all respects with pre-existing shares even if special rights are being provided, company needs to comply with the law, do proper disclosures, and regulator must not have any objection to it.

A. Why SEBI Recalibrates Rights at the Doorstep of the Bourse

Coming back to special rights to Investors, SEBI's stance was made particularly explicit in its 2024 advisory (later retracted), which proposed that all special rights under SHA or AoA must lapse at the time of DRHP filing. However, after industry representations, SEBI revised its position to mandate that “all special rights shall lapse on the date of listing, thus providing a much-required clarification to investors.

In certain cases where IPO transactions are at an advanced stage, wherein companies have not been allowed to keep the special rights, they were compelled to terminate all special rights on the date of listing and updating status of the same in the updated draft red herring prospectus. In other instances, companies are grappling with the implications of the observations of the regulator, exploring different scenarios and combinations so that outcome is possible both with Investor and the regulator.

B. How to Keep Sailing Post IPO

Post-listing of a Company, the regulatory governance shifts under the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“LODR”). To have proper oversight, the regulator through its' consultation paper on “strengthening corporate governance at listed entities by empowering shareholders – amendments to SEBI (LODR) Regulations, 2015” dated February 21, 2023, clarified its stance on special rights originating from inter-se Shareholders' Agreements (SHAs) between members and/or non-members of a listed company that could affect control or management.

Regulation 30 of LODR mandates that the company disclose events or information, which are material in the opinion of the board of directors of a company, deemed material under LODR or material as per materiality policy. Such events or information can be agreements, M&A transactions, SHAs which may have an impact in terms of this regulation inter alia others mentioned in the LODR. Such disclosures must be made to the stock exchange and on the company's website within the stipulated time.

Following this, Regulation 30A imposes a disclosure obligation on shareholders, promoters, promoter group entities, related parties, directors, key managerial personnel, and employees of the listed entity, as well as its holding, subsidiary, and associate companies. This applies to any agreements binding on the listed entity, including those with the potential to impact management or control, or those required to be disclosed under other provisions of the regulations. These agreements must be disclosed within 48 hours of their execution or signing. In case, there is a subsisting agreement then in such case the parties shall inform the listed entity which in turn shall inform the stock exchange as per the timelines specified by the Regulator or exchange. SEBI has thus ensured that whether or not the company is a direct party to such agreements that provide special rights, they must be disclosed in accordance with LODR.

Furthermore, Regulation 31B of LODR requires that all special rights granted to shareholders be approved by a special resolution every five years. Regulations 30, 30A, and 31B apply retrospectively, with Regulation 31B specifically requiring the approval of existing special rights within five years from the date the amendment takes effect. This provision applies regardless of whether the special rights originate from pre-IPO agreements or post-listing arrangements.

C. The Gray Area

A fascinating conundrum surfaces in the light of Regulation 31B which, despite its seemingly straightforward provisions, leaves room for an interpretive challenge. While it is clear that the approval or disapproval of special rights and their corresponding amendments or inclusion to the Articles can occur within the same meeting. The scenario grows precarious when shareholder approval for the special rights is denied, but the resolution for the amendment in the AoA wasn't passed on the same day or AoA left unamended to effect the disapproval of special rights provided earlier. This quagmire arises when the shareholders disapprove of the special rights embedded within the AoA but the company neglects or omits to pass the requisite resolution to amend its Articles within the same meeting. Under the framework of Regulation 31B, such a lapse would render the special rights ineffective thus extinguishing any claim of enforceability. Crucially, even if the special rights remain in the AoA due to this oversight, the investors cannot later invoke these rights merely on the grounds that the AoA was not amended, despite special rights being disapproved via special resolution under regulation 31B of LODR. Currently, no such situation has arisen however it can be a potential point on which litigation may arise.

Although, provision tightens the noose on any potential claims, ensuring that investors cannot revive rights that were never properly approved in the first place, thus preventing an unintentional perpetuation of unapproved shareholder privileges.

