Introduction
While capital reduction as part of corporate restructuring is not a novel concept, it has increasingly found center stage in Indian corporate jurisprudence. The recent case of Shirish Vinod Shah (HUF) v. Bharti Telecom Limited[1] (‘BTL Case’) offers a pivotal reference point for understanding the legality and operational contours of capital restructuring by way of selective capital reduction under Section 66 of the Companies Act, 2013 (‘Act’). The BTL Case marks the first comprehensive appellate-level pronouncement on selective capital reduction and establishes both procedural and substantive benchmarks for how companies should navigate capital reduction process, particularly when they involve the exclusion of specific shareholders.
Statutory framework governing capital reduction
Section 66 of the Act empowers a company, by passing a special resolution and with confirmation from the National Company Law Tribunal (‘NCLT’), to reduce its share capital ‘in any manner’. Specifically, Section 66(1)(b)(ii) allows a company to ‘pay off any paid-up share capital which is in excess of the wants of the company’. Therefore, in case of capital reduction when the shares are fully paid up, the cancellation of the same requires payment on the part of the company to the shareholders. This wide language provides companies with flexible mechanisms for capital restructuring.
The procedural aspect of capital reduction under Section 66 is set out below:
As Section 66 permits capital reduction ‘in any manner’, a recurring question in the context of capital reduction is whether such reduction must be carried out in a proportionate manner across all shareholders or whether it can be ‘selective’, i.e., targeting only a specific class. In other words, can a company legally extinguish or reduce the rights of only some shareholders, including a complete buy-out of minority shareholders, without affecting others?
Answering in affirmative, the BTL Case has upheld a company’s right to selectively reduce capital provided that such reduction is fair, non-oppressive, and procedurally compliant.
BTL Case
Facts: Bharti Telecom Limited (‘BTL’), a company formerly listed on Indian stock exchanges, was delisted in the year 2000. After such delisting, BTL’s public shareholders held a combined minority stake of 1.09%. In 2018, BTL proposed a scheme and passed a special resolution for selective capital reduction under Section 66 of the Act in order to cancel and extinguish all the equity shares held by such minority shareholders at INR 196.80 per share (based on a valuation report by Ernst & Young), thereby reducing its share capital. The majority promoter shareholders (holding ~ 99.9% of the equity capital of BTL) approved the scheme, however, the minority public shareholders (holding ~1.09% of the equity capital of BTL) objected to such scheme, primarily on the grounds that the valuation applied a 25% discount to the fair market value of the shares.
Contentions: One of the main arguments raised by the objecting minority public shareholders was that the discount that was applied on the value of shares was unfair and violated principles of natural justice and corporate law. It was argued that the 25% ‘discount for lack of marketability’ was improperly applied.
BTL defended the valuation, stating that the discount reflected the shares’ lack of marketability and was in line with generally accepted accounting principles and was carried out by a SEBI-registered Category-I Merchant Banker (i.e. Ernst & Young).
Held: The National Company Law Appellate Tribunal upheld the scheme, emphasizing the following: (i) the overwhelming majority approval (99.9%) indicated shareholder support; (ii) all procedural aspects of capital reduction under Section 66 were followed by BTL; (iii) the discount was justified due to the shares being unlisted and illiquid; and (iv) there was no evidence of oppression or mismanagement.
The BTL Case ruling highlights the strong deference that authorities give to corporate autonomy. The underlying philosophy is that the shareholders (especially a super-majority) are best placed to determine the company’s direction and commercial objectives. As such, BTL’s right to reconfigure its capital structure was upheld as a legitimate corporate objective.
Discounted valuation:
Valuation is a cornerstone of corporate finance, particularly when companies undertake corporate restructuring actions. While valuation itself is an intricate process involving financial, market-based, and asset-based approaches, contentions often arise on the aspect of private companies applying a ‘discounted valuation’ on their shares on the basis of certain parameters.
Discounted valuation refers to the practice of applying a discount to the value of shares, often justified by the illiquid or non-marketable nature of shares in private companies. Unlike listed shares that have a readily discoverable market price, unlisted shares require more nuanced valuation mechanisms, which may incorporate discounts for lack of marketability in minority holdings.
Such discounts are common in financial and accounting practices, and are often supported by Indian Accounting Standards (Ind AS), particularly Ind AS 113, which allows for the inclusion of non-marketability as a factor in determining fair value.
Judicial approach towards selective capital reduction and discounted valuation
Indian courts and tribunals have generally upheld selective capital reductions, even when they are carried out on discounted valuations. As long as there is no fraud, misrepresentation, or oppression, courts typically hesitate to overrule such decisions of private companies.
- Miheer H. Mafatlal v. Mafatlal Industries Ltd.[2] (1996)
The Supreme Court held that valuation is a matter of expert judgment and courts should not interfere unless the method used is patently unfair, arbitrary, or unlawful. While this case did not involve a capital reduction, it is a seminal ruling on valuation methodologies.
