Share allotment and dilution of voting power do not by themselves vary shareholders' rights; special resolution and BIFR rules controlled here.

An increase in share capital that merely dilutes voting strength does not by itself vary shareholders' rights under sections 106 and 107 of the Companies Act, 1956; the rights attached to the class remain unchanged, so that challenge failed. Further allotment of equity shares to a third party was valid under section 81 because the company had a special resolution authorising the allotment and the board acted within that authority; the allotment was therefore not illegal. Prior approval of the BIFR was not required under section 22(2)(b) of the Sick Industrial Companies (Special Provisions) Act, 1985, as the rehabilitation scheme did not involve a takeover or change in management, so the allotment was not hit by that restriction.

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Issues: (i) Whether increase in the number of equity shares and consequent dilution of voting power amounted to variation of shareholders' rights under sections 106 and 107 of the Companies Act, 1956; (ii) whether allotment of further equity shares to a third party was valid under section 81 of the Companies Act, 1956; and (iii) whether prior approval of the BIFR was necessary before giving effect to the allotment under the Sick Industrial Companies (Special Provisions) Act, 1985.

Issue (i): Whether increase in the number of equity shares and consequent dilution of voting power amounted to variation of shareholders' rights under sections 106 and 107 of the Companies Act, 1956.

Analysis: The rights attached to a class of shares are not varied merely because the company increases its capital and issues further shares ranking pari passu. A reduction in voting strength caused by the creation of additional shares affects the enjoyment of the right, but not the right itself. The statutory scheme in sections 106 and 107 applies only when the rights attached to a class of shares are actually altered.

Conclusion: The increase in equity shares did not amount to variation of shareholders' rights, and the challenge under sections 106 and 107 failed.

Issue (ii): Whether allotment of further equity shares to a third party was valid under section 81 of the Companies Act, 1956.

Analysis: Section 81(1) gives existing equity shareholders a preferential right to further shares, but section 81(1A) permits allotment to any person if authorised by a special resolution in general meeting. The company produced its records showing that the relevant special resolution was passed and that the board had allotted the shares in accordance with that resolution. The alleged unsecured loan supporting the allotment was also supported by the record.

Conclusion: The allotment of further shares was valid under section 81 and was not illegal.

Issue (iii): Whether prior approval of the BIFR was necessary before giving effect to the allotment under the Sick Industrial Companies (Special Provisions) Act, 1985.

Analysis: The restriction in section 22(2)(b) applies where the sanctioned rehabilitation scheme involves a change in or takeover of management. Where the scheme is only for reconstruction, revival, or rehabilitation without such change, prior approval of the BIFR is not required. On the facts found, the rehabilitation scheme did not involve a takeover or change of management.

Conclusion: Prior approval of the BIFR was not required, and the allotment was not hit by section 22(2)(b).

Final Conclusion: The petition lacked merit and was liable to be rejected because the impugned share allotment was legally sustainable and the challenge to it could not be maintained.

Ratio Decidendi: An increase in share capital that merely dilutes voting strength does not by itself vary shareholders' rights, and further shares may be validly allotted to a third party under a special resolution unless the statutory conditions for pre-emptive allotment or BIFR approval are attracted.

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