Importantly, while Regulation 31B of LODR does not define “special rights”, SEBI's consultation paper clarify that it includes nomination, affirmative/veto rights, information rights, Anti-dilution rights etc. The underlying policy concern stems from investors continuing to exercise disproportionate influence through these special rights, particularly after diluting their shareholding post-IPO. While in some cases, the regulator has been allowing companies to keep nomination or information related rights subject to 31B of LODR while it has not allowed in certain cases. Providing such rights would majorly depend upon influence of such rights over management and control of company and how long such rights will persist. In many instances, SEBI, through its observations on DRHPs, has sought clarification from companies regarding special rights granted to shareholders. Following this, SEBI has either allowed or disallowed such rights based on their potential impact. While SEBI typically mandates the termination of these special rights upon listing, in cases where they have been permitted, it has generally been limited to nomination rights and/or information rights.

Hence, the pertinent questions that stems out of this is why specifically nomination and information related special rights were allowed by the regulator? Answer to this lies in the debate of word “control”.

D. Between Brakes and Steering Wheels: What 'Control' Really Means

The SAT identified the lens to identify two categories of 'control'. Its' ruling in Subhkam Ventures (I) Pvt. Ltd. v. SEBI (SAT, decided on 15.01.2010), which laid the cornerstone for the distinction between proactive and reactive control. SAT held that protective rights those allowing investors to prevent certain actions do not amount to control unless they permit the investor to drive the affairs of the company. It is a power by which an investor can command a company to do what he wants it to do, creating or controlling a situation by taking the initiative. The power to only prevent a company from doing what the latter wants to do is by itself not control. True control lies in the driving seat where the investor not only has the right to say "no" but to say "go", where they control not just the brakes but the accelerator and steering wheel of corporate strategy. It is the kind of power that, when wielded, can shape the course of the company's policy and management decisions, irrespective of whether it comes through shareholding, managerial rights, or shareholder agreements. The test of control, as established, lies in the initiative the ability to shape the direction and substance of corporate decisions. In the words of the Court, control represents “creating or controlling a situation by taking the initiative”, it is the ability to steer the company's decisions and he is in the driving force behind a company. The Court rejected the notion that control can simply mean the power to prevent actions.

Later on, the Supreme Court in ArcelorMittal India Pvt. Ltd. v. Satish Kumar Gupta (decided on 04.10.2018) also recognized the validity of the Subhkam test, albeit in the context of insolvency proceedings. While initially expressing that Subhkam should not be viewed as a binding precedent in all contexts, the Court later employed its logic to interpret “control” under the IBC framework. The Court, adopting the logic of Subhkam, held that the expression “control” denotes only positive control, meaning the de facto control of actual management or policy decisions that can be or are in fact taken. The mere power to block special resolutions of a company cannot amount to control, distinguishing oversight from the affirmative exercise of authority.

This logic was reaffirmed in VCPL v. SEBI (SAT, decided on 20.07.2022), where SAT emphasized that mere protective rights cannot be equated to control over operations or management of a company unless they override the board's independent decision-making or confer proactive power over policy. The Court, in its wisdom, emphasized that while protective rights such as those ensuring compliance with corporate governance standards are indispensable, they do not, by themselves, drive a company. They do not grant the holder the power to influence management or shape policy decisions unless they confer upon the investor a proactive role in the operational and strategic decisions of a company.

E. What does all this mean?

This judicial trajectory highlights a clear conceptual division between oversight rights like information rights & nomination rights and management control (regulatory trigger).

It needs to be kept in mind that promoter-shareholders, unlike other public shareholders, face additional regulatory and contractual obligations, such as liability for prospectus misstatements, minimum promoter contribution with lock-in periods, penalty for non-compliance on company's part, and providing exit options for investors. These obligations are partially offset by special rights, which are crucial for promoters, especially in startup companies where significant pre-IPO dilution due to so many funding rounds often leaves founders with minimal stakes yet classified as promoters. Without sufficient voting power, special rights like nomination rights are lifeline for founders to leverage their expertise and contributions to the company's growth.

