Majority shareholders can legally oust minorities through selective capital reduction under Section 66 without requiring control premium

NCLAT dismissed the appeal challenging selective capital reduction under Section 66 of Companies Act, 2013. The tribunal held that majority shareholders (99.92% voting shares) could validly oust minority shareholders through special resolution, as there is no vested right for minorities to continue as shareholders during capital reduction. The court upheld the independent valuation at Rs. 196.80 per share by E&Y, finding the 25% discount for liquidity/marketability justified and rejecting minority shareholders' claim for control premium. NCLAT ruled that SEBI ICDR Regulations 2009 were inapplicable to capital reduction, and the company properly complied with disclosure requirements under Section 102. The selective capital reduction was deemed lawful under Section 66(1)(b)(ii).

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1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment were:

1. Whether the reduction of capital by Bharti Telecom Limited (BTL) was in accordance with Section 66 of the Companies Act, 2013.

2. Whether selective capital reduction was permissible under Section 66(1)(b)(ii) of the Companies Act, 2013.

3. Whether the minority shareholders could be compelled to exit by a resolution passed by the majority, despite their unwillingness.

4. Whether the valuation of shares at Rs. 196.80 by Ernst & Young (E&Y) was correct and independent, considering the previous valuation of Rs. 310 for preferential shares to SingTel.

5. Whether the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 were applicable.

6. Whether a 25% Discount for Lack of Marketability (DLOM) was justified, and if minority shareholders were entitled to a "Control Premium" instead.

7. Whether BTL failed to disclose required documents in the explanatory statement, violating Section 102 of the Companies Act, 2013.

2. ISSUE-WISE DETAILED ANALYSIS

Issue No. I: Capital Reduction Compliance

The Appellants argued that Section 66 mandates a uniform approach to capital reduction, opposing selective reduction as unfair and discriminatory. The Court noted that Section 66 allows capital reduction "in any manner," including selective reduction. The majority of shareholders approved the reduction through a special resolution, fulfilling legal requirements. The Tribunal confirmed no objections from creditors, and the process was deemed compliant with Section 66.

Issue No. II: Valuation of Shares

The Appellants challenged the valuation disparity between E&Y's report and the previous valuation for SingTel. The Court recognized that market conditions had changed, affecting valuations. E&Y's valuation was based on detailed methodologies, and the Tribunal found no evidence of bias. The Court emphasized that valuation is a technical matter for experts, and judicial interference is limited unless valuation is patently unfair.

Issue No. III: Discount for Lack of Marketability (DLOM)

The Appellants contested the application of a 25% DLOM, arguing for a Control Premium instead. The Court explained that DLOM accounts for the illiquidity of unlisted shares, and the independent valuer provided detailed reasoning for its application. The majority shareholders already had control, making a Control Premium irrelevant. The Tribunal accepted the DLOM as reasonable.

Issue No. IV: Disclosure and Compliance with Section 102

The Appellants claimed that BTL failed to disclose necessary documents, violating Section 102. The Court found that BTL complied by allowing inspection of documents at its office, as required. The notice provided sufficient information for shareholders to understand the implications of the capital reduction.

3. SIGNIFICANT HOLDINGS

The Court upheld the Tribunal's decision, affirming that:

- Reduction of capital by BTL was in accordance with Section 66 of the Companies Act, 2013.

- Selective capital reduction was permissible and valid under the Act.

- Minority shareholders could be compelled to exit through a majority resolution.

- The valuation by E&Y was correct, independent, and complied with established practices.

- SEBI Regulations were not applicable to the unlisted company.

- The 25% DLOM was justified, and a Control Premium was not warranted.

- BTL did not violate Section 102, and the resolution was valid.

All appeals were dismissed, and the Tribunal's order was upheld as fair and compliant with legal standards.

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