2026 (3) TMI 476 - SC - Companies Law

Reduction of Share Capital affirmed; court upheld tribunal findings rejecting procedural bias and perverse valuation.

Reduction of share capital was examined for procedural infirmity and valuer bias; court applied statutory text, inspection availability, tribunal ... Reduction of share capital under Section 66 of the Companies Act, 2013 - Jurisdictional defect on the composition of the NCLAT & the status-quo order - fair value versus fair market value - disclosure obligations in reduction of capital - independence of valuer and bias - discount for lack of marketability (DLOM) in valuation - procedural disclosure requirements - Oppression and mismanagement​​​​​​​ - Allegation of being arbitrarily disgorged of shareholdings and eased out of the 1st respondent company, (BTL) in a grossly unfair manner, making a sham of an evaluation fixing the share price at an unreasonably low value - Bench composition and impartiality. Bench composition and impartiality - Constitutional challenge to the composition of the NCLAT Bench - HELD THAT:- The Court held that the statutory scheme under the Companies Act, 2013 does not require Larger Benches of the NCLAT to have a majority of Judicial Members and that the presence of a Judicial Member heading the Bench with two Technical Members did not vitiate the NCLAT's decision. The ratio in earlier precedents was examined but distinguished on facts and statute; no jurisdictional defect was found in the NCLAT's composition in this case. [Paras 22] No interference with the NCLAT's order on the ground of Bench composition. Disclosure obligations in reduction of capital - Allegation that the notice and related disclosures for the reduction of share capital constituted a 'tricky notice' and were procedurally infirm - HELD THAT:- The Court found that Section 66 does not mandate a valuation report as part of the statutory notice and that the company had disclosed the price offered and kept valuation/fairness reports available for inspection at the registered office. The NCLT and NCLAT examined objections and the Court, confined by its limited jurisdiction under Section 423, found no procedural infirmity amounting to a 'tricky notice' or inadequate disclosure that would vitiate the reduction. [Paras 32] Procedural objections to the notice and non-supply of valuation/fairness reports were rejected. Independence of valuer and bias - Claim that the valuer lacked independence because of association with the company's internal auditor - HELD THAT:- The Court held that appointment of an internal auditor and the valuer's association with that auditor did not demonstrably establish a real danger of bias. The fairness report from a different agency and confirmations by unrelated financial advisers were relied on; mere possibility or probability of bias was insufficient to vitiate the valuation under the facts of this case. [Paras 35] The contention of valuer bias was rejected for lack of demonstrable real prejudice. Discount for lack of marketability (DLOM) in valuation - Validity of applying DLOM and whether the valuation fixed for the reduction of capital was unreasonable - HELD THAT:- The Court held that DLOM is not universally impermissible and that Ind AS and ICAI valuation standards recognise marketability adjustments where appropriate; Section 66 does not preclude such adjustments. Considering the company's delisted status, absence of dividends, relevant market data, prior offers and the rights issue impact, the Tribunal's scrutiny did not reveal an egregiously wrong valuation. The tests applied in precedent (fairness, majority approval, absence of manifest unreasonableness) were satisfied on the record. [Paras 46, 48, 50] Application of DLOM and the resulting valuation were held permissible and not so unreasonable as to justify upsetting the scheme. Final Conclusion: The appeals are dismissed: the Court found no jurisdictional defect in the NCLAT's constitution, no procedural 'tricky notice' or demonstrable valuer bias, and no legal impropriety in applying DLOM or in the valuation sufficient to upset the reduction of capital; the NCLT/NCLAT findings stand. Issues: (i) Whether the reduction of share capital under Section 66 of the Companies Act, 2013 and the procedure followed (notice, disclosure and independence of valuer) were vitiated by procedural infirmity or bias; (ii) Whether the valuation method applied, specifically the use of Discount for Lack of Marketability (DLOM), and the price fixed for minority shareholders was unreasonable or perverse, warranting interference by this Court.Issue (i): Whether the procedure followed for reduction of share capital, including the notice, retention of valuation and fairness reports at the registered office, and the appointment of a valuer allegedly related to the internal auditor, amounted to procedural infirmity or bias invalidating the scheme.Analysis: The Court examined statutory requirements under Section 66 and related provisions, the contents of the notice, availability of valuation and fairness reports at the registered office, participation and voting by identified shareholders, the NCLT/NCLAT scrutiny and findings, and the evidence regarding connections between the valuer and the internal auditor. The Court noted that Section 66 does not mandate a valuation report, that the company had nonetheless obtained a valuation and a fairness report, that the reports were available for inspection and some shareholders inspected them, and that the NCLT and NCLAT examined objections and issued concurrent findings. On the question of valuer independence, the Court applied the legal standard that bias must be demonstrably real and found no real danger of bias, noting independent affirmation of the valuation by unrelated agencies and compliance with accounting certification requirements.Conclusion: Against the appellants. The Court held that there was no procedural infirmity or demonstrable bias that vitiated the reduction of share capital or justified interference.Issue (ii): Whether the valuation and the application of DLOM in fixing the exit price were unreasonable or perverse so as to warrant judicial interference under Section 423 of the Companies Act, 2013.Analysis: The Court considered statutory scheme, applicable accounting and valuation standards (including Ind AS 113 and ICAI valuation guidance), precedent on DLOM (including foreign decisions and scholarly commentary), the factual matrix of BTL (delisted, sole business being investment in a listed subsidiary, history of rights issue and prior offers), and the NCLT/NCLAT findings. The Court observed that valuation is context sensitive, that Ind AS treats fair value as market-based and permits consideration of marketability, and that ICAI standards recognise DLOM as an adjustment requiring consideration of asset characteristics. The Court applied established tests for interference: whether the scheme is unfair or inequitable, whether the valuation is egregiously wrong or perverse, and whether there is demonstrable prejudice. Having regard to prior offers, the rights issue, independent confirmations, and the NCLT/NCLAT scrutiny, the Court found the valuation rationale plausible and not so unreasonable as to offend judicial conscience.Conclusion: Against the appellants. The Court held that the application of DLOM and the resultant price were not perverse or egregiously unreasonable and did not justify setting aside the reduction.Final Conclusion: The appeals are dismissed. The Court affirmed the concurrent findings of the NCLT and the NCLAT that the reduction of share capital and the valuation methodology did not suffer from procedural invalidity or such perversity as to warrant interference under Section 423 of the Companies Act, 2013.Ratio Decidendi: Where Section 66 of the Companies Act, 2013 permits reduction of share capital without a mandatory valuation report, the Court will not interfere with a statutory reduction confirmed by the Tribunal unless the valuation or process is demonstrably unfair, perverse, or vitiated by real and present bias; adjustments for lack of marketability may be applied consistent with applicable accounting and valuation standards and judicial interference is limited to cases of egregious unreasonableness or perversity.