While keeping in mind the judicial trajectory, practical needs of a company, contribution of promoter's and investor's in the growth of company, the regulator's response to a company's DHRP and special rights arrangements can be covered in two core scenarios;

1. No special rights should survive listing unless explicitly allowed by SEBI.

2. Any continuing rights in listed companies must be subjected to periodic shareholder ratification.

F. Post-Listing Adaptations and Workarounds

With respect to the regulation 31B of LODR, there is still very limited litigation directly interpreting the implications (which special rights can be carried forward post listing and which the investors have let go off) pre and post IPO. However, till now SEBI, along with stock exchanges, has been strictly enforcing these norms both during the IPO process and in post-listing compliance monitoring. The evolving landscape is reflected in recent IPO filings, where companies have proactively incorporated specific declarations that align with the requirements of Regulation 31B. These include clauses stating that 'all special rights of pre-IPO shareholders shall terminate upon listing' or that any continuing rights 'shall be subject to approval by shareholders as required under applicable law'. The companies are also adopting the following methods to keep up to date with needs of the investors and the regulator. Having specifically analyzed DRHPs filed by startup companies in last five years, the following comes out as key learnings;

i) Sunset on Special Rights at IPO

The principle of 'sunset at IPO' has become a common feature in IPO documentation. In most cases, companies include a clause in the DRHP stating below;

a) Except as disclosed below, the Company does not have any subsisting shareholders' agreements among our Shareholders vis-a-vis the Company:

b) Except as disclosed below and in this Prospectus, the Company has not entered into any material agreements which are prejudicial to the interests of public shareholders and other than in the ordinary course of business, carried on or intended to be carried on by the Company.

c) Except as disclosed below, there are no material covenants in any agreements or arrangements (specifically in relation to primary or secondary transactions of the securities of the Company or financial arrangements relating to the Company) that it is a party to.

This is followed by a detailed breakdown of the rights and privileges retained post listing (if any), particularly the special rights under negotiation and subject to approval of the regulator. These disclosures typically follow the aforementioned clause, outlining the specific special rights that remain in effect post-listing. Thereafter generally the following clause follows;

a) The SHA or any amendment thereto shall stand terminated upon the earlier date of: (i) [cutoff date] or such extended cut-off date; and (iii) the date on which our Board decides not to undertake the IPO. In the event of termination of the SHA and the amendments thereto, the provisions of the SHA, shall, immediately and automatically, stand re-instated and shall be deemed to have been continuing from the date of execution of the date of latest amendment to the SHA.

However, it's important to note that the types of special rights retained, and the terms surrounding them, can vary significantly. Such clauses are subject to change on a case-by-case basis, influenced by factors such as the company's history, prior negotiations, and the specific nature of the rights in question. Thus, while the general framework of these clauses is standard, their application may differ depending on the individual circumstances and the negotiations specific to each company.

ii) Conditional Carry-Forward of Certain Rights

Where certain rights are intended to be retained post-listing, companies often structure their SHA amendment agreement to comply with Regulation 31B and with the observations of the regulator. These clauses are drafted with the understanding that continuing rights, such as the right to nominate a director, must be approved by shareholders. A typical clause might read;

a) Notwithstanding the termination of this Agreement on listing, the Investor's right to nominate one director or observer shall be incorporated in the Articles of Association of the Company and continue post-listing, provided that such nomination right shall be subject to approval by the shareholders of the Company as required under regulation 31B of the SEBI LODR Regulation, 2015. The Company shall ensure that prior to listing, its Articles of Association are amended, to effectuate this understanding.

This method of drafting ensures that while the SHA itself terminates, the company intends to honor that particular right through its governance processes, provided that the shareholders approve it. Such provisions are crucial in mitigating any ambiguity, with the investor acknowledging that post-listing rights are not absolute and must be reaffirmed by the public shareholders.

iii) Which Rights Lapse vs. Which May Be Retained

In practice, many companies choose to let all special rights lapse to avoid the complexity of post-IPO approvals. However, some companies negotiate arrangements with key investors or key persons to retain board seats, particularly for those who continue to hold a significant stake. If the shareholder vote fails to approve these continuing rights, the nominated director would have to vacate the seat and according to AoA of a company will be amended.

iv) Strategic and Creative Post-IPO Structuring

Some companies have turned to creative structures that replace formal special rights with more flexible governance arrangements. For example, instead of a formal veto right, a company may constitute a strategy committee that includes an investor's nominee. While the committee's recommendations are not binding on the board, they carry influence and persuasive value. This approach provides a similar degree of oversight without violating SEBI's restrictions on special rights. Similarly, companies may enter into commercial agreements with key shareholders post-IPO, giving those shareholders leverage in specific areas such as technology support or branding, while avoiding formal control over the company's core operations. These alternatives allow companies to maintain strategic relationships with influential investors. However, even these inclusions would be subject to disclosure requirement and in certain cases to the satisfaction of the regulator.

