TaxTMI 
TaxTMI 
2026 (3) TMI 476
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...., Adv., Mr. Ankur Singhal, Adv., Ms. Pooja Singh, Adv., Mr. B P Singh, Adv., Mr. Soumya Dutta, AOR Mr. Percival Billimoria, Sr. Adv., Mr. Khowaja Siddiqui, Adv., Mr. Arvind Gupta, AOR Mr. Kshitij Arora, Adv., Ms. Rachita Sood, Adv., Ms. Priyamvada Paneru, Adv., Mr. Rahul Bhaskar, Adv., JUDGMENT PER K. VINOD CHANDRAN, J. 1. The appellants, investors in a minority, cry foul on the allegation of their being arbitrarily disgorged of their shareholdings and eased out of the 1st respondent company, (BTL for brevity) in a grossly unfair manner, making a sham of an evaluation fixing the share price at an unreasonably low value. Shorn of the details, the 1st respondent, a closely held company having 1.09% of its shareholding with individuals, decided to reduce its share capital under Section 66 of the Companies Act 2013 ['the Act of 2013'] by cancelling 28,457,840 equity shares held by the identified minority shareholders by paying an amount of Rs. 163.25/- per equity share of Rs. 10/- each. The resolution was passed by a Special Resolution with a majority of more than 99.90%, the sanction for which was sought before the National Company Law Tribunal (the NCLT hereinafter). The NCL....
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....reholders having asked for a copy of the valuation and fairness reports, the same were not supplied. There are serious procedural infractions and inadequate, misleading disclosures, in violation of the mandate of Section 102 of the Act of 2013, which vitiates the entire process of reduction of shareholding. On a summing up of the procedural infractions, it is urged that the explanatory note of the General Meeting is a 'tricky notice' for : (i) it does not have a summary of or the valuation report itself, (ii) non-disclosure of the methodology adopted in valuation; reference not being made to the share value of Bharti Airtel Limited (BAL for brevity), a subsidiary company the shareholding in which is the only business of the first respondent company and (iii) the valuation having been made by an interested entity. The 'tricky notice' disabled an informed decision by the individual shareholders, is the contention, fortified with decisions. This encompasses the challenge to the manner in which the procedure was carried out. 4. Insofar as the methodology is concerned, it is argued that the BTL, earlier listed in the Stock Exchanges was delisted between 199....
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.... in which circumstance there should have been a higher standard of fairness and transparency applied. 6. The reference to market value is no basis since the investors had remained in the company for long, admittedly even without payment of dividends. A fair value for their exit from the company cannot be equated with the fair market value. The several offers made for buy-back and purchase at a higher value and the value at which SingTel purchased shares in the BTL, almost simultaneous to the reduction in share capital would definitely regulate valuation under Section 66. Reference is also made to Section 68 and Section 230 of the Act of 2013, respectively of a voluntary exit and one based on compromise which procedure ought to have been applied to bring in the standard of fairness even under Section 66, which is an involuntary purchase made by the majority in oppression of the minority shareholders; a forced exit. The material defect is the low value of the share fixed for the exit of the minority shareholders. Sri. Parmeshwar while summing up cautions that we would be laying down the law with respect to edging out of minority shareholders, which necessarily has to satisfy the j....
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....ear question of law raised, which is absent in the present case. Every legal requirement has been complied with for the reduction of share capital under Section 66 of the Act of 2013 and there is no violation complained of but for a mere allegation of prejudice which the appellants have failed to substantiate as real and compelling, enabling this Court to interfere. Valuation is dependent on multiple factors and not possible of mathematical certainty. It is urged that in the formation of companies, the shareholders come together and enter into a contract or charter as revealed from the Articles of Association to which each of them are bound. The decisions are of the majority of such shareholders, failing which there would be mayhem and no corporate entity would be able to perform its functions and arrive at its collective goal of realizing its objectives. In the present case, it is pointed out that the appellants, eleven in number and those before the NCLAT, thirty-five in number do not together satisfy the definition of a minority as coming out from Section 244 of the Act of 2013. Neither do they have the number of shareholders, nor do their total value of shareholding satisfy the....
