Haresh ShahThe Honourable Supreme Court of India addressed a challenge by minority shareholders against a reduction of share capital. Before we deep dive into the judgment for contextual here is a table outlining the timeline of Bharti Telecom Limited’s (BTL) journey, from its delisting and consolidation of Bharti Airtel Limited (BAL) shares to its capital restructuring activities.
| Date / Period | Phase | Event Description |
| July 29, 1985 | Incorporation | BTL is incorporated under the Companies Act, 1956. |
| Oct 1999 – March 2000 | Delisting | BTL is delisted from the Bombay (Oct 1999), Kolkata (Nov 1, 1999), Ludhiana (Jan 25, 2000), and Delhi (March 6, 2000) stock exchanges after promoters acquire over 90% of shares. |
| July 17, 2001 | Initial Buy-back Offer | BTL offers a buy-back at Rs. 96 per share. |
| Jan 2002 – Feb 18, 2002 | BAL Listing | BAL launches its IPO and is listed; BTL’s shareholding in BAL reduces to 46.4%, making BAL an associate company rather than a subsidiary. |
| May 5, 2006 | Promoter Offer | Promoter firm Bharti Overseas Trading Company offers to purchase shares from the public at Rs. 400 per share. |
| Sept 19, 2007 | Private Purchase Offer | A commodity broker offers to purchase shares at Rs. 2000 per share. |
| Jan 8, 2016 | Rights Issue | BTL issues rights (115 shares for every 1 held) specifically to raise funds to re-acquire a majority stake in BAL. |
| Nov 3, 2017 | Subsidiary Consolidation | Following market purchases funded by the rights issue, BAL officially becomes a subsidiary of BTL again. |
| Jan 18, 2018 | Strategic Valuation | Relevant date for a valuation by J. C. Bhalla & Co., estimating BTL’s fair value at Rs. 310 per share for a strategic investment. |
| May 31, 2018 | Reduction Valuation | The valuation date used by Ernst & Young (E&Y) to determine the price for the capital reduction exercise. |
| June 19, 2018 | Board Resolution | BTL Board resolves to pursue a Reduction of Share Capital under Section 66; E&Y submits a valuation fixing the price at Rs. 196.80 (inclusive of tax). |
| July 26, 2018 | Special Resolution | Shareholders approve the selective capital reduction with a 99.90% majority. |
| Jan 15, 2019 | RBI Registration | BTL is registered with the RBI as a Core Investment Company (CIC-ND-SI). |
| March 12, 2019 | Preferential Allotment | BTL executes a preferential allotment of shares (approx. 1.73%) to SingTel at Rs. 310 per share to repay company debts. |
| Sept 27, 2019 | NCLT Order | The Tribunal approves the capital reduction scheme, confirming the exit price for minority shareholders. |
| Apr 4, 2025* | NCLAT Order | NCLAT uphelds the NCLT order. |
| March 10, 2026 | Final Adjudication | The Supreme Court dismisses appeals from minority shareholders, upholding the capital reduction and the 25% “Discount for Lack of Marketability” applied to the valuation (based on conversation history). |
*The NCLAT judgement was covered in our May 2025 issue.
We now deep dive into the honorable Supreme Court’s Judgement
Issues
The core issues before the Court included:
- Validity of the Share Capital Reduction: Whether the reduction of share capital under Section 66 of the Companies Act 2013 was fair, transparent, and legally sound?
- Procedural Integrity (“The Manner”): Whether the notice for the general meeting was a “tricky notice” due to the non-supply of valuation reports and alleged misleading disclosures?
- Valuation Methodology (“The Method”): Whether the application of the Discount for Lack of Marketability (DLOM) was arbitrary and whether the share price was fixed at an unconscionably low value?
- Independence of Valuer: Whether the valuer was biased due to an alleged inextricable link with the company’s internal auditor?
- Jurisdictional Defect: Whether the composition of the National Company Law Appellate Tribunal (NCLAT) Bench—comprising two Technical Members and one Judicial Member—was illegal?
Facts
- Bharti Telecom Limited (BTL), a closely held company with only 1.09% of its shareholding held by individuals, decided to reduce its share capital under Section 66 of the Act of 2013
- The proposal involved cancelling over twenty-eight million equity shares held by identified minority shareholders.
- BTL initially proposed a price of Rs. 163.25 per share, but the NCLT directed a higher payment of Rs. 196.80 per share by removing an arbitrary tax deduction.
- A Special Resolution for the capital reduction was passed with a majority of more than 99.90%.
- The appellants, a group of minority investors, alleged they were being forcibly disgorged of their shares in an unfair manner.
- BTL’s primary business was investment in its subsidiary, Bharti Airtel Limited (BAL); while BAL was listed, BTL had been delisted since 1999-2000 and paid no dividends for years.
- In 2016, BTL had conducted a rights issue offering 115 shares for every single share held, which significantly increased the total volume of shares held by the appellants before the capital reduction.
