SC Upholds Capital Reduction as Valuation Report Not Mandatory Under Section 66

The Discount For Lack of Marketability In India: Pannalal Bhansali And The Contextual Application Of DLOM To Unlisted Shareholdings

INTRODUCTION

In a landmark judgment delivered on March 10, 2026, the Supreme Court of India in Pannalal Bhansali v. Bharti Telecom Limited & Ors. (2026 INSC 213) provided comprehensive clarity on one of the most contentious aspects of corporate restructuring under the Companies Act, 2013: the validity and fairness standards applicable to schemes of share capital reduction. The central ruling establishes that Section 66 of the Companies Act, 2013 does not mandate the disclosure or production of a valuation report from a registered valuer as a condition precedent to the validity of a capital reduction scheme, and that the Discount for Lack of Marketability (DLOM) constitutes a permissible and defensible valuation adjustment in capital reduction contexts, provided that the valuation is grounded in accepted accounting standards and that the overall process satisfies statutory procedural requirements and substantive fairness standards.

This case comment provides a comprehensive breakdown of the Supreme Court’s judgment across its three principal dimensions: the jurisdictional composition of the appellate tribunal, the procedural fairness requirements governing capital reduction schemes, and the substantive standards for valuation methodology and share price determination. The comment further elucidates the practical implications of these holdings for corporate practitioners, boards of directors, and companies proposing capital reduction schemes in India, while simultaneously identifying potential limitations and future challenges to the judgment’s precedential authority.

1. BACKGROUND FACTS

The Factual Matrix

Bharti Telecom Limited was a closely held company with merely 1.09% of its shareholding with individuals, the vast majority being held by institutional and promoter entities. The only business of BTL was the holding of a significant investment in Bharti Airtel Limited (BAL), a listed telecom company. BTL had been delisted from all stock exchanges between 1999-2000. Subsequently, when BAL launched its Initial Public Offering in January 2002, BAL became listed on the Bombay Stock Exchange while BTL’s majority shareholding in BAL fell considerably, making them associate companies. Following a rights issue brought out in the year 2016 with resultant capital increase in BTL, BAL again became a subsidiary of BTL.

The Decision to Reduce Share Capital

The Board of Directors of BTL decided to reduce its share capital under Section 66 of the Companies Act, 2013, by cancelling 28,457,840 equity shares held by identified minority shareholders. The company offered a price of Rs. 163.25/- per equity share of Rs. 10/- each. The reduction was proposed to be effected by purchasing these shares out of the company’s own funds, thereby providing an exit option to the identified individual shareholders who had held shares for extended periods without receipt of dividends.

Valuation Methodology

In order to arrive at a fair value for the identified shares, the company appointed a valuation agency to conduct a detailed valuation exercise. The valuation report, issued in June 2018, was affirmed by a separate fairness report issued by a different agency on the same date. The valuation employed, inter alia, the Discount for Lack of Marketability (DLOM) methodology at a rate of 25%, as approved by Indian Accounting Standards brought out by the Institute of Chartered Accountants of India (ICAI). The valuation considered the market value of BAL and the Net Asset Value of BTL to arrive at the fair value of BTL shares.

Shareholder Approval

A special resolution was passed by the Board and subsequently placed before the shareholders in an Extraordinary General Meeting (EAGM) convened on June 19, 2018, with the voting period extending till July 26, 2018. The special resolution was passed with an overwhelming majority of 99.90% of the total equity shareholders and 76.35% of the identified shareholders present and voting in favour of the share capital reduction. No Objection Certificates were also received from all creditors of the company.

Petition before the National Company Law Tribunal (NCLT)

Following the passage of the special resolution, BTL filed a petition before the National Company Law Tribunal for confirmation of the scheme of share capital reduction under Section 66 of the Companies Act, 2013. As is mandated under Section 66(3), the NCLT called for a report from the Regional Director of the Department who confirmed compliance of the procedure prescribed under the Act for reduction of capital.

The NCLT, after examining the petitions filed by objecting shareholders, found that the decision to deduct the Dividend Distribution Tax from the price fixed for the individual shares was arbitrary. Consequently, the NCLT directed BTL to pay the identified individual investors Rs. 196.80/- per equity share without the tax deduction, an increase from the originally proposed Rs. 163.25/- per share. However, the NCLT upheld the validity of the capital reduction scheme and the valuation methodology employed, including the application of DLOM. The NCLT did not reject the contentions of the objecting shareholders in limine on the grounds that they had participated in the EAGM and voted in favour of the capital reduction or abstained from voting.

Appeals before the National Company Law Appellate Tribunal (NCLAT)

Following the NCLT’s order, thirty-five of the shareholders who had voted in favour of the reduction of share capital filed appeals before the National Company Law Appellate Tribunal (NCLAT). These appellants challenged inter alia the application of DLOM, the related nature of the valuation agency to the internal auditor, the procedural infirmities in the disclosure process, and the alleged arbitrariness of the price fixed.

The NCLAT, by its order, upheld the findings of the NCLT and rejected the contentions of the appellants. Eleven of these appellants, dissatisfied with the NCLAT’s order, preferred appeals before the Supreme Court of India. The NCLAT bench, as noted in the Supreme Court judgment, was headed by a Judicial Member and comprised two Technical Members, with the decision being unanimous.

• ANALYSIS OF THE COURT’S RULING

The Supreme Court’s judgment, delivered by Justice K. Vinod Chandran, with concurrence of Justice Sanjay Kumar, systematically addressed each of the three categories of contentions raised by the appellants and rejected all of them. The analysis proceeded across three principal domains: (1) the jurisdictional defect in the composition of the NCLAT and the status quo order; (2) procedural infractions relating to the manner in which the capital reduction was effected; and (3) the substantive issues relating to the methodology of valuation and the quantum of consideration offered.

