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Issues: (i) whether selective reduction of share capital affecting only the identified shareholders was permissible and fair; (ii) whether the valuation methodology and deduction of dividend distribution tax from the share value could be sustained for confirmation of the reduction.
Issue (i): whether selective reduction of share capital affecting only the identified shareholders was permissible and fair.
Analysis: Section 66 of the Companies Act, 2013 permits reduction of share capital by special resolution in any manner, subject to Tribunal confirmation. The reduction of capital was held to be a matter of domestic concern, and the majority could decide the mode and incidence of reduction. The shareholders had overwhelmingly approved the proposal, including a substantial majority of the identified shareholders. The creditors had consented and no creditor objection survived. The objections based on the absence of a separate class meeting, alleged coercion, and unequal treatment were not accepted as a bar to selective reduction.
Conclusion: Selective reduction was held permissible and fair, and the objection was rejected.
Issue (ii): whether the valuation methodology and deduction of dividend distribution tax from the share value could be sustained for confirmation of the reduction.
Analysis: The Tribunal accepted that valuation is not an exact science and that the expert valuer's adoption of a two-week VWAP, a discount for lack of marketability, and related assumptions was not ex facie unreasonable. However, the proposed deduction of dividend distribution tax from the valuation arrived at by the valuer was found prejudicial to the identified shareholders and discriminatory in effect. The Tribunal held that the tax outflow attributable to the reduction should not be deducted from the fair value fixed for the shareholders. The reduction could still be sanctioned on the basis of the valuation without such deduction, especially in light of shareholder approval and creditor consent.
Conclusion: The valuation was upheld, but deduction of dividend distribution tax from the per-share value was disallowed.
Final Conclusion: The reduction of share capital was confirmed with modification that the identified shareholders were to be paid the full value determined by the valuer without deduction of dividend distribution tax, and the altered capital structure was approved accordingly.
Ratio Decidendi: In a selective reduction of share capital under Section 66, the Tribunal may sanction the proposal if the reduction is fair, creditor interests are protected, and the valuation is not ex facie unreasonable, but any deduction that renders the treatment of the affected shareholders discriminatory or unfair may be disallowed as a condition of confirmation.
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