- In Re: Reckitt Benckiser (India) Ltd.[3] (2005)
The Delhi High Court (‘DHC’) upheld a scheme for selective reduction of share capital involving only minority public shareholders. It held that capital reduction is a matter of domestic concern, and the decision of the majority will prevail unless there is demonstrable unfairness or fraud. Further, the DHC recognized the company’s right to extinguish some shares without uniformly affecting all shareholders. The DHC observed that “A company limited by shares is permitted to reduce its capital in any manner, including selectively, if the reduction is fair and equitable.”
- Sandvik Asia Ltd. v. Bharat Kumar Padamsi (2009)[4]
The Bombay High Court (‘BHC’) approved a scheme involving buying out of minority shareholders and making the company wholly owned by the promoters. The BHC held that if the non-promoter shareholders are paid fair value, the court would not interfere. The valuation was challenged as being overly discounted, however, BHC found it to be based on a recognized accounting method and conducted by experts.
- Chandra Bhan Gandhi v. Reckitt Benckiser (India) Pvt. Ltd (2012)[5]
The DHC held that there is no legal requirement to treat all shareholders equally in a capital reduction. It upheld the legality of disproportionate and selective capital reduction, affirming that courts will not interfere unless the transaction is unconscionable, unfair, or unlawful.
- Druva Data Solutions Private Limited (2020)[6]
The NCLT (Bombay branch) approved a zero-consideration capital reduction where shares held by minority shareholders were extinguished without payment. The Regional Director objected on fairness grounds, however the NCLT held that majority rule and compliance with Section 66 suffices, even in the absence of compensation.
The above cases have built a strong line of jurisprudence in favour of selective capital reduction . It is abundantly clear that the authorities will not micromanage valuation decisions unless there is a glaring injustice or breach of fiduciary duty.
Analysis
The BTL Case reinforces the legal permissibility of selective capital reduction but also exposes certain systemic limitations in India’s corporate law framework when it comes to minority protection, notably:
- No separate class vote for minority: Unlike schemes of compromise or arrangement under Sections 230–232 of the Act (which require approval by each class of stakeholders), Section 66 imposes no requirement for separate class votes. As a result, a special resolution passed by a dominant majority can effectively eliminate minority shareholders without their meaningful participation or consent.
- Limited disclosure requirements: While statutory inspection rights were complied with in the BTL Case, key documents like the valuation report and fairness opinion were not annexed to the shareholder notice. Although made available for inspection, such passive disclosure dilutes the ability of minority shareholders to make informed decisions. A more robust regulatory framework could require active, accessible, and summarized disclosures for increased transparency, akin to SEBI standards in takeover or delisting regimes.
These inherent issues mean that even legally sound transactions can lead to outcomes that seem unfair from a minority protection standpoint.
Conclusion
The BTL Case reinforces the legal validity and robustness of Section 66 as a corporate restructuring tool. It clarifies that selective capital reduction, far from being exceptional or controversial, is legally sanctioned and judicially supported, provided it conforms to due process and fair valuation. The BTL Case, thus, is a clear assertion of corporate autonomy.
It is also pertinent to note that until recently, buybacks were regarded as one of the most efficient mechanisms for reducing a company’s capital base and re-distributing accumulated profits among the shareholders. However, due to changes in taxation law post amendments introduced by the Finance Act, 2024, the attractiveness of buybacks has diminished significantly. Previously, buybacks offered a relatively tax-efficient structure due to abolition of Dividend Distribution Tax (DDT) in 2020 as tax was levied on the company itself[7] rather than on shareholders. After 2024, the entire amount received by shareholders from a buyback is treated as ‘dividend income’ and is therefore taxable in the hands of shareholders at relevant applicable income tax slab rates, and no deduction is permitted for the original purchase price of the shares. This change eliminates the capital gains treatment for shareholders and substantially increases the effective tax burden, particularly for high-net-worth individuals and resident promoters.
In this context, capital reduction under Section 66 of the Act has emerged as a more tax efficient and legally flexible alternative. Unlike buybacks, the income of shareholders under a capital reduction is assessed under the capital gains framework which allows shareholders to deduct their acquisition cost and potentially reduce tax outgo. Moreover, the broad and enabling language of Section 66 supports a diverse range of restructuring objectives-including exit of dissenting shareholders, consolidation of holdings, simplification of capital base, and resolution of shareholder disputes, thereby making it more versatile than the strictly regulated buyback regime under Sections 68 to 70 of the Act.
Written by Nidhi Arora (Partner) and Shagun Taparia (Associate)
[1] Company Appeal (AT) No. 273 of 2019
[2] (1996) 87 Comp Cas 792 (SC)
[3] 122(2005)DLT612
[4] (2009) 92 SCL 272 (Bom)
[5] (2012) 129 DRJ 93 (DB)
[6] CP 3268/MB-I/2018
[7] Section 115QA, Income Tax Act, 1961