ISSUE I. JURISDICTIONAL DEFECT ON THE COMPOSITION OF THE NCLAT & THE STATUS-QUO ORDER

1. The Challenge to NCLAT Composition

The Statutory Provisions Governing NCLAT Composition

The appellants contended that the NCLAT bench which heard their appeal was unconstitutionally constituted, comprising two Technical Members and one Judicial Member, thereby violating the principle enunciated in Union of India v. Madras Bar Association (2010-MBA), wherein the Constitution Bench deprecated the practice of a majority of Technical Members sitting in a Bench of the NCLT or the NCLAT, which substitutes the High Court.

The Supreme Court examined the statutory provisions governing the composition of the NCLAT. Under the Companies Act, 1956 (the earlier legislation), Section 10-FL provided for the constitution of Benches by the President of the Tribunal, out of which one shall be a Judicial Member and another a Technical Member. The proviso thereto empowered the President of the Tribunal by general or special order to permit Members to sit singly and exercise the jurisdictional powers and authorities of the Tribunal with respect to such class of cases or matters as specified.

However, the Supreme Court noted that these provisions are no more applicable since the Companies Act, 1956 has been replaced by the Companies Act, 2013. Sections 418A and 419 of the new statute speak of Benches of the NCLAT and that of the NCLT. The proviso to sub-section (1) of Section 418A requires a Bench of the NCLAT to have at least one Judicial Member and one Technical Member and the proviso to Section 419(3) mandates a similar composition in constitution of Benches of two Members. Section 419 further provides that the Tribunal shall exercise the powers in respect of such class of cases or such matters pertaining to a class of cases as the President by general or special order specifies, by a Bench consisting of a Single Judicial Member.

Evolution of Jurisprudence on NCLAT Composition

The Supreme Court traced the evolution of judicial pronouncements on the composition of NCLT and NCLAT:

2010-MBA Decision: The Constitution Bench in 2010-MBA considered the challenge against the Companies (Second Amendment) Act, 2002, constituting the NCLT & NCLAT; pointedly for the purpose of this case, with reference to Section 10-FL insofar as the constitution of Benches. Paragraph 120(xii), one of the several corrections suggested, required two members of the Tribunal to always have a Judicial Member and any Larger or Special Benches constituted to have more Judicial Members than Technical Members.

2015-MBA Decision: The provisions leading to the constitution of the NCLT and NCLAT were again challenged in Madras Bar Association v. Union of India (2015-MBA). Section 419, as seen from the law reports, was not challenged before the Constitution Bench and Section 418A came to be introduced by Act 29 of 2020, later to the decision. Three issues arose in the 2015-MBA, which were with respect to (i) the constitution of NCLT and NCLAT, held to be valid; (ii) qualification of President and the Members of NCLT and NCLAT, Section 409(3)(a) & (e) as also Section 411(3) held invalid as making eligible a person other than a Secretary or Additional Secretary to be a Technical Member and (iii) the constitution of the Selection Committee for Members; held to be possible if comprising of only four Members, two from the Judicial side being the Chief Justice of India or his nominee and a Senior Judge of the Supreme Court or the Chief Justice of a High Court and two Secretaries, one from the Ministry of Finance and Company Affairs and the other from the Ministry of Law and Justice, with the Chief Justice of India or his nominee having a casting vote; following the earlier judgment. Thus, ensuring that the Judiciary has the final say, untrammeled by any governmental influence or interference in the appointment of a Member of the Tribunal, be it a Judicial Member or a Technical Member.

The Court’s Conclusion on NCLAT Composition

The Supreme Court concluded that the provisions as of now do not require a majority of Judicial Members in the Larger Benches of the NCLT or the NCLAT. The Court could not but notice the extract made in 2010-MBA from State of West Bengal v. Anwar Ali Sarkar in the context of Article 14, which applies equally to the issue raised before the Court, attempting a distinction drawn between judicial members and technical members. The extract was made consequent to the finding in paragraph 102 that “The fundamental right to equality before law and equal protection of laws guaranteed by Article 14 of the Constitution, clearly includes a right to have the persons rights adjudicated by a forum which exercises judicial power in an impartial and independent manner, consistent with the recognized principles of adjudication” (sic). Anwar Ali Sarkar held that even a criminal is entitled to set up a defense, and a special trial, as was contemplated in the legislation under challenge though is in public interest, would interfere with his fundamental rights.

Examining the special law contrasted with the ordinary law of the land, Vivian Bose J. in paragraph 87 of Anwar Ali Sarkar opined that the test is not merely academic, for equality should be tested on the collective conscience of a sovereign democratic republic as to whether substantially equal treatment would be found by ‘men of resolute minds and unbiased views’. Whether these men would find it right or proper in a democracy of the kind we have proclaimed ourselves, is the true test. The Supreme Court respectfully adopted the definition as applicable to adjudications in every sphere and branch involving interpretation and resolution of disputes, complex and simple, both. All adjudicators first and foremost are or should be reasonable persons having resolute minds and unbiased views. Though judicial experience is valuable, administrative officers and technocrats; to whom judicious consideration is not alien in their long tenures of service dealing also with quasi-judicial matters, statutory appeals and the like, when permitted by the legislature to be included as Tribunal Members to aid, assist and promote a holistic adjudication of disputes and interpretation of laws, having administrative and technical ramifications, they cannot after permitting them to sit side-by-side be treated or their capabilities, with disdain or label them lower in status or in quality.

Application to the Present Case

In the present case, the Supreme Court noted that the Bench was headed by a Judicial Member and had two Technical Members, and the opinion was unanimous at the NCLAT. The Court also found no parallel infirmity as arising from B.R. Thakare, wherein a single Member of the Tribunal, an Administrative Member, was tasked with the adjudication of a dispute relating to cadre determination involving interpretation of the respective rules. It was held as a measure of proper administration of justice that ‘… while allotting work to a Single Member, whether judicial or administrative, the Chairman should keep in mind the nature of the litigation and where questions of law and its interpretation are involved, they should be assigned to a Division Bench of which one of them is a Judicial Member’ (sic). No distinction was drawn with reference to the source from which the Members come and there is no application to the facts of the present case.