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....ther agencies having no connection with BTL or the Internal Auditor as was sought for by the Custodian who is a party in Civil Appeal No. 2864 of 2021. The valuation and fairness report being on the same date only denotes the day of issuance and is no reflection of the time taken for evaluation. 12. On facts it is pointed out that BTL having been delisted from all stock exchanges made a buy-back offer of Rs. 96/- per share in the year 2001, which was the only buy-back offered by the company itself. One of the promoters of BTL, Bharti Overseas Trading Company had offered Rs. 400/- per share in May 2006. But for that there is nothing substantial brought out from the various documents produced as to a clear value of the share of BTL, whose only investment was in BAL. In 2016, there was a rights issue which increased the share base exponentially causing significant lowering of the monetary value of the shares. This was followed up with a preferential allotment of shares at the rate of Rs. 310/- per share in favour of a Strategic Long-Term Promoter, SingTel, so as to infuse funds into the company. The share value for the said transaction was on the basis of the prevailing market pric....
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....solution and 76.35% of the identified shareholders present and voting also voted in favour of the special resolution approving the share value of Rs. 196.80/-. No Objection Certificates were also received from all the creditors and hence, the petition under Section 66 of the Act seeking confirmation of the scheme of capital reduction before the NCLT. 14. The NCLT as is the mandate, called for a report from the Regional Director of the Department who confirmed compliance of the procedure prescribed under the Act for reduction of capital. The NCLT having confirmed the capital reduction after looking at the objections filed by public shareholders, the NCLAT has also approved the same. There is hence no scope for interference, especially since no prejudice is shown. It is pointed out that the capital reduction was proceeded with immediately after the rights issue which put the identified shareholders in a position enhancing their shareholding exponentially, especially since the rights issue offered 115 shares at par for Rs. 10/-, as against every single share held by an investor. Hence, the capital reduction after the rights issue put the investors in a very favorable position and t....
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....s constituted by the President out of which one shall be a Judicial Member and another a Technical Member. The first proviso empowered the President of the Tribunal by general or special order to permit Members to sit single and exercise the jurisdictional powers and authorities of the Tribunal with respect to such class of cases or matters with respect to a class of cases, as specified. The above provision is no more applicable since the Companies Act, 1956 has been replaced by the Companies Act, 2013. Sections 418A and 419 of the new statute speak of Benches of the NCLAT and that of the NCLT. The proviso to sub-section (1) of Section 418A requires a Bench of the NCLAT to have at least one Judicial Member and one Technical Member and the proviso to Section 419(3) mandates a similar composition in constitution of Benches of two Members. Section 419 further provides that the Tribunal shall exercise the powers in respect of such class of cases or such matters pertaining to a class of cases as the President by general or special order specifies, by a Bench consisting of a Single Judicial Member. 18. The provisions leading to the constitution of the NCLT and NCLAT were again challen....
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....special law contrasted with the ordinary law of the land, Vivian Bose J. in paragraph 87; Anwar Ali Sarkar opined that the test is not merely academic, for equality should be tested on the collective conscience of a sovereign democratic republic as to whether substantially equal treatment would be found by 'men of resolute minds and unbiased views'. Whether these men would find it right or proper in a democracy of the kind we have proclaimed ourselves, is the true test. We respectfully adopt the definition as applicable to adjudications in every sphere and branch involving interpretation and resolution of disputes, complex and simple, both. All adjudicators first and foremost are or should be reasonable persons having resolute minds and unbiased views. Though judicial experience is valuable, administrative officers and technocrats; to whom judicious consideration is not alien in their long tenures of service dealing also with quasi-judicial matters, statutory appeals and the like, when permitted by the legislature to be included as Tribunal Members to aid, assist and promote a holistic adjudication of disputes and interpretation of laws, having administrative and technical ramifica....
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....have the consequence of the shareholding being converted to money which would be held by the Custodian, the disbursement and adjustment of which would depend on further orders passed by this Court in the pending appeal. Reference is also made to Annexure-22 in Civil Appeal No. 2864 of 2021 to contend that the undertaking before the Custodian to disclose the Special Courts order before the NCLT was not complied with. The Special Courts order or even this Court's as we perceive it has no bearing on the share capital reduction of BTL. What assumes relevance is the custody of certain shares being with the Custodian, in which circumstance the proceeds with respect to that, on reduction of share capital, will have to be submitted to the Custodian. It does not have any significance to the reduction of share capital or the proceedings before the NCLT. The Manner; The procedural infraction: 23. Under this head is raised issues of; (i) a request from the shareholders, though disclosed in the notice having not been indicated in the Board Resolution; (ii) the 'tricky notice' issued insofar as the elements constituting valuation having not been disclosed, especially the ....