G. From Clause to Case: How DRHPs Reveal the Regulator's Mind

There have been cases wherein the regulator had allowed for the continuation of nominee for the purpose of completion of their exiting terms and information rights under tightly circumscribed conditions and subject to PIT Regulations, 2015. These carve-outs reflect regulatory recognition of the need for some measure of oversight, without disturbing the principle of shareholder equality. To illustrate the practical application of these provisions, let's consider the following IPO scenarios where special rights were addressed:

i) Zomato Ltd. (2021)

The Company in its draft prospectus disclosed that all pre-IPO SHAs would terminate immediately prior to listing except a few rights that were explicitly disclosed in the draft prospectus i.e., Founder's right to nominate a director to the board of the company and right to nominate one non-executive director each to i.e, Alipay and Info Edge, each being liable to retire by rotation, on the board till such time as their respective shareholding, along with their respective affiliates holding securities of our Company, is at least 7.5% of the share capital of our Company on a fully diluted basis subject to approval of the Shareholders by way of a special resolution in a general meeting post listing of the equity shares of company. This was in line with the prevailing understanding of SEBI's guidance before the formal introduction of Regulation 31B. By taking this approach, Zomato set a template for other tech startups to follow, relinquishing special rights in favor of regulatory simplicity except those specifically required for the purpose of growth of the company and in lines with understanding regulator. Zomato's proactive steps likely influenced SEBI's approach to handling investor rights in startup companies' IPOs.

ii) Delhivery Ltd (2022)

Delhivery retained special rights to nominate a director to the board for certain shareholders. While Delhivery's SHA was terminated, the AoA was amended to incorporate these special rights to nominate a director to the board. This arrangement complied with SEBI's framework, and the nomination right was subject to shareholder approval at the first AGM.

iii) Honasa Consumer Limited (Mamaearth) (2023)

Mamaearth's prospectus disclosed how special rights related to investor consent over certain corporate actions would terminate upon listing. However, the company allowed Peak XV and Sequoia Capital, each being allowed to nominate non-executive nominee director on the board till such time they maintain their shareholding in the company (individually) along with their affiliates is atleast 10% of the share capital of the company on fully diluted basis. The promoters subject to the ICDR regulations, shall be allowed to nominate two directors to the board and appoint themselves or somebody else as the chairman of the company. This arrangement was explicitly disclosed in the DRHP and did require shareholder approval. The regulator did not object to this provision, illustrating a pragmatic approach where nomination rights were permitted in the spirit of facilitating knowledge transfer and governance oversight.

iv) Swiggy Limited (2024)

The company entered into an Amendment cum Waiver Agreement with certain stakeholders to facilitate the offer. This Agreement amends several provisions of the Shareholders' Agreement, waiving the right to nominate directors to board committees, appoint observers, exercise information and inspection rights, and imposing lock-in restrictions on founders of the company. Additionally, the right of first refusal and tag-along rights were waived for the Offer for Sale. The company amended its Articles of Association, subject to shareholder approval via a special resolution, to grant MIH the right to nominate 1 director if it holds 5% of equity and an additional director if it holds 15%. If MIH transfers 10% or more of its equity to a non-prohibited party, it was allowed to transfer its nomination right to the new holder. Accel Entities and SoftBank were provided the right to nominate 1 director if they hold at least 5% of equity. Any party holding at least 15% of equity, excluding prohibited parties were also entitled to nominate 1 director. Founders i.e., Sriharsha Majety and Lakshmi Nandan Reddy Obul retained the right to nominate 2 directors to the board if they met shareholding, they remain on the board and employment conditions. Upon IPO listing, the Shareholders' Agreement was terminated, and special rights under Part B of the Articles were ceased, while provisions on definitions, confidentiality, and dispute resolution survived. These changes were implemented in compliance with LODR.

v) Ether Energy Limited (2025)