As of now, the Companies Act permits a Single Bench to sit only in the NCLT and that too a Bench of a Judicial Member. The NCLAT as provided in Section 418A always comprises of two Members, one of whom is a Judicial Member or such larger composition where the prescription is only of the presence of a Member from the Judicial side and not in the majority.

The Supreme Court found absolutely no reason to interfere with the order on the question raised of the composition of the Bench of the Appellate Tribunal.

ISSUE II. THE MANNER: THE PROCEDURAL INFRACTION

Introduction to the Manner-Based Challenges

Under this head are raised issues of: (i) a request from the shareholders, though disclosed in the notice having not been indicated in the Board Resolution; (ii) the ‘tricky notice’ issued insofar as the elements constituting valuation having not been disclosed, especially the valuation and fairness reports; (iii) the valuation having been effected by a related agency; (iv) the fairness report having been issued on the very same date of the valuation report and (v) the valuation and fairness reports having not been sent along with the notice and kept out of reach of the investors by making it open for verification only at the Registered Office of the Company.

The Question of Shareholder Request and Board Resolution

The appellants contended that the Board resolution does not speak of a request made by the shareholders to give them an escape route, which is included in the notice of the General Meeting; misleading since such a request was absent or not formally expressed in a Board resolution.

The Supreme Court found, on facts, that the shares of the company remained locked in for long after the initial buyback offer, pursuant to delisting. There were also no dividends paid, in which circumstance the individual investors had sought for an exit option at the Annual General Meetings (AGM), the minutes of which were handed over to the Court. That the investors herein did not opt for the buyback offer and had been holding the shares despite no payment of dividend for long is crystal clear from the minutes of the AGM. Also, it is revealed that there were requests made for buyback or another opportunity by which an exit is provided to the shareholders.

The Court noted that even when the request made by the individual shareholders from the minutes of the AGM was pointed out, there was stiff opposition by the appellants on the ground that they never asked for a forced exit from the company. Be that as it may, when it cannot be denied that the reduction of capital is a valid means, legally permissible under the Act of 2013 which is also hedged in by safeguards insofar as a sanction being required by a special resolution in an extraordinary general meeting with a further sanction by the Tribunal, wherein the Central Government and the Registrar of Companies is entitled to offer their opinions; there is little room to find a request for exit from the investors being necessary. The Board having decided to go in for a reduction in capital, which definitely is not a buyback option but would all the same be an exit measure, there is no infirmity in the notice having indicated the request made by the investors. Especially since the shares of the company were locked in and it was decided that the capital reduction process is the best possible route to provide an exit opportunity in a fair and transparent manner. The observations in the notice though not a part of the resolution would have weighed with the Board of Directors in arriving at a decision for reduction of capital by purchase of the shares held by the identified investors, members of the public.

The ‘Tricky Notice’ Doctrine and its Application

The Supreme Court was quite conscious of its confined jurisdiction under Section 423 of the Act of 2013, which is to consider a question of law. As held in Devas Multimedia (P) Ltd. v. Antrix Corpn. Ltd., when NCLT & NCLAT have recorded concurrent findings it is not for the Court to reappreciate evidence in the usual course. However, the Court is obliged to look into the question of whether there is any perversity in the findings, which it is trite is one of law.

The Supreme Court examined the statutory requirements for disclosure. A comparison was attempted to be drawn from other provisions, which also are exit options available to the shareholders. Section 62 dealing with further issuance of share capital by sub-section (1)(c) requires a valuation report from a registered valuer, which in that circumstance would have to be enclosed with the notice to the existing shareholders. Likewise, Section 230 of the Act of 2013 under Chapter XV deals with compromise, arrangement and amalgamation with creditors and members. When a compromise or arrangement is made with the creditors or the members, the provision speaks of two motions before the Tribunal, one to convene a meeting of the creditors or a class of creditors or members or a class of members to be held and conducted in such manner as the Tribunal directs. In the first motion made before the Tribunal, as is evident from sub-section (2)(v), a valuation report in respect of the shares and the property and all assets, tangible and intangible, movable and immovable of the company by a registered valuer is required to be annexed. If the meeting sanctions the resolution by 3/4th majority, then again the compromise or arrangement has to be sanctioned by the Tribunal by an order, for which a second motion is stipulated by sub-section (6).

An amalgamation or merger as contemplated in Section 232 also stipulates a report of the expert with regard to valuation by sub-section (2)(d). So does Section 236(2) in the context of a buyback or purchase of minority shares, which is conspicuously absent in a reduction of share capital, which also results in an exit of certain shareholders. Similarly, a buyback under Section 68 is optional and it is for the shareholder to decide whether the buyback is accepted or not, looking at the value at which the buyback is offered, which provision also does not stipulate a valuation report. Hence, whenever a valuation report was found expedient, it was statutorily required, but not under Section 66.

Reduction of share capital can be achieved by a special resolution and confirmation by the Tribunal, without a report of valuation from an approved/registered valuer and hence, it does not fall within the ambit of a relevant material; without the full and complete disclosure of which the reduction of capital cannot be acted upon. However, it is pertinent to notice that the company despite any legal requirement had adopted a valuation exercise, which was further affirmed in a fairness evaluation by a different agency, both of which reports were retained in the Registered Office of the Company, kept open for verification by the investors. As has been factually found one of the investors, through his advocate had verified the reports and made a subsequent request only for the details of the shareholders and raised no dispute against the value adopted.

The Supreme Court did not find any procedural infraction or misleading disclosure to style the notice as a ‘tricky notice’. The notice contains the full disclosure as required in a measure employed for reduction of share capital under Section 66, which is the price offered by the company which translates as an exit option for the identified shareholder.

