NCLAT uphelds NCLT’s judgement on Bharti Telecom Limited Selective Capital Reduction of Minority Shareholders

The core issue revolves around a scheme of selective and compulsory equity share capital reduction of minority public shareholders implemented by Bharti Telecom Limited (BTL). BTL, which was earlier listed company, is the holding company of Bharti Airtel Ltd (BAL), the leading telecom operator of India.

Certain minority shareholders filed the appeals challenging the:

• Minority shareholders never pursued for exit
• Validity of voting done by promoters in case of selective capital reduction
• Selective reduction applicability under section 66 of the Companies Act, 2013
• Challenging the fair valuation
  • Non-sharing of the valuation report
  • Significant downsizing of valuation for capital reduction vis-à-vis preferential allotment done just prior to capital reduction
  • Applicability for a discount for lack of marketability
  • Independency of valuer

Let us understand history & brief facts:

Bharti Telecom Limited (BTL): The Respondent No. 1 in the appeals. It was initially listed on stock exchanges, delisted, and later became a Core Investment Company primarily holding shares in Bharti Airtel Limited. The legal proceedings revolve around its scheme of capital reduction and the valuation offered to minority shareholders.

Bharti Airtel Limited (BAL): A subsidiary/associate of BTL, the Respondent No.2. BTL’s investment in BAL forms the significant majority of BTL’s assets. BAL launched an IPO and became listed.

The Appellants (Identified Shareholders): The appellants are a group of identified minority shareholders, constituting approximately 0.11% of BTL’s shareholding, who are contested this reduction before NCLAT.

BTL post 2017

We look at the BTL intention of partnering with Singtel by allotment of preferential shares and selective share capital reduction.

• January 18, 2018: This is the relevant date for a Valuation Report obtained from J C Bhalla & Co, which estimated the fair value per equity share of BTL at Rs. 310. This valuation was performed in the context of BTL’s plan to involve SingTel as a partner in their telecom business and likely for the allotment of preferential shares to SingTel.
• June 19, 2018: BTL board of directors proposed a scheme of capital reduction of selected minority shareholders only.
• 2018: A petition related to capital reduction (C.P. (IB) No. 167/Chd/Hry/2018) is filed with the National Company Law Tribunal, Chandigarh Bench, Chandigarh (‘Tribunal’). This scheme involved offering reduction of shares held by the minority shareholders at a price of Rs. 163.25 per share, based on a valuation by Ernst & Young Merchant Banking Services Private Limited on 31^st May, 2018. The calculated effective price per share of Rs. 196.80 was arrived at after applying a 25% Discount for Lack of Marketability (DLOM) and deducting Dividend Distribution Tax (DDT).
• As per order passed on September 27, 2019, the NCLT, Chandigarh, considers and ultimately rejects the appeals filed by the minority shareholders. The NCLT confirms that the valuation method and the application of DLOM by Ernst & Young were permissible and not ex facie unreasonable.

Hon’ble NCLAT Findings:

Hon’ble NCLAT dealt with following issues in precise manner:

• Whether the reduction of capital by the Respondent No. 1/ BTL was in accordance with Section 66 of the Companies Act, 2013
• Whether selective capital reduction was permissible in terms of Section 66(1)(b)(ii) of the Companies Act, 2013.
• Whether the Appellants minority shareholders could have been compelled to be ousted
• Whether valuation of the shares carried out by E&Y @ Rs. 196.80 was correct and in accordance with law & other valuation related issues
• Whether SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 (“ICDR Regulations, 2009”) were applicable in the present case

Reduction u/s 66:

Based on various past decisions, the shareholders of the company are true owners and understand what is in interest of the company as well as owners (shareholders) and therefore shareholders have exclusive jurisdiction to decide on the issue of capital reduction in any manner including selective capital reduction and if so, in what manner. There are no conditions attached to the terms “in any manner” as stipulated under Section 66 of the Companies Act, 2013.

In the Companies Act, 2013, certain protections are given to minority shareholders, but no vested rights have been conferred on the minority shareholders for their continuation as shareholders of the company. Consequently, minority shareholders can be ousted from shareholding if a special resolution is passed by the majority of the equity shareholders.

In this specific case, a special resolution was passed by 99.92% of voting shares, which the Tribunal noted meant the conditions for ousting the minority were met. In summary, while the Appellants argued they were unwilling and felt compelled to exit, the Respondent and the Appellate Tribunal viewed the selective capital reduction as a lawful mechanism under Section 66 of the Companies Act, 2013 The Appellate Tribunal explicitly found that minority shareholders do not have a vested right to continue as shareholders and can be compelled to be ousted if a special resolution for capital reduction is passed by the majority.

Valuations Angle

• Validation of the Valuation: NCLAT found that the valuation carried out by E&Y at Rs. 196.80 per share was correct and in accordance with law and established valuation practices
• Acceptance of DLOM: NCLAT noted that the independent valuer provided detailed reasons for applying the DLOM and found it particularly important for valuing non-listed companies to reflect reduced marketability. Thus, accepted the 25% DLOM used.
• Rejection of Control Premium: The question of a control premium did not arise as there was no change in control of the Respondent No. 1 pursuant to the capital reduction.
• Valuation Distinct from Preferential Allotment: The considerations for raising resources through preferential allotment were different from those for providing an exit to minority shareholders with unlisted shares. They found the situations could not be compared.

In essence, based on various case laws, Hon’ble NCLAT clearly demonstrated that the valuation is subject of valuers and the same could not be challenged merely on account of different valuation report, different methods, etc unless there is gross unfairness in determination of fair value for the shares.

Final Findings:

• Reduction of capital by the Respondent No. 1/ BTL was in accordance Section 66 Companies Act, 2013.
• Selective capital reduction was permissible in terms of Section 66(1)(b)(ii) of the Companies Act, 2013.
• The Appellants minority shareholders could have been compelled to be ousted from the equity holding by passing resolution by majority of shareholders despite unwillingness of the minority shareholders.
•  The valuation of the shares carried out by E&Y @ Rs. 196.80 was correct and in accordance with law along with establish valuation practices.
•  The valuation done by E&Y Merchant Banking Division was Independent. (vi) The SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 (“ICDR Regulations, 2009”) were not applicable in the present case.
• 25% Discount for Liquidity of Marketability (DLOM) was permitted and justifiable in determining the valuation for the purpose of offering the minority shareholders
• The minority shareholders who supported the Respondent company right from inception were not entitled to receive “Control Premium” instead of “DLOM”.
• The Respondent No. 1/ BTL did not violate Section 102 of the Companies Act, 2013 and therefore making the special resolution passed for the approval of the scheme of reduction of share capital was valid.

Our Observations

The learned appellate tribunal’s observation on Sec 66 of the Companies Act 2013 is that it allows capital reduction in any manner. Thus, selective capital reduction is in accordance with the law. It also means dissenting shareholders’ shares also must get cancelled.

In our humble opinion, if that is the interpretation of law, the permanent exit valuation should be such that it compensates loss of ownership and benefits derived from the same forever. In the present case, minority dissenting shareholders were holding shares for decades. Even after delisting they participated in right issue. To provide fair price to minority shareholders stating that there is no control premium and valuation should be discounted for lack of liquidity does not seem to be fair to minority shareholders. Especially when BTL is a holding company of one of the largest telecom company in India and on consolidation basis earning per share is quite high.

In short, such cases the law should provide different method of valuation and so that minority shareholders are compensated.