In July 2024, the company entered into an amended and restated Shareholders' Agreement with a diverse group of stakeholders, including Tarun Sanjay Mehta, Swapnil Babanlal Jain, HMCL, Caladium Investment Pte Ltd, National Investment and Infrastructure Fund II, and India-Japan Fund, among others. This agreement outlined the rights and responsibilities of these parties regarding their shareholding and governance within the Company, including board nominations, observer appointments, and information rights, while also imposing certain transfer restrictions such as rights of first offer/refusal, tag-along, and drag-along rights. To further support the company's upcoming public offering, the parties agreed to an SHA Amendment cum Waiver Agreement in September 2024, which modified several provisions to streamline the process, including waiving specific rights and granting consents for the participation of selling shareholders in the offer for sale. This amendment will automatically terminate if certain conditions are not met, such as failure to list the equity shares on the stock exchanges or rejection of the draft red herring prospectus by SEBI or the company decide not to go forward with the offer or the 12 months from the date of observations received from SEBI, at which point the original SHA will be reinstated, though some clauses, particularly those regarding governing law and dispute resolution, will remain effective post-termination.

IV. REGULATORY CONFLUENCE: WHEN COMPANY AND SEBI LAW ISN'T ENOUGH

We know that special rights are enforced depending upon the structure of a company, be it a private company, a public company, an IPO bound company or a listed company. Each of them would be required to conform to applicable law and judicial trends to enforce special rights. However, even complying with all such laws, a company needs to be mindful of sectoral regulation. As we are aware, India's sectoral regulatory framework is not monolithic; it is a layered mosaic where RBI, IRDAI, SEBI, MIB, and others assert domain-specific oversight. The enforceability and survivability of special rights are often contingent on a harmonisation exercise across these regulatory silos. A shareholder right that is legally sound under company law may be rendered inoperative if it contravenes the policies or fit-and-proper norms of a sectoral regulator. Thus, the scrutiny of special rights must transcend corporate statutes and penetrate into sectoral frameworks that speak in the language of policy, prudence, and public interest. The following are some of the major compliance issues under the following regulatory bodies;

A. RBI

In case of change in shareholding and control prior approval from RBI is required for the companies regulated by RBI, especially where shareholding exceeds 26% or control shifts (Board or management).

The RBI has also cracked down on passive board influence. Its May 2024 directive requires investor-appointed observers to resign and seek formal directorships, effectively eliminating the comfort zone of informal control without statutory accountability. This tightening of oversight reflects RBI's preference for transparency and governance rooted in statutory accountability.

B. IRDAI

IRDAI's withdrawal of its Indian Ownership and Control (IOC) Guidelines was seen as liberalization of foreign investor participation. The FDI limit was raised to 74% (Finance Act, 2021), and mandatory Indian control requirements were removed. However, IRDAI's Corporate Governance Guidelines (effective April 1, 2024) impose fresh structural safeguards.

Special rights for investors, such as board nomination, veto on business strategy, or control over CEO appointments, must harmonize with these governance expectations. Any broad veto threatening management autonomy or public policy interest could face regulatory rejection.

C. SEBI

An entity is not always required to be listed at a stock exchange to come under the watchful eyes of SEBI. While the regulator is well-known for its role in listed company governance, its regulation of intermediaries (stockbrokers, investment advisers, etc.) includes rigorous fit and proper norms (Schedule II, SEBI (Intermediaries) Regulations, 2008). Any change in control whether contractual or de facto requires SEBI's prior approval and some cases prior approval of Stock Exchange would be required as well.

Thus, sectoral regulations do not merely add an extra compliance layer, they constitute a part of essential public policy framework that can displace or neutralize contractually agreed special rights. The challenge lies in harmonizing these inter-se arrangements with regulations, especially where multiple regulators operate in overlapping domains. Investors and investee companies must anticipate these intersections during deal structuring and drafting inter. This entails proactive engagement with sectoral regulators, seeking prior clarity or approvals where required, and a recognition that even legally enforceable rights on paper may remain inoperative without regulator's blessing.

Authors: Mr Ravi Prakash (Associate Partner), Ms Menali Jain (Associate), Mr Varun Litoriya (Associate) From The Transactions Advisory At Corporate Professionals Advisors & Advocates. Views are personal.