The Issue of Related Party Valuation and Perceivable Bias

The Supreme Court examined the Basic Principles Governing Internal Audit which mandates that the internal auditor shall be free from undue influence and shall resist any undue pressure or interference in establishing the scope of the assignments or the manner in which the audit is conducted and reported. The internal auditor in the nature of an in-house vigilance machinery, is mandated by the Act of 2013, under Section 138 read with The Companies (Accounts) Rules, 2014. Rule 13 of the said Rules by its Explanation also permits an employee to be appointed as an internal auditor, which in the present case has not been resorted to. Though, distinguished from statutory audits under Chapter X, the internal auditor, here an outside agency, merely by their appointment by the company cannot be said to be related in any manner to the company. Appointment as an internal auditor, does not bring in a bias with respect to the activities of the company which would essentially go against the scope and spirit of an audit carried out of the accounts of the company as an in-house verification, which is also a statutory requirement, available for scrutiny before a statutory auditor.

It has been held in N.K. Bajpai v. Union of India that bias should be demonstrably real and present to vitiate an action. Where it is shown that there exists a real danger of bias the action would attract judicial chastisement while, if it is only a mere probability or even a preponderance of probability it cannot affect the action adversely, was the law declared. The Supreme Court found no even a probability that the internal auditor would act in a biased manner, leave alone the valuation agency which is an affiliate of the former.

The Supreme Court further noticed that the fairness report has been obtained from a different agency which has no connection with the internal auditor and in any event, the valuation report is accepted as valid and proper by the ICICI Securities Limited and SBI Caps Securities Limited. All the more as per the proviso to Section 66(3) the Tribunal considering the reduction of capital measure has to obtain a certificate from the Company’s auditor that the accounting standards adopted is in conformity with that specified in Section 133, which is produced as Annexure A13 in the application under Section 66 before the NCLT produced as Annexure-A/14 in the Convenience Compilation.

The Question of Simultaneous Issuance of Valuation and Fairness Reports

The appellants contended that the fairness report having been issued on the very same date of the valuation report is indicative of the hasty manner in which valuation and fairness evaluation were proceeded with, a clear sham.

The Supreme Court found that the fairness report signed on the same day as the valuation report does not raise any apprehension of levity since the fairness is of the approach in valuation, which does not require a threadbare analysis or a reverification of the books of accounts. The figures are more than explicit and so is the method adopted as discernible by financial experts. The Court also reckoned the contention raised by the respondent company that the date of the report indicates the day of issuance and not necessarily the time taken or the diligence exercised in arriving at the valuation or even affirming the fairness.

The Question of Accessibility of Valuation Reports to Shareholders

One other contention is of the reports being kept in the Registered Office not being sufficient based on Firestone Tyre & Rubber Co. vs. Synthetics and Chemicals Ltd. highlighting the difficulty and disinclination of shareholders to travel to the Registered Office.

The Supreme Court could not subscribe to the said view at least in today’s scenario of ease of travel, especially since most of the 35 appellants before the NCLAT lived in Delhi, when the Registered Office was in Gurgaon, Haryana. Some had their residence at Mumbai & Pune and only three were abroad, as revealed from the cause title of the order of the NCLAT. None except one thought it fit to verify the reports. The Court hence found absolutely no reason to sustain the procedural infraction on the grounds of non-disclosure or bias, as alleged by the appellants.

ISSUE III. THE METHOD AND THE MATTER: DLOM AND THE SHARE PRICE

Framing the Issues and the Kiri Industries Precedent

The above aspects are considered together since they are inextricably linked. The share value determined for reduction of share capital is termed unfair solely because of the application of DLOM, which is said to be inapplicable in a situation of this kind where there is a forced exit of the shareholders. Both sides relied on Kiri Industries Ltd. On a reading of the same, the Supreme Court did not find any international denouncement of the application of DLOM in all situations, as argued by the appellants. True, in the aforesaid case wherein there was a forced buyout as per the order of the Singapore International Commercial Court, wherein the minority shareholders were asked to be bought out by the majority shareholders, DLOM was declined.

The Jurisprudence on DLOM and Forced Buyouts

(i) The Thio and Liew Cases

Insofar as the DLOM principle is concerned, the decision in Thio Syn Kym Wendy and Others v. Thio Syn Pyn and Others and the decision in Liew Kit Fah and Others v. Koh Keng Chew and Others were referred to. Liew Kit Fah held that liquidity, after all is a valuable attribute of an investment and the lack of it is a depreciatory factor, giving rise to application of DLOM in the valuation of unquoted shares. However this was observed to be laid down in a consent order where there was no Court order on account of a finding of oppression. The principle laid down in Thio Syn Kym Wendy that DLOM will apply to illiquid privately held shares, save in exceptional circumstances proven by the party alleging it, was held to be an incidental observation which cannot be elevated into a principle of law. In the context of a Court ordered buyout in an action alleging oppression, DLOM was found to be inapplicable, not as a universal principle but more on the facts of that case.

(ii) The Douglas Moll Analysis and Fair Value Distinction

Interestingly the Court referred to an article of Professor Douglas Moll titled “Shareholder Oppression and ‘Fair Value’: of Discounts, Dates and Dastardly Deeds in Close Corporation” (2004) 54 (2) Duke LJ 293, wherein the distinction between fair value and fair market value was brought out. ‘Fair value’, as distinguished from ‘fair market value’, is the enterprise value; the pro-rata portion of the company’s overall value as an operating business. ‘Fair market value’ on the other hand involves the Court valuing the minority’s share by considering what a hypothetical purchaser would pay for them. Professor Moll was of the opinion that in a ‘fair market value’ situation, a marketability discount is applied since a hypothetical purchaser is likely to pay less for shares which lack a ready market. Professor Moll was also of the opinion that valuation is inherently contextual and buyout proceedings in the context of an oppression setting, would make the marketability discounts inappropriate. The report is an interesting read and affords insights in the context of an oppressive setting with respect to Close Corporations, in the United States of America. The illustrative reference to minority with a 33% shareholding in an oppressive setting also is distinguishable from the instant case, which deals with a far lesser minority and in the Indian setting. The statutory language was also pertinently pointed out as standing against a marketability discount being applied, when the specific term used was ‘fair value’ as distinguished from ‘fair market value’, employed in comparable statutes.

