Summary: This article analyses Regulation 31B of SEBI’s LODR Regulations, which requires listed companies to obtain shareholder approval every five years for special rights granted to certain shareholders, addressing concerns about perpetual rights that survive dilution. Whilst the regulation seeks to balance commercial flexibility with shareholder protection, its broad scope has generated debate about proportionality, with most companies deferring approval requests until the 2028 deadline.
A fundamental principle of corporate governance is that once a company raises public money, whether through public equity or private equity investment, it ceases to be “the founder’s company” in the traditional sense. The infusion of external capital transforms the company into an entity with obligations to all shareholders, not merely the vision of its founders. Whilst founders may continue to express their opinions and provide strategic direction, they cannot operate with unfettered control once public investment has been secured. This principle applies not only to companies post-listing, but also to those that have raised private equity prior to their public debut. Once external investors commit capital, the company’s governance framework must balance the founder’s vision with all shareholders’ legitimate expectations.
Regulation 31B of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“Regulation 31B”), was introduced to regulate ‘special rights’ provided to shareholders of listed entities, aiming to tackle the trend of rights that survive dilution and exist in perpetuity, and mandate periodic shareholder approval of these special rights every five years by means of a special resolution. This regulatory intervention represents a significant shift in how Indian capital markets approach the balance between contractual freedom and equitable treatment of shareholders.
Regulation 31B came into effect in June 2023, and stems from the SEBI’s observation that shareholders’ agreements granting special rights to certain shareholders are drafted in such a way that those special rights would continue to be available to those shareholders even after a significant dilution of their holding in listed entities, permitting certain shareholders to enjoy such special rights perpetually, which is against the principle of rights being proportional to one’s holding in a company.[1]
As per Regulation 4 of the LODR Regulations, every listed entity shall ensure equitable treatment of all shareholders, including minority and foreign shareholders.[2] The tension between this foundational principle and the commercial reality of special rights granted to strategic investors forms the backdrop against which Regulation 31B must be understood.
The regulatory framework seeks to address a complex challenge: how to accommodate the legitimate commercial needs of companies seeking investment whilst protecting the interests of public shareholders who enter the market after listing. The issues identified include that the reference to ‘Special Rights’ is broad and potentially self-defeating, and the requirement is onerous for rights holders despite having received shareholder approval earlier by means of a special resolution.
Understanding Regulation 31B: Framework and Applicability
Regulation 31B(1) provides that any special right granted to the shareholders of a listed entity shall be subject to shareholder approval in a general meeting by way of a special resolution once every five years, starting from the date of grant of such special right, with the proviso that the special rights available to the shareholders of a listed entity as on the date of coming into force of this regulation shall be subject to shareholder approval by way of a special resolution within a period of five years from the date of coming into force of this regulation.
The regulatory framework establishes a periodic review mechanism rather than an outright prohibition. This approach reflects SEBI’s attempt to balance competing interests: allowing companies the flexibility to grant special rights when commercially necessary whilst ensuring that such rights do not become entrenched without ongoing shareholder consent. The idea behind the proposal was to introduce a sunset clause for special rights, akin to superior voting rights, enjoyed by certain shareholders, as it was observed that the special rights were drafted in such a way that they would continue forever. While a sunset clause may lead to non-availability of the special rights after a specified period, a provision of periodic approval of such special rights once in five years was proposed, so that the listed entity may grant, if it so desires, in its own interest, special rights, but subject to shareholders’ consent and approval once every five years.[3]
The regulation’s applicability extends to all listed entities that have granted special rights to their shareholders, regardless of when such rights were granted. The regulation applies to all existing special rights without grandfathering, as SEBI determined that exempting pre-existing rights would leave the identified problem unaddressed and perpetuate privileges granted in the past without regard to the wishes of the changing shareholder base.
Types of Special Rights under Regulation 31B
Special rights under Regulation 31B include nomination rights (allowing shareholders to appoint directors regardless of shareholding percentage, maintaining board representation despite dilution), veto and affirmative voting rights (granting power to block or approve corporate actions, though Subhkam Ventures v. SEBI[4] distinguishes proactive control from reactive veto power), information rights (providing enhanced access to company information), and protective mechanisms such as anti-dilution, right of first refusal, and tag-along rights. However, Regulation 31B’s broad definition may inadvertently capture minority protective rights, potentially extending beyond the identified regulatory problem.
A proposal for nuanced categorisation of special rights — to better serve stated objectives and ensure regulatory flexibility — has been suggested, based on the nature of right and shareholding patterns, with proactive versus reactive rights being one such classification model, if control is made an organising principle. This proposed framework would distinguish between rights that enable shareholders to exercise control over the company (proactive rights) and those that merely protect shareholders from adverse actions (reactive rights).
An analysis of 25 companies revealed that rights spanned across a wide range and were conferred by a diverse set of instruments, with each of the rights being subject to a special resolution and most being inserted into the articles of association, and most of these resolutions were passed with at least 90% shareholder approval. This empirical evidence suggests that shareholders are generally supportive of special rights when properly disclosed and justified. Of these, 22 companies have sought nomination rights as special rights; seven have sought information rights, granting specific shareholders access to financial statements, board meeting minutes, and other company information; three have sought anti-dilution rights or pre-emptive rights, enabling certain shareholders to maintain their shareholding percentage or subscribing to new securities; 10 have sought transfer-related rights, including rights of first offer, rights of first refusal, tag-along rights, and drag-along rights; nine have sought reserved matter rights or veto rights, requiring prior approval or affirmative votes from specific shareholders for certain strategic decisions. Additionally, three companies have granted rights relating to the appointment of the chairperson of the board, and two have granted rights relating to board committee composition.
Empirical analysis shows that the problem identified by SEBI may be overstated and its presumptions do not necessarily hold. Shareholders appear to be conscious of the rights they are voting on at the time of their conferral, with consistency in voting patterns on rights with limited pushback. However, the assumption that shareholders are always “conscious and protected” must be qualified by the ownership structure of the company. Where promoters and private equity investors collectively hold 75% or more of the voting power, special resolutions can be passed regardless of public shareholder opposition, effectively rendering minority shareholder votes inconsequential. Shareholder awareness and protection, therefore, depend significantly on the presence or absence of a dominant promoter, the overall ownership concentration, and stability versus churn in public shareholding.
Conclusion
Regulation 31B represents a significant regulatory intervention in the governance of listed entities, seeking to balance commercial flexibility with shareholder protection. Whilst the regulation addresses legitimate concerns related to perpetual special rights that survive dilution, its broad scope and periodic approval requirement have sparked debate over proportionality and effectiveness. The regulation’s implementation timeline reveals an interesting dynamic: existing listed companies were granted a five-year transition window to seek shareholder approval, whilst newly listed companies must seek approval immediately. This has led many companies to defer approaching shareholders to avoid early rejection. Consequently, few proposals were observed in 2023, with a gradual increase in 2024-25, and the remaining and a large number of proposals are expected in 2028 when the initial five-year approval period will expire and renewals will become due. Some companies may choose to let special rights lapse rather than risk shareholder rejection, fundamentally reshaping the governance landscape of listed entities in India.
[1] Clause 4.1 of the Memorandum by SEBI one “Strengthening corporate governance at listed entities by empowering shareholders – Amendments to the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015” (Accessible here) (“Memorandum”).
[2] Clause 4.3.1 of the Memorandum.
[3] Clause 4.6.1 of the Memorandum.
[4] Subhkam Ventures (I) Private Limited v. SEBI, Appeal No. 8 of 2009.