The Supreme Court has clarified that the reduction of share capital is a domestic affair of a company, to be decided by a special resolution of the majority. In short, the court’s or Tribunal’s role is not to substitute its own business wisdom but to ensure the scheme is fair, just, and not egregiously wrong or prejudicial to any class of shareholders.
The Apex Court ruled that Section 66 of the Companies Act, 2013, does not statutorily require a valuation report to be prepared or circulated to shareholders for a capital reduction scheme. Therefore, the non-attachment of such a report to the general meeting notice does not vitiate the process, provided the price offered is disclosed and the underlying documents are made available for inspection.
The Court also held that the application of a Discount for Lack of Marketability (DLOM) is a valid and permissible valuation methodology under Indian Accounting Standards for determining the fair value of unlisted, illiquid shares in the context of a capital reduction, particularly when it is not a case of a court-ordered buyout due to oppression.
For a court to find a capital reduction scheme prejudicial, the objector must demonstrate more than just receiving a price lower than desired. It must be shown that the offer is ‘inherently unjust’ or that the valuation is so off-track that it offends the judicial conscience. The approval of the scheme by a majority of the affected shareholders is a strong indicator of its fairness, added the Court.
As far as composition of NCLAT Benches are concerned, the Apex Court said that a bench of the NCLAT is validly constituted under Section 418A of the Companies Act, 2013, as long as it consists of at least one Judicial Member and one Technical Member. Further, the 2013 Act does not mandate a majority of Judicial Members on the bench.
A Two-Judge Bench comprising Justice Sanjay Kumar and Justice K. Vinod Chandran emphasized that the 2016 rights issue, where shareholders received 115 shares at par for every 1 share held, had exponentially increased the number of shares, thereby diminishing the monetary value per share. When this was factored in, the payout to shareholders was substantial. The Bench therefore held that the price could not be considered unreasonable or prejudicial, especially since a majority of the identified shareholders present and voting had approved it.
The Bench further held that Section 66 of the Companies Act, 2013, unlike other sections such as Section 230 (compromise/arrangement) or Section 232 (merger), does not statutorily mandate a valuation report for a reduction of share capital. Therefore, not annexing the report to the notice did not constitute a misleading disclosure or make the notice ‘tricky’. The company had disclosed the final price and made the reports available for inspection for over a month, which was deemed sufficient.
Regarding the valuer’s independence, the Bench stated that bias must be demonstrably real and present and cannot be assumed merely because the valuer was an affiliate of the internal auditor. This was further supported by the fact that a separate fairness report was obtained and two other independent agencies later affirmed the valuation.
Moving ahead, the Bench observed that the currently applicable Companies Act, 2013, under Section 418A, only requires that a bench of the NCLAT must have at least one Judicial Member and one Technical Member. It does not mandate a judicial majority. Thus, there is no reason to treat Technical Members as lower in status or quality, as all adjudicators are expected to have ‘resolute minds and unbiased views’. Since the bench was headed by a Judicial Member and the statutory composition was met, the NCLAT’s order could not be interfered with on this ground.
Briefly, the appellants were minority shareholders in Bharti Telecom Limited (BTL), a closely held company, and the BTL’s primary business was its investment in its subsidiary, Bharti Airtel Limited (BAL). The appellants alleged they were being arbitrarily forced out of the company through a reduction of share capital under Section 66 of the Companies Act, 2013, at a grossly unfair and low share price. It was alleged that BTL decided to reduce its share capital by cancelling 28,457,840 equity shares held by identified minority shareholders, who collectively held 1.09% of the company’s shareholding.
The company initially offered a price of ₹163.25 per equity share. This was based on a valuation report that applied a Discount for Lack of Marketability (DLOM) since BTL’s shares were unlisted. A special resolution to approve this capital reduction was passed with a majority of over 99.90% of the total shareholders. Among the identified minority shareholders who were present and voting, 76.35% voted in favour of the resolution.
BTL then sought sanction from the National Company Law Tribunal (NCLT), which found the deduction of Dividend Distribution Tax from the share price to be arbitrary and directed BTL to pay a revised price of ₹196.80 per share, which BTL accepted. Despite this, thirty-five shareholders, some of whom had voted for the resolution, appealed to the National Company Law Appellate Tribunal (NCLAT), which dismissed their appeals. Aggrieved, eleven of these shareholders appealed to the Supreme Court.
Appearances:
Senior Advocate K. Parameshwar, AOR M/s Udit Kishan And Associates, along with Advocates Masoom K. Shah, Udit Gupta, Veda Singh, Prasad Hegde, N Sai Kaushal, Adit Garg, Rohan Chawla, and Aashvi P. Shah, for the Appellant
Senior Advocates Shyam Divan, Ramji Srinivasan, and Percival Billimoria, AORs Arti Singh, Soumya Dutta, Arvind Gupta, along with Advocates Kamal Shankar, Tanmay Sharma, Aakashdeep Singh Roda, Arjun Narang, Shivam Jain, Shefali Munde, Arjun Bhatia, Arpith Jacob Varaprasad, Ankur Singhal, Pooja Singh, B P Singh, Khowaja Siddiqui, Kshitij Arora, Rachita Sood, Priyamvada Paneru, and Rahul Bhaskar, for the Respondents