The Absence of Oppression in the Present Case

It is recognised even by Prof. Moll that investors generally pay a premium for liquidity and conversely extract discounts for illiquidity. In the present case, there is no oppression complained of by the minority shareholders and in any event, 11 appellants do not, by their sheer number or with their combined holdings, constitute a collective which could validly raise an allegation of oppression under Section 244 of the Act of 2013. The Supreme Court also noticed that the shareholders identified for the purpose of capital reduction, together far exceeded the minimum number; one hundred under Section 244. There was no complaint of any oppressive action existing. All the same in the setting of the present proceedings, even the objection raised by an individual shareholder as to the reasonableness of the price fixed has to be looked into, which pertinently is not in a setting of oppression.

The ‘Claims of Justice’ and Procedural Fairness

In Baillie, the decision in Foss v. Harbottle was noticed and the exception carved out to the ‘proper plaintiff’ rule even while rejecting the challenge against the action of its Directors enabling purchase of the personal properties of the Directors for prices far exceeding its actual value that too by mortgaging and encumbering other properties of the company and applying these proceeds to make the purchases. However, it was observed that it would not be proper to hold that a society of private persons associated together in an undertaking, are deprived of their civil rights inter se, because the Crown or the Legislature has conferred on them a corporate character to make more attainable, the common objects. The ‘claims of justice’ then would be found superior to any difficulties arising out of technical rules regarding the mode in which the corporations are required to sue. Even in Foss v. Harbottle it was held that if a case arises as to an injury to a corporation or to some of its members, for which no adequate remedy remains except that of a suit by an individual corporator in their private character, requiring protection of those rights entitled in their corporate character, then the ‘claims of justice’ would override procedural technicalities. It is the said principle that is enshrined in the Act of 2013 where even when a special resolution is passed the Tribunal is required to scrutinise a reduction in capital under Section 66, after hearing all the stake holders, ex debito justitiae.

The Legal Framework Governing Reduction of Share Capital

(i) Principles from In Re: Reckitt Benckiser and British and American Trustee Cases

Coming back to the present case, here the measure employed was of a reduction in capital as permitted by the statute. In Re: Reckitt Benckiser (India) Ltd. encapsulated the principles regulating a reduction of share capital after referring to British and American Trustee and Finance Corporation v. Couper. The broad principles distilled were that (i) reduction of share capital is a strictly domestic concern depending on the decision of the majority, (ii) if reduction of share capital is approved by a special resolution, the majority also has the right to decide how it should be carried out, (iii) reduction of share capital can be brought about by extinguishing some of the shares while retaining others even in the same class or making a proportionate reduction for all or even for some, while for others it is totally extinguished. The reduction thus can be in any manner and even if it is selective it is permissible.

(ii) Consensual Nature of the Present Reduction

The reduction of capital was sanctioned by the Board and it was put up as a special resolution before the general meeting convened. The special resolution was passed by not only the majority shareholders but also by 3/4th of the majority individual shareholders, present and voting, identified for the purpose of reduction of share capital, which makes it consensual. Even the appellant in C.A. No.7655 of 2025, who holds the majority of the minority shareholding voted in favour of the special resolution.

An argument was raised that only 733 out of the 4942 identified shareholders voted and the 3/4th majority from those present and voting is a mirage. The Supreme Court could not accept the said contention, first for reason of the statute not prescribing any majority from the identified shareholders. Then, the others thought it fit to abstain and in a democratic set up where the will of the majority reigns supreme, the abstainers are deemed to have left the choice to those who vote and they acquiesce to the majority will of those present and voting in the extraordinary general meeting. It is only later, finding the application of DLOM that an objection was taken. Thus there is no oppression setting in the present case and there can be no distinction drawn from the statutory words employed of a ‘fair value’ and a ‘fair market value’.

The Statutory Scheme and Indian Accounting Standards

(i) The Statutory Framework

The statutory scheme also does not restrict the use of DLOM. Examining the statutory scheme under Section 66, in addition to the special resolution and notice to the Central Government and the Registrar of Companies, sanction is accorded by the Tribunal for capital reduction only if it is satisfied that the accounting treatment proposed by the company for such reduction is in conformity with the accounting standards specified in Section 133 or any other provision of the Act and a certificate to that effect by the company’s auditor has been filed with the Tribunal, as per the proviso to Section 66(3); which the Supreme Court found was furnished. Section 133 enables the Central Government to prescribe accounting standards as recommended by the Institute of Chartered Accountants of India constituted under Section 3 of the Chartered Accountants Act, 1949 in consultation with and after examination of the recommendations made by the National Financial Reporting Authority, constituted under Section 132 of the Act of 2013.

(ii) Indian Accounting Standards (Ind AS 113) and Fair Value Measurement

The Indian Accounting Standards (Ind AS) 113 provides for fair value determination as a market based measurement and not an entity specific measurement, quite contrary to the statutory scheme found in the United States as described by Professor Moll. The definition of fair value as per the Ind AS 113 is ‘the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date'(sic). It is required that when measuring fair value, an entity shall take into account the characteristics of the asset or liability, if market participants would take those characteristics into account when pricing the asset or liability at the measurement date. These characteristics include, not exhaustively, but as stated in the Ind AS 113, as an example, the condition and location of the asset and restrictions if any on the sale or use of the asset. Hence, the approved accounting standards, as statutorily brought out, treats the fair price as one linked with the market especially in the context of Section 66, reduction of share capital.