Analysis and Arguments
[su_pullquote align=”right”]“Supreme Court held that section 66 of the Companies Act, 2013 does not require mandatory obtaining or circulating of formal valuation report from an approved/registered valuer for reduction of share capital”[/su_pullquote]- NCLAT Composition: The Court found the Bench composition valid under Sections 418A and 419 of the Act of 2013, noting that a Bench of two members (one Judicial and one Technical) is the minimum requirement, and the presence of an additional Technical Member did not invalidate the unanimous decision.
- Procedural Fairness: The Court rejected the “tricky notice” argument, stating that Section 66 does not statutorily mandate enclosing a valuation report with the notice 20, 21. The reports were kept at the registered office for inspection, which the Court deemed sufficient in the modern era of ease of travel.
- Valuer Independence: The Court ruled that the internal auditor is intended to be an independent agency under the Act. The mere fact that the valuer was an affiliate of the internal auditor did not prove bias, especially since the valuation was affirmed as fair by multiple independent agencies like ICICI Securities and SBI Caps.
Valuation and DLOM:
The “three Ms” challenging the share valuation fairness, as encapsulated by the Senior Counsel for the appellants, are the Manner, the Method, and the Matter.
These counts represent the following objections:
- The Manner (The Procedure): This refers to the procedural infractions alleged by the minority shareholders. The challenge included:
- The claim that the notice for the General Meeting was a “tricky notice” because it did not include the valuation report or a summary of it and failed to disclose the methodology used.
- The allegation that the Board’s notice was misleading, as it suggested shareholders had requested an exit route when no such formal request was documented in the Board resolution.
- The hasty nature of the process, noted by the fact that the valuation report and fairness report were issued on the same date.
- The use of an interested entity (an associate of the company’s internal auditor) to conduct the valuation, which raised concerns about bias.
- The Method (The Measure): This refers to the valuation methodology employed to determine the share price. The appellants argued that:
- The use of the Discount for Lack of Marketability (DLOM) was arbitrary, without legal sanction, and contrary to accepted international norms for a “forced” exit.
- The share price of Bharti Telecom Limited (BTL) should have been fixed with direct reference to the market value of its subsidiary, Bharti Airtel Limited (BAL), since investment in BAL was BTL’s only business.
- The Matter (The Price): This refers to the actual price determined, which the appellants styled as unconscionably low. Arguments under this head included:
- The price was wholly deficient when compared to historical offers, such as Rs. Four hundred offers in 2006 or a private offer of Rs. 2,000 in 2007.
- The price (Rs. 163.25/Rs. 196.80) was significantly lower than the Rs. 310 per share paid by SingTel for a 49% stake in BTL around the same time…
- The low value was viewed as a “material defect” that resulted in the forced disgorgement of minority holdings for an unfair deal.
The court justified the 25% Discount for Lack of Marketability (DLOM) by ruling that it is a recognised, expert-driven accounting adjustment necessitated by the specific illiquid nature of Bharti Telecom Limited (BTL) shares.
The justification was based on the following key grounds:
Statutory and Professional Recognition
The court noted that the application of DLOM is not arbitrary but is supported by established legal and accounting frameworks:
- Indian Accounting Standards (Ind AS 113): These standards define “fair value” as a market-based measurement that must take into account characteristics such as restrictions on the sale of an asset.
- ICAI Valuation Standards: The court highlighted “ICAI Valuation Standard 103,” which explicitly lists DLOM as a valid adjustment based on the premise that readily marketable assets command a higher value than those that are difficult to sell.
- The “Dividend Distribution Tax” (DDT) deduction issue refers to a specific portion of the share valuation that the National Company Law Tribunal (NCLT) found to be arbitrary, leading to a significant increase in the final payout to minority shareholders.
The issue unfolded as follows:
Initial Deduction by the Company:
Bharti Telecom Limited (BTL) originally fixed the share price at Rs. 163.25 per equity share. This value was calculated after the company deducted the taxes it would have to pay (specifically Dividend Distribution Tax) from the determined fair value of the shares.
The NCLT’s Ruling:
The NCLT scrutinized this calculation and determined that deducting the company’s tax liability from the price offered to individual investors was arbitrary.
Price Adjustment:
Consequently, the NCLT directed BTL to pay the identified investors the full value without the tax deduction, which raised the price to Rs. 196.80 per equity share. BTL acceded to this order and adjusted the payout accordingly.
Reasonableness of Price:
[su_pullquote align=”right”]“Supreme Court holds that Section 66 does not mandate the circulation of formal valuation reports to shareholders”[/su_pullquote]The Court observed that the 2016 rights issue had exponentially increased the payouts for investors. For instance, one appellant who would have received Rs. Sixteen lakhs before the rights issue ended up with approximately Rs. 47.30 crores due to the increased share count. The rights issue changed the context for evaluating the “fairness” of the share price. The appellants pointed to historical offers of Rs. 2,000 per share from 2007, but the Court ruled that these were no longer relevant because the rights issue had so fundamentally altered the company’s share base.
In summary, while the per-share price might have appeared lower than historical peaks, the volume of shares gained through the 2016 rights issue ensured that investors received a “bountiful yield” and were placed in a “very favourable position” during the final capital reduction.