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....sparent manner. The observations in the notice though not a part of the resolution would have weighed with the Board of Directors in arriving at a decision for reduction of capital by purchase of the shares held by the identified investors, members of the public. 25. The further contention is with respect to a 'tricky notice' which is argued on the basis of reliance placed on various decisions of the High Courts and this Court relying on Baillie v. Oriental Telephone and Electric Co. Ltd. [1915] 1 Ch 503. We would in that circumstance, look at the decision from the source, which coined the term 'tricky notice' and in that context a bit of the history of corporate law would be apposite. Foss v. Harbottle 67 E.R. 189 is a leading precedent in corporate law which brought in the principle of 'proper plaintiff rule' wherein the alleged wrongs against a company had to be agitated by the company itself. There were exceptions, subsequently carved out, by judicial precedents, sanctioning an individual action in the event of (i) ultra vires actions, (ii) a fraud on the minority, (iii) an illegal action by the majority and (iv) a 'tricky notice' without ....
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....a 'tricky notice'. 28. LIC v. Escorts Ltd and Others (1986) 1 SCC 264 is an authority for the proposition that a shareholder calling an extraordinary general meeting of the company is not bound to disclose its reasons as is incumbent on the management so to do under Section 173(2) of the Companies Act, 1956. Claude-Lila Parulekar (SMT.) v. Sakal Papers (P) Ltd. and Others (2005) 11 SCC 73 dealt with transfer of shares denying the right of pre-emption to the existing shareholders, the appellant therein. The decision to raise the issued capital of the company and to allot the shares at par, to any person whether a member of the company or not was to be ratified by a General Body Meeting. The notice issued subsequently for an Annual General Meeting contained the details of ordinary and special business but no indication whatsoever of the increase in the share capital and allotment of shares. It was argued by the respondents that after the notice of AGM, the Ministry of Finance had given notice extending the validity of a sanction for a foreign exchange loan, clarifying that no further extension would be granted, based on which the foreign financier advised the company to increase i....
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....share capital by sub-section (1)(c) requires a valuation report from a registered valuer, which in that circumstance would have to be enclosed with the notice to the existing shareholders. Likewise, Section 230 of the Act of 2013 under Chapter XV deals with compromise, arrangement and amalgamation with creditors and members. When a compromise or arrangement is made with the creditors or the members, the provision speaks of two motions before the Tribunal, one to convene a meeting of the creditors or a class of creditors or members or a class of members to be held and conducted in such manner as the Tribunal directs. In the first motion made before the Tribunal, as is evident from sub-section (2)(v), a valuation report in respect of the shares and the property and all assets, tangible and intangible, movable and immovable of the company by a registered valuer is required to be annexed. If the meeting sanctions the resolution by 3/4th majority, then again the compromise or arrangement has to be sanctioned by the Tribunal by an order, for which a second motion is stipulated by sub-section (6). 31. An amalgamation or merger as contemplated in Section 232 also stipulates a report of ....
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....r the ground of a perceivable bias raised. The specific argument is that the valuer was an associate/affiliate of the internal auditor of the company. It was buttressed by reference to documents, including the valuation report displaying the same logo, having common partners/directors and the internal auditor having a controlling interest in the valuer. There was a contention by the respondent that no allegation of mala fide or bias can be raised without making the entity against whom such an allegation is raised, a party to the lis. We are not persuaded to reject the contention only on that ground since here the lis was initiated by the company for the purpose of obtaining a confirmation of the special resolution, which is strictly not adversarial in nature, but in which the stakeholders are entitled to raise their objections and argue against such confirmation. Hence, when an objection is raised as to the independence or lack of it, of a valuer, it is for the Tribunal to look into it and if satisfied implead that entity or otherwise reject it in limine; which later procedure was adopted in the present case. 34. Before us, the learned Senior Counsel appearing for the respondent....
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.... measure has to obtain a certificate from the Company's auditor that the accounting standards adopted is in conformity with that specified in Section 133, which is produced as Annexure A13 in the application under Section 66 before the NCLT produced as Annexure-A/14 in the Convenience Compilation. 36. The fairness report signed on the same day as the valuation report does not raise any apprehension of levity since the fairness is of the approach in valuation, which does not require a threadbare analysis or a reverification of the books of accounts. The figures are more than explicit and so is the method adopted as discernible by financial experts. We also reckon the contention raised by the respondent company that the date of the report indicates the day of issuance and not necessarily the time taken or the diligence exercised in arriving at the valuation or even affirming the fairness. 37. One other contention is of the reports being kept in the Registered Office not being sufficient based on Firestone Tyre & Rubber Co. vs. Synthetics and Chemicals Ltd. (1971) Comp. Cases 377 (Bom.) highlighting the difficulty and disinclination of shareholders to travel to the Registered Of....