(iii) ICAI Valuation Standards and DLOM

The Valuation Standards Board ICAI and the ICAI Registered Valuers Organisation of the Institute of Chartered Accountants of India has brought out ‘ICAI Valuation Standard 103-Valuation Approaches and Methods’. The Discount for Lack of Marketability (DLOM) is one of the subheadings under the heading “Adjustment and Valuation”. It is stated therein that ‘DLOM is based on the premise that an asset which is readily marketable commands a higher value than an asset which requires longer period/ more efforts to be sold or an asset having restriction on its ability to sell.’ ‘Determining an appropriate level of DLOM can be a complex and subjective process. Accordingly, the specific nature and characteristics of the asset and the acts and circumstances surrounding the valuation should be considered.’

Application of DLOM in the Valuation of BTL

(i) The Factual Circumstances Warranting DLOM

Looking at the valuation report it definitely reckoned the share value of BAL for a reasonable period since that would have a nexus in deciding the value of shares of BTL whose only business is investment in the listed BAL. BTL admittedly was not listed having been delisted in the year 1999-2000 and continued without any payment of dividend to the shareholders. The only buyout, which was statutorily prescribed, was offered at the rate of Rs.96/- per share, long back in the year 2001. In 2006, one of the promotor firms of BTL had offered to purchase the shares of public shareholders at Rs.400/- per share. More importantly, BTL conducted a rights issue in 2016 whereby the existing shareholders were offered and issued 115 shares for every one share held by them which resulted in diminishing the monetary value of BTL shares. The various offers relied on in the Convenience Compilation, at Annexure 2, even though not authenticated, reveals only a price of Rs.35-Rs.55 that too before the rights issue of the shares. A commodity broker is said to have offered an amount of Rs.2000/- in the year 2007 that too, far prior to the rights issue. The further issue of share capital for the purpose of bringing in an investor as a strategic long-term promoter made a valuation at Rs.310/- per equity share which is not parallel with the reduction of capital now attempted by the respondent company.

The marketability of the shares is absent, and it has to be reiterated that the company had not been paying any dividends. There were also requests made by the shareholders for an exit option as is revealed from the minutes of the AGMs. In the totality of the circumstances, the applicability of DLOM cannot be held invalid and in any event, what has to be looked at by the Tribunal in scrutinising the scheme of reduction of capital is only as to whether there was a fair measure employed which cannot be termed unreasonable or prejudicial to the individual shareholders.

The Standards for Judicial Scrutiny of Capital Reduction

(i) The Test from In Re: Reckitt Benckiser

In Re: Reckitt Benckiser (India) Ltd. held that when the matter comes to Court, the satisfaction of the Court is as to whether (i) there is an unfair or inequitable transaction and (ii) whether the creditors entitled to object to the reduction have either consented or are paid or are secured.

(ii) The Detailed Test from In Re: Cadbury India Limited

In Re: Cadbury India Limited examined Section 100 of the Act of 1956; analogous to the purpose of Section 66, to find three requirements; (i) the Articles of Association should permit a reduction of share capital; (ii) the scheme for reduction should be approved by a special resolution and (iii) the Court’s sanction (sic- now the ‘Tribunal’) must be obtained if the special resolution is passed. The consideration of sanction of the scheme of reduction is regulated insofar as being (i) not against public interest; (ii) fair and just and not unreasonable and (iii) not unfairly discriminatory or prejudicial against a class of shareholders.

As for prejudice it was held to be something more than just receiving less than what a particular shareholder may desire. To find prejudice there should be an attempt to force a class of shareholders to divest themselves of their holding at a rate far below what is reasonable, fair and just; a strategy by which an entire class is forced to accept something that is inherently unjust. It was also held that reasonableness can be tested on the basis of past open offers, extinguishments or buy-backs and the rates at which they were effected. If the rates offered in the scheme of reduction is more than the past offers then, the burden on the objector is exponentially high when raising the plea that the offer is unfair or unreasonable, to establish real prejudice, palpable bias and demonstrable arbitrariness. Allegation of violation of principles of fairness, when raised should be substantiated by obvious and blatant unfairness as revealed from the consequent action; which is absent here.

(iii) The Applied Test

Unless the valuation is especially unreasonable it would be a wrong approach to reject a plausible rationale provided by the valuer on the mere ground that the objector has a different point of view. The test insofar as considering a sanction as held in In Re: Cadbury India Limited is as to whether (i) a fair and reasonable value was offered to the minority shareholders? (ii) The majority of the non-promoter shareholders have voted in favour of the resolution? (iii) the resolution read by any fair-minded and reasonable person, without microscopic scrutiny, finds it to be egregiously wrong offending the judicial conscience? (iii) the valuer has gone so off-track that the result of valuation return can only be wrong? The Supreme Court found that all the above tests are satisfied in the above case.

Specific Refutation of Prejudice Contentions

(i) Fair and Reasonable Value

The Supreme Court found that a fair and reasonable value was offered to the minority shareholders and the majority of the identified shareholders present and voting, voted in favour of the resolution. Even on a microscopic scrutiny the valuation cannot be found to be egregiously wrong especially looking at the previous offers and also the rights issue offered at par, prior to the reduction of share capital, exponentially increasing the take aways of the individual shareholders and the valuation cannot at all be said to have gone off-track, so as to make it egregiously wrong.

(ii) The Specific Calculation for the Appellant

In this context, the Supreme Court noted that the share value now fixed by the Board and approved by the majority of the shareholders of the company which on modification by the Tribunal stands at Rs.196.80/- for each equity share. Even taking the highest offer at Rs.2000/- by a commodity broker as claimed by the appellants, prior to the rights issue, as of now on a further purchase of 115 shares at par, expending Rs.1150/- in the rights issue, the single share available with the identified shareholders becomes 116 at the rate of Rs.196.80/-, which by no stretch of imagination or any standard of scrutiny adopted, can be said to be unreasonable.

(iii) The Custodian’s Valuation

Arguments raised on the valuation initiated at the behest of the Custodian, is available at Annexure A-9 & A-11, both in the year 2012, based on the purchase offers received. The purchase offers ranged between Rs.550/- to Rs.3,650/-. The valuation too by SBI Caps Securities and ICICI Securities ranged between Rs.12,707/- to Rs.20,215/- after applying discounts ranging from 20% to 30%. The above valuation was in the year 2012, while consequent to the reduction of share capital, the Custodian had sought for a verification of the valuation conducted by the very same agencies. ICICI Securities by Annexure A-30 while affirming the valuation as fair specifically noticed that the adverse effect by reason of the huge liability created on BAL, by a ruling of the Supreme Court was not captured in the earlier valuation. They also emphatically notice that the Valuation was by a reputed international firm and the Fairness Report by a SEBI registered category-I merchant banker. SBI Caps Securities also confirmed the valuation by A-31.

The Character and Sophistication of the Investors

The appellants herein are not wary investors, cautious retirees or mere speculators, but seasoned retail investors who blend in equal measure prudence with quite calculation. The share value of BAL was in the public domain, being a listed company. The appellants were aware of the fact that BTL had only investment in BAL, which confined its operations. The appellants were aware and many had participated in the rights issue brought about and if not participated, at their peril. The shareholders were also aware of the price at which SingTel was brought in, as a strategic long-term promoter, pursuant to which the reduction of share capital was attempted which gave them enough material for making an informed and calculated decision as to whether they should opt for it.

The Investment Patience and Valuation Expertise

Far from the bullish and bearish trends that regulate the flexible share value of listed companies in a volatile market, the appellants held on to the shares of BTL; with zero listing, zero marketability, zero dividend payment, zero exit options also declining purchase offers, with the stoic resolve of a feline waiting patiently for its prey. The move was made when the AGM was constituted quite realising the price offered for each equity share, which was even minus the taxes payable by the company. The decision taken at the EAGM passing the special resolution clinches the issue. Only on finding the DLOM having been applied, the objections were raised despite the fact that at the time of EAGM the appellants were satisfied with the price offered. The objection is only in applying DLOM with nothing in substantiation as to how the price fixed is unreasonable. The identified shareholders voted in majority or abstained, finding the price offered to be reasonable and not prejudicial, which though pounced upon was resiled from later.

The Supreme Court remarked that the nature’s wild offers no second pounce at the prey nor do the hinterlands of financial wilderness and in any event, valuation is an exercise which is best left to the experts as has been held in Mihir H. Mafatlal v. Mafatlal Industries Ltd.

1. WAY FORWARD

2. Clarification on the Non-Mandatory Nature of Valuation Reports under Section 66

One of the most significant holdings of the Supreme Court relates to the explicit clarification that Section 66 of the Companies Act, 2013 does not mandate the production or disclosure of a valuation report from a registered valuer as a condition precedent to the validity of a capital reduction scheme. This holding constitutes a material and substantial distinction from the requirements applicable to other forms of capital restructuring, including Section 62 (further issuance of shares), Section 230 (schemes of compromise and arrangement), Section 232 (amalgamation and merger), Section 236 (buyback of minority shares), and Section 68 (optional buyback).

The Supreme Court’s reasoning in this regard was grounded in a textual and comparative statutory analysis. The Court observed: “Reduction of share capital can be achieved by a special resolution and confirmation by the Tribunal, without a report of valuation from an approved/registered valuer and hence, it does not fall within the ambit of a relevant material; without the full and complete disclosure of which the reduction of capital cannot be acted upon.” This statutory interpretation is logically defensible insofar as the legislature, having expressly prescribed mandatory valuation report requirements in Sections 62, 230, 232, 236, and others, could reasonably be inferred to have deliberately chosen not to impose such a requirement in Section 66.

For corporate governance practitioners, this holding carries substantial implications. Companies effecting capital reduction under Section 66 are not legally obligated to commission a valuation report from a registered valuer as a prerequisite to the scheme. However, the judgment should not be read as a blanket dispensation for corporate action bereft of valuation analysis. Rather, the Supreme Court’s judgment suggests that while such reports are not legally mandatory, their voluntary adoption enhances procedural transparency and demonstrates a commitment to shareholder fairness. The Court’s recognition that BTL, “despite any legal requirement had adopted a valuation exercise,” and its affirmation of this approach, indicates judicial approval for the practice of obtaining voluntary valuations even when not statutorily mandated.

For corporates proposing capital reduction, the optimal practice would be to voluntarily commission a comprehensive valuation report from a qualified and independent valuation agency, while simultaneously ensuring that such report is grounded in accepted accounting standards and methodologies. This approach serves multiple objectives: it demonstrates corporate good faith in the capital reduction process; it provides a defensible and transparent basis for the price determination; it enables shareholders to make informed decisions regarding the reduction; and it substantially mitigates the risk of subsequent litigation contesting the fairness of the valuation.

3. The Discretionary Application of DLOM and Valuation Methodologies

The Supreme Court’s judgment endorses the application of the Discount for Lack of Marketability (DLOM) methodology in the valuation of unlisted and illiquid shares, even in the context of capital reduction schemes where the reduction effectively constitutes a forced exit for minority shareholders. While acknowledging the contentions of the appellants that DLOM was deprecated in certain international jurisprudence (particularly the Singapore Court of Appeal decision in Kiri Industries), the Supreme Court found that DLOM remains a permissible and contextually appropriate methodology in the Indian corporate framework.

The Court’s reasoning emphasizes the contextual nature of valuation: “In the totality of the circumstances, the applicability of DLOM cannot be held invalid and in any event, what has to be looked at by the Tribunal in scrutinising the scheme of reduction of capital is only as to whether there was a fair measure employed which cannot be termed unreasonable or prejudicial to the individual shareholders.”

