The courts in India have time and again reaffirmed that selective capital reduction is a possibility. However, they continue to be debated and challenged by the shareholders who are impacted by it.

Selective capital reduction is a process where the shares of some of the shareholders of a company are cancelled / extinguished by the company while the shares held by the other shareholders remain unaffected. This process is different from that of a voluntary buy-back where the company purchases back the shares issued by it to the shareholders on a proportionate basis. The shareholders whose shares are extinguished in a capital reduction tend to see this as a forced exit. This forced exit is what is objected to, and the aggrieved shareholders approach the NCLT with innovative objections surrounding the aspect of fairness on the part of the Companies.

Background

One of the companies that faced the heat from its shareholders was Bharti Telecom Limited (“BTL”), whose shares were delisted from the stock exchanges between 1999 and 2000. After a long time in 2018, BTL decided to extinguish 1.09% of its total shareholding belonging to 4,942 individual shareholders (“Identified Shareholders”). When the matter was under scrutiny by the NCLT bench in Chandigarh, some of these Identified Shareholders chose to object to the grant of approval by the NCLT. The NCLT nevertheless granted the approval to BTL[1] and BTL promptly extinguished the shares by informing the Registrar of Companies. The shareholders took the matter to appeal before the National Company Law Appellate Tribunal (“NCLAT”), which has now passed a judgment on the matter[2], making it a valuable precedent for more than one reason. To begin with, NCLAT has not only re-established the legitimacy of selective reduction of share capital as a mechanism for investor exit, but also delivered some guidance on the process involved in capital reduction.

Grounds of challenge and the issues framed by NCLAT

The grounds of appeal by the shareholders were as follows:

  • The scheme of share capital reduction lacked transparency;
  • The act of selective capital reduction is unfair, unjustified, coercive, discriminatory, and illegal;
  • Since the majority shareholders held 98.91% of the shares of the Company, the votes of the public minority shareholders were rather rendered meaningless;
  • There was a discrepancy in the price at which the shares were offered (valuation) to the Identified Shareholders by way of capital reduction in comparison to the price at which the same was offered only a few months ago to the SingTel Group.

The NCLAT, after analysing the above grounds raised by the Appellants, identified several issues and sub-issues for determination. These covered issues pertaining to the validity of the selective capital reduction process followed by the Company, the fairness in the valuation and the consideration of the Discount for Lack of Mobility for arriving at the price, the transparency while taking the shareholder approval for the capital reduction.

Findings

The validity of Selective Capital Reduction :  The NCLAT had no difficulty in arriving at the conclusion that the selective reduction of share capital undertaken by BTL was in accordance with the provisions of Section 66 of the Companies Act, 2013 and that the statutory procedure provided therein was duly complied with.  The NCLAT also affirmed that the phrase “in any manner” as used under Section 66 is inclusive in nature and does not restrict the methods or modes of reduction and includes selective capital reduction which is a domestic and internal decision of the Company. With over 99% of the shareholders including majority of the minority shareholders approving the scheme, the NCLAT followed a plethora of judgments to uphold the prerogative of the majority shareholders to determine the mode and manner of capital reduction. Drawing a parallel with the commercial wisdom of the Committee of Creditors under the Insolvency and Bankruptcy Code, the Tribunal observed that shareholders, as the true owners of the company, are best placed to decide what serves the company’s and their interests. As such, the decision on capital reduction lies within the exclusive domain of shareholders, with minimal scope for judicial intervention.

Forced exit of minority shareholders :  What the critical point of the judgment is its observation that the Companies Act, 2013 does not require a separate class resolution for capital reduction (unlike in a scheme of arrangement). Consequently, the unwillingness of minority shareholders alone cannot invalidate a duly passed special resolution for capital reduction, even if it results in their exit from the company. The law does not mandate that reduction must affect all shareholders equally or proportionately and that the minority shareholders do not have any vested rights for their continuation as shareholders of a company.

Valuation : On the matter of share valuation, the NCLAT clarified that valuation is inherently a matter of commercial judgment based on assumptions, prevailing market conditions, and various empirical factors relying on the judgment of the Bombay High Court in In Re: Cadbury India Limited.[3] The role of courts is limited to ensuring that the valuation process has been fair, unbiased, and conducted by an independent and competent valuer. The fact that shares were previously allotted at a higher price does not by itself render the current valuation invalid. The NCLAT also observed that the shares of Bharti Airtel Ltd. (whose stock prices had a strong influence on the BTL share prices) was at a much higher price as opposed to when the capital reduction was approved and that this justified the difference in valuation. The Appellants’ challenge to the 25% Discount for Lack of Mobility (“DLOM”) while arriving at the offer price was also turned down by the NCLAT while clarifying that DLOM is appropriate for unlisted companies due to illiquidity of its shares.

Fairness in the process : In so far as the fairness of the process followed by BTL, it was observed by the NCLAT that the valuation report was not required to be shared with the shareholders along with the explanatory statement in terms of Section 102 of the Companies Act and the provision only mandated BTL to allow for inspection of the said documents. The NCLAT also endorsed the NCLT’s view that virtual voting has enhanced participation, and this aligned with modern practices, dismissing the need for physical meetings.

Analysis

The NCLAT has reiterated that the ultimate authority in such matters lies with the shareholders, who, as true owners of the company, are deemed best positioned to act in the interest of the company and its members, provided such decisions are made within the legal framework.

The judgment reinforces the legality of selective capital reduction under Indian law, and affirms the discretion of the companies in choosing the valuation and voting mechanisms. The judgment gives a glimpse of how a handful of minority shareholders can stall the majority will of the company through allegations of lack of fairness and impropriety, while in reality, there would be no basis for such arguments in law. However, since fairness and transparency in activities such as capital reduction and scheme of arrangements are necessary as they also involve approval from the majority shareholders, the tribunals cannot take such allegations at face value and will necessarily have to deal with them.

Although objections, such as the objection to the application of DLOM and non-supply of valuation reports along with explanatory statements, are common objections that are being raised in most capital reduction matters, findings of binding nature to address these issues are not in abundance. This is partly the reason why the objectors continue to raise them. Hopefully, the detailed findings and observations with respect to the different allegations and objections raised through 14 separate appeals in this judgment would put a quietus to such issues in the future or at least help NCLTs to decide and dispose of capital reduction petitions at a much faster pace.

The judgment would also help in overturning narrow interpretations being given to selective capital reduction by NLCTs such as the one adopted by the NCLT, Kolkata, in the Philips case[4], which held that capital reduction is permissible only under the specific scenarios listed in Section 66(1), thereby overlooking the inclusive and non-exhaustive nature of the statutory language.

Conclusion

The judgment sets a positive tone to state that companies can use capital reduction confidently, knowing that the law supports them against minority handouts. For investors, the lesson is that “your say grows with your stake”, whereas for those with smaller holdings, it is about the need to weigh the risks of being outvoted.

The case serves as a critical reference for companies and shareholders navigating capital restructuring in an ever-evolving corporate landscape.

[1] Order dated 27.09.2019 passed by the NCLT, Chandigarh Bench, in CA Nos. 226/2019 & 553/2018 in C.P No. 167/Chd/Hry/2018

[2] Judgment dated 03.04.2025 in Comp. Appeal (AT) 273 of 2019

[3] (2014) SCC OnLine Bom 4934

[4] CP/312(KB)2023

 

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