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....tingly the Court referred to an article of Professor Douglas Moll titled "Shareholder Oppression and 'Fair Value': of Discounts, Dates and Dastardly Deeds in Close Corporation" (2004) 54 (2) Duke LJ 293, wherein the distinction between fair value and fair market value was brought out which we have read, as available on the internet. 'Fair value', as distinguished from 'fair market value', is the enterprise value; the pro-rata portion of the company's overall value as an operating business. 'Fair market value' on the other hand involves the Court valuing the minority's share by considering what a hypothetical purchaser would pay for them. Professor Moll was of the opinion that in a 'fair market value' situation, a marketability discount is applied since a hypothetical purchaser is likely to pay less for shares which lack a ready market. Professor Moll was also of the opinion that valuation is inherently contextual and buyout proceedings in the context of an oppression setting, would make the marketability discounts inappropriate. The report is an interesting read and affords insights in the context of an oppressive setting with respect to Close Corporations, in the United States of ....
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....emedy remains except that of a suit by an individual corporator in their private character, requiring protection of those rights entitled in their corporate character, then the 'claims of justice' would override procedural technicalities. It is the said principle that is enshrined in the Act of 2013 where even when a special resolution is passed the Tribunal is required to scrutinise a reduction in capital under Section 66, after hearing all the stake holders, ex debito justitiae. 42. Coming back to the present case, here the measure employed was of a reduction in capital as permitted by the statute. In Re: Reckitt Benckiser (India) Ltd. 2005 SCC Online Del 674 encapsulated the principles regulating a reduction of share capital after referring to British and American Trustee and Finance Corporation v. Couper (1894) SC 399. The broad principles distilled were that, (i) reduction of share capital is a strictly domestic concern depending on the decision of the majority, (ii) if reduction of share capital is approved by a special resolution, the majority also has the right to decide how it should be carried out, (iii) reduction of share capital can be brou....
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....ountants of India constituted under Section 3 of the Chartered Accountants Act, 1949 in consultation with and after examination of the recommendations made by the National Financial Reporting Authority, constituted under Section 132 of the Act of 2013. The Indian Accounting Standards (Ind AS) 113 provides for fair value determination as a market based measurement and not an entity specific measurement, quite contrary to the statutory scheme found in the United States as described by Professor Moll. 45. The definition of fair value as per the Ind AS 113 is 'the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date'(sic). It is required that when measuring fair value, an entity shall take into account the characteristics of the asset or liability, if market participants would take those characteristics into account when pricing the asset or liability at the measurement date. These characteristics include, not exhaustively, but as stated in the Ind AS 113, as an example, the condition and location of the asset and restrictions if any on the sale or use of the asset. Hence, the appr....
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....tability of the shares is absent, and it has to be reiterated that the company had not been paying any dividends. There were also requests made by the shareholders for an exit option as is revealed from the minutes of the AGMs. In the totality of the circumstances, the applicability of DLOM cannot be held invalid and in any event, what has to be looked at by the Tribunal in scrutinising the scheme of reduction of capital is only as to whether there was a fair measure employed which cannot be termed unreasonable or prejudicial to the individual shareholders. 47. In Re: Reckitt Benckiser (India) Ltd. held that when the matter comes to Court, the satisfaction of the Court is as to whether (i) there is an unfair or inequitable transaction and (ii) whether the creditors entitled to object to the reduction have either consented or are paid or are secured. In Re: Cadbury India Limited 2014 SCC Online Bom 4934 examined Section 100 of the Act of 1956; analogous to the purpose of Section 66, to find three requirements; (i) the Articles of Association should permit a reduction of share capital; (ii) the scheme for reduction should be approved by a special res....
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....d voting, voted in favour of the resolution. Even on a microscopic scrutiny the valuation cannot be found to be egregiously wrong especially looking at the previous offers and also the rights issue offered at par, prior to the reduction of share capital, exponentially increasing the take aways of the individual shareholders and the valuation cannot at all be said to have gone off-track, so as to make it egregiously wrong. 49. In this context, we cannot but notice that the share value now fixed by the Board and approved by the majority of the shareholders of the company which on modification by the Tribunal stands at Rs. 196.80/- for each equity share. Even taking the highest offer at Rs. 2000/- by a commodity broker as claimed by the appellants, prior to the rights issue, as of now on a further purchase of 115 shares at par, expending Rs.1150/- in the rights issue, the single share available with the identified shareholders becomes 116 at the rate of Rs. 196.80/-, which by no stretch of imagination or any standard of scrutiny adopted, can be said to be unreasonable. Arguments raised on the valuation initiated at the behest of the Custodian, is available at Annexure A-9 & A-11, b....