The judgment identifies several factual circumstances which, in their totality, justified the application of DLOM in the valuation of BTL shares:

• Absence of Listing: BTL had been delisted from all stock exchanges since 1999-2000, rendering its shares non-tradeable in any organized market.
• Absence of Dividends: The company had consistently failed to pay dividends to shareholders over an extended period, depriving shareholders of liquidity through regular returns.
• Absence of Marketability: There was no ready market for the shares of BTL, and finding external purchasers for such shares would require substantial time and effort.
• Restrictions on Alienation: The closely held nature of the company and the absence of any formal market mechanism created inherent restrictions on the sale or use of the shares.
• Prior Valuation Precedents: Historical valuations by reputed agencies (ICICI Securities and SBI Caps Securities in 2012) had themselves applied discounts ranging from 20% to 30%, demonstrating market acceptance of the DLOM principle in the context of BTL.

(iii) The Ind AS 113 Framework

Significantly, the Supreme Court grounded the applicability of DLOM within the Indian statutory framework by reference to Indian Accounting Standards (Ind AS 113), which provides that fair value shall take into account the characteristics of the asset or liability, including “the condition and location of the asset and restrictions if any on the sale or use of the asset.” The Court further endorsed the ICAI Valuation Standards 103, which explicitly recognizes DLOM as a permissible valuation adjustment under the heading “Adjustment and Valuation,” with the caveat that “Determining an appropriate level of DLOM can be a complex and subjective process. Accordingly, the specific nature and characteristics of the asset and the acts and circumstances surrounding the valuation should be considered.”

(iv) The Distinction Between Oppression Context and Consensual Reduction

A critical distinction drawn by the Supreme Court relates to the applicability of DLOM in different contexts. The Court noted that in the Singapore case of Kiri Industries, DLOM was rejected in a context of a court-ordered buyout in an action alleging oppression. However, the Court observed that “In the present case, there is no oppression complained of by the minority shareholders and in any event, 11 appellants do not, by their sheer number or with their combined holdings, constitute a collective which could validly raise an allegation of oppression under Section 244 of the Act of 2013.”

This distinction implies that the applicability of DLOM may be contextually determined based on whether the capital reduction is being effected in a setting of alleged oppression or in a more consensual framework where the shareholders have voted on the scheme. Given that 76.35% of the identified shareholders present and voting approved the capital reduction resolution, the reduction fell into the latter category, rendering DLOM more readily applicable.

For practitioners, this holding suggests that DLOM remains a permissible and defensible valuation adjustment in capital reduction schemes, provided that: (a) the shares being valued are genuinely illiquid and unmarketable; (b) the company has a history of non-payment of dividends; (c) the shares are unlisted and have been delisted for a considerable period; (d) prior professional valuations of comparable securities have applied similar discounts; and (e) the capital reduction is not being challenged as an oppressive action within the meaning of Section 244 of the Companies Act, 2013. Corporates should, however, ensure that the rate and application of DLOM is both reasonable and defensible with reference to accepted valuation standards and the specific characteristics of the unlisted securities being valued.

4. The Doctrine of ‘Tricky Notice’ and Shareholder Disclosure Requirements

(i) The Historical Roots and Contemporary Application

The Supreme Court’s analysis of the ‘tricky notice’ doctrine represents a significant clarification regarding the boundaries of procedural fairness in corporate action, particularly in relation to disclosure obligations to shareholders. The Court traced the historical development of this doctrine from the foundational case of Kaye v. Croydon Tramways & Co. Ltd. through its application in Baillie v. Oriental Telephone and Electric Co. Ltd., establishing that a ‘tricky notice’ is one which is “not frank, not open, not clear and not in any way satisfactory,” and which plays with words or artfully frames matters to mislead shareholders into accepting corporate action without full knowledge of relevant material facts.

However, the Supreme Court’s analysis demonstrates that the application of the ‘tricky notice’ doctrine is not merely about the formal completeness of disclosure, but rather about the substantive fairness and transparency of the communication. In the present case, despite the fact that the valuation and fairness reports were not attached to the notice of the extraordinary general meeting, the Court found no violation of the ‘tricky notice’ principle because:

• • The statutory framework applicable to capital reduction under Section 66 does not mandate the disclosure of valuation reports;
  • The fair value determination resulting from the valuation exercise was disclosed in the notice of the general meeting;
  • The methodology adopted in the valuation was kept open for verification by shareholders at the registered office of the company;
  • The notice specifically indicated that the valuation and fairness reports had been kept in the registered office for inspection during the stipulated voting period;
  • At least one investor had verified the reports and raised no dispute against the value adopted; and
  • The voting period extended over a full month, providing reasonable opportunity for shareholders to examine the documents before voting.

(ii) The Market-Based Fair Value Standard

A critical distinction that the Supreme Court drew relates to the nature of the price offered. The Court held that Section 66, in conjunction with Indian Accounting Standards (Ind AS 113), requires that the fair value determination be grounded in market-based methodology, not merely entity-specific or investor-specific expectations. As the Court observed: “Hence, the approved accounting standards, as statutorily brought out, treats the fair price as one linked with the market especially in the context of Section 66, reduction of share capital.”

This holding has significant implications for the disclosure obligations of companies. Companies need not disclose a full and detailed valuation report if the statutory framework does not mandate such disclosure; however, whatever disclosure is provided regarding the valuation must be honest, accurate, and reflective of a market-based determination rather than an arbitrary or entity-biased assessment. The Court’s approval of BTL’s disclosure approach suggests that companies should:

• • Clearly communicate the methodology employed in determining the fair value;
  • Make available for shareholder inspection the detailed valuation reports and supporting documentation;
  • Extend a reasonable period for shareholders to examine these documents prior to voting;
  • Ensure that the price offered is grounded in market-based factors, such as the fair value of subsidiary companies or comparable market transactions.

(iii) The Distinction from Oppression Context

The Supreme Court’s ‘tricky notice’ analysis also makes clear that the doctrine applies with particular force in contexts where shareholders are alleged to be subjected to oppression or fraud. However, in a consensual capital reduction framework where the majority of shareholders have voted in favor of the scheme, the application of the doctrine becomes more attenuated. The Court observed: “All