Supreme Court rules on valuation report requirement for selective capital reduction

Background of the Case

In a significant judgment, the Supreme Court (hereinafter referred to as “the Court”), in the case of Pannalal Bhansali¹ (one of the public minority shareholders, hereinafter referred to as “the Appellant”), has settled several important questions relating to reduction of share capital under Section 66 of the Companies Act, 2013 (“the Act”), minority shareholder rights, valuation methodology, and the applicability of Discount for Lack of Marketability (“DLOM”) in share capital reduction schemes.

The case arose in the context of a selective capital reduction undertaken by Bharti Telecom Limited (BTL), wherein minority shareholders were to be bought out for consideration determined by the company. The challenge primarily revolved around the fairness of valuation and procedural compliance.

Facts of the Case

• BTL is an investment holding company whose primary business is holding shares in Bharti Airtel Limited (BAL), a listed telecom company.
• Over time, BTL’s shareholding in BAL fluctuated; however, pursuant to a rights issue in 2016, BTL increased its stake and BAL again became its subsidiary. This significantly altered BTL’s capital structure and shareholding base.
• BTL proposed reduction of share capital by cancelling 28,457,840 shares held by minority shareholders and compensating them at INR 163.25 per share.
• The proposal was approved by a special resolution with more than 99.90% majority.
• The company determined the share value at INR 163.25 per share based on a valuation report, applying DLOM due to unlisted status.
• A fairness opinion from an independent entity supported the valuation. The National Company Law Tribunal (NCLT), while approving the scheme, enhanced the payout to INR 196.80 per share by disallowing the deduction of Dividend Distribution Tax. BTL accepted the modification.
• 35 identified shareholders challenged the reduction and appealed before the NCLAT, which dismissed their appeals.
• Aggrieved thereafter, eleven shareholders led by the Appellant approached the Supreme Court, contending that they were unfairly forced out at an undervalued price through a flawed process.

Key Issues

1. Whether the NCLAT bench, comprised of one Judicial Member and two Technical Members, suffered from an unconstitutional composition amounting to a jurisdictional defect.
2. Whether the non-circulation of valuation and fairness reports vitiated the notice convening the General Meeting, and whether Section 66 mandates a valuation report as a condition precedent to a valid capital reduction.
3. Whether the valuation was tainted by bias, given that the valuer was an affiliate/associate of BTL’s internal auditor.
4. Whether the application of DLOM was legally sanctioned and methodologically appropriate in the context of a forced exit through capital reduction under Section 66.
5. Whether the share price of INR 196.80 per share was fair, reasonable, and not egregiously wrong, especially in comparison to historical offers and the price at which SingTel purchased shares in BTL.

Key Takeaways

1. NCLAT Bench Composition – No Jurisdictional Defect

• The Supreme Court held that Sections 418A and 419 of the Companies Act, 2013 only require at least one Judicial Member in a bench; a majority of Judicial Members is not mandated.
• The earlier Constitution Bench decision in Union of India v. Madras Bar Association² was rendered under the Companies Act, 1956 and has no direct application to benches constituted under the Companies Act, 2013.
• Technical Members, given their administrative and domain expertise, are legitimate adjudicators and cannot be treated as inferior to Judicial Members.
• Since the NCLAT bench was headed by a Judicial Member and the opinion was unanimous, no jurisdictional infirmity arose.

2. Notice Disclosure and Requirement of Valuation Report

• The Court held that Section 66 does not statutorily mandate obtaining or circulating a valuation report unlike Sections 62, 230, 232, and 236, which expressly require one.
• Accordingly, a capital reduction can be validly effected through a special resolution and NCLT confirmation alone, without any valuation report. BTL’s decision to commission one was purely a matter of prudence and good governance, not a legal obligation.
• Since valuation was not required, keeping the reports available for inspection at the registered office (rather than circulating them) did not amount to non-disclosure of “relevant material.”
• The Court held that the notice was not a “tricky notice” within the meaning of Kaye v. Croydon Tramways³ and Baillie v. Oriental Telephone⁴ since it contained full disclosure as required under Section 66, i.e., the price offered as an exit option.
• The Court also noted that sophisticated investors who chose not to visit the registered office cannot subsequently claim inadequate disclosure.

3. Valuation Bias – No Real or Demonstrable Bias Established

• The Court reaffirmed the principle from N.K. Bajpai v. Union of India⁵ that bias must be demonstrably real and present to vitiate an action. A mere probability or preponderance of probability is insufficient.
• The valuer, though an affiliate of BTL’s internal auditor, was an independent agency with global presence. The internal auditor’s independence is itself mandated under ICAI guidelines and the Companies Act.
• Importantly, the valuation was separately affirmed as fair and reasonable in a fairness report by a different, wholly unconnected agency, and further independently verified as valid by ICICI Securities and SBI Caps Securities (appointed by the Custodian).
• The Court found not even a probability of biased conduct by the internal auditor or the valuation agency.