Rejection of the “Forced Exit” Argument
The appellants argued that DLOM should not apply in a “forced exit” scenario. However, the court ruled:
- Contextual Valuation: While some international jurisdictions (like Singapore in Kiri Industries) have declined DLOM in oppression cases, there is no universal international denouncement of the practice.
- Absence of Oppression: In this case, there was no finding of “oppressive action” by the majority, and the capital reduction was passed by a massive majority of shareholders.
The honourable court discussed the specific legal differences between Section 66 (Reduction of Share Capital) and Section 68 (Buy-back of Shares) of the Companies Act, 2013, centre on the nature of the shareholder’s exit and the procedural requirements for the company.
The primary differences identified in the judgment are as follows:
Nature of the Exit
- Section 66 (Involuntary/Forced Exit): This section involves an involuntary purchase of shares by the majority, which the court describes as a “forced exit” for the identified minority shareholders. It is a domestic corporate concern that depends on the decision of the majority to reduce capital.
- Section 68 (Voluntary/Optional Exit): In contrast, a buy-back under Section 68 is optional. It is entirely up to the individual shareholder to decide whether to accept the buy-back offer based on the price provided by the company.
Procedural Safeguards and Approvals
- Section 66 (Tribunal Confirmation Required): Because Section 66 can result in a forced exit, it is hedged with significant statutory safeguards. It requires a Special Resolution passed by the shareholders and, crucially, mandatory confirmation by the National Company Law Tribunal (NCLT). The Tribunal must also give notice to the Central Government and the Registrar of Companies to seek their opinions before sanctioning the reduction.
- Section 68 (Shareholder Choice): The sources note that Section 68 does not require the same level of judicial scrutiny (like Tribunal confirmation) because the transaction is voluntary; the shareholder is the final arbiter of whether the offer is acceptable.
Valuation Report Requirements
- Section 66: The judgment clarifies that Section 66 does not statutorily mandate a valuation report from a registered valuer. The process is considered valid if a Special Resolution is passed and the Tribunal is satisfied with the accounting treatment.
- Section 68: Similarly, Section 68 does not stipulate a valuation report, as the decision remains with the shareholder to accept or reject the offered value.
Summary of Legal Distinction
The court highlights that while both can result in an exit for shareholders, Section 66 is a majority-driven corporate action that requires judicial oversight to ensure it is not “prejudicial or unfair,” whereas Section 68 is a market-driven offer that leaves the final decision to the individual investor.
Under Section 66 of the Companies Act 2013, the reduction of share capital is considered a “strictly domestic concern” of the company, but it is hedged with several significant statutory and judicial safeguards to protect the interests of stakeholders.
The legal safeguards identified in the sources include:
Internal Corporate Approvals
- Articles of Association (AoA) Authorization: The company’s Articles must explicitly permit the reduction of share capital.
- Special Resolution: The reduction must be approved by a Special Resolution passed at a General Meeting of the company. This ensures that a super-majority (at least 75%) of the shareholders agree to the proposal.
Mandatory Judicial Scrutiny
- Tribunal Confirmation: Unlike a buy-back under Section 68, a reduction of capital under Section 66 requires mandatory confirmation by the National Company Law Tribunal (NCLT).
- Duty to Scrutinise: The Tribunal is legally required to scrutinise the scheme to ensure it is fair, just, and not unreasonable. It must be satisfied that the reduction is not against public interest and is not unfairly discriminatory or prejudicial against any class of shareholders.
- Ex Debito Justitiae: The Tribunal acts in the interest of justice, hearing all stakeholders to ensure that the majority is not “running roughshod” over minority rights.
Regulatory Oversight and Opinions
- Notice to Authorities: The Tribunal must give notice of the application to the Central Government and the Registrar of Companies (ROC).
- Right to Object: These authorities, along with the Regional Director, are entitled to offer their opinions and reports to the Tribunal regarding the company’s compliance with the prescribed procedure.
Creditor Protection
- Consent and Security: The Tribunal must be satisfied that every creditor of the company has either consented to the reduction or that their debt has been discharged, determined, or secured.
- No Objection Certificates: The company is typically required to obtain “No Objection Certificates” from its creditors before the scheme is confirmed.
Accounting and Audit Safeguards
- Compliance with Accounting Standards: Under the proviso to Section 66(3), the Tribunal cannot sanction the reduction unless the proposed accounting treatment is in conformity with the standards specified in Section 133.
- Auditor’s Certificate: The company must file a certificate from its auditor with the Tribunal, explicitly confirming that the accounting treatment is compliant with statutory standards.
Judgment
The Supreme Court rejected the appeals, upholding the concurrent findings of the NCLT and NCLAT. It concluded that the company had complied with all legal requirements of Section 66 and that the reduction was neither prejudicial nor unfair to the minority shareholders. The Court emphasised that valuation is an expert exercise and, unless it is egregiously wrong or off-track, courts should not interfere with plausible rationales provided by experts. The court found that Section 66 of the Companies Act 2013 does not restrict the use of DLOM, provided the accounting treatment is in conformity with prescribed standards.
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