4. DLOM – Legally Sanctioned and Methodologically Appropriate

• The Court held that the statutory scheme under Section 66 does not restrict the use of DLOM. Further, the Indian Accounting Standards (Ind AS 113) and ICAI Valuation Standard 103 expressly recognise DLOM as an accepted methodology.
• Under Ind AS 113, “fair value” is a market-based measurement and is the price in an orderly transaction between market participants explicitly incorporating the marketability characteristics of the asset.
• Since BTL was delisted and its shares had zero marketability, application of DLOM at 25% (the minimum) was appropriate and well-reasoned by the valuer.
• The Court distinguished international cases such as Singapore’s Kiri Industries Ltd. v. Senda International Capital Ltd.⁶ where DLOM was declined in court-ordered buyouts in oppression settings and held that no such oppression context existed in the present case.
• The Court clarified that the distinction between “fair value” (enterprise value) and “fair market value” under US statutes has no parallel in the Indian statutory framework under Section 66, which mandates fair value in a market-based sense.

5. Share Price – Fair, Reasonable, and Not Egregiously Wrong

• Applying the test from Cadbury India Limited⁷, the Court examined whether:
  • a fair and reasonable value was offered;
  • the majority of non-promoter shareholders voted in favour; and
  • the valuation was egregiously wrong.
• The Court reiterated that prejudice means something more than merely receiving less than what a particular shareholder desires. It requires an attempt to force a class of shareholders to divest at a rate far below what is reasonable, fair, and just, i.e., an inherently unjust outcome for an entire class. No such prejudice was found here.
• Reasonableness was tested against past open offers and transactions. Since the price of INR 196.80 per share exceeded prior offers, the burden on the Appellants to establish real prejudice, palpable bias, and demonstrable arbitrariness was exponentially high, and a burden they failed to discharge.
• The Court held that the historical offers cited by the Appellants (e.g., INR 400 per share in 2006, INR 2,000 per share in 2007) were made long before the 2016 rights issue which sharply diluted per-share value and could not be benchmarked against the current price.
• Further, the SingTel preferential allotment at INR 310 per share was on FEMA-regulated floor price basis for a strategic partnership, carrying a premium not comparable to a capital reduction exit.
• The Court reaffirmed the principle from Mihir H. Mafatlal v. Mafatlal Industries Ltd.⁸ that valuation is best left to experts, and courts should not substitute their own views unless the valuation is egregiously wrong.

Conclusion

The Court dismissed the appeals and upheld the reduction of share capital, conclusively holding that a valuation report is not a mandatory requirement under Section 66. The judgment clarifies the interplay between procedural requirements for capital reduction, the evidentiary value of valuation reports, the scope of DLOM as an accepted methodology under Indian Accounting Standards, and the limits of judicial scrutiny under Section 423 of the Companies Act, 2013.

Kretha Comments

The Hon’ble Supreme Court’s decision is a landmark clarification of the rights and remedies of minority shareholders in a share capital reduction process. The judgment decisively settles that Section 66 of the Companies Act, 2013 is a self-contained provision with its own procedural safeguards, i.e., a special resolution and Tribunal confirmation. It does not import the heightened valuation disclosure requirements applicable under other exit mechanisms such as buybacks, mergers, or squeeze-outs.

From a corporate law perspective, the ruling validates the use of DLOM for unlisted, illiquid shares in capital reduction proceedings under Indian Accounting Standards, providing much-needed certainty for companies and their valuers. It also draws a clear distinction between the Indian legal framework and the US frameworks, where statutory language or oppression settings may lead to different outcomes on DLOM.

Companies undertaking capital reduction exercises should, however, as a matter of good governance, ensure robust independent valuation, transparent disclosure, and adequate notice periods even where not strictly mandated by statute to insulate the process from procedural challenge.

1. Civil Appeal No. 7655 of 2025 ↩︎
2. (2010) 11 SCC 1 ↩︎
3. [1898] 1 Ch. 358 ↩︎
4. [1915] 1 Ch 503 ↩︎
5. (2012) 4 SCC 653 ↩︎
6. 2[2022] SGCA (I) 5 ↩︎
7. 2014 SCC Online Bom 4934 ↩︎
8. (1997) 1 SCC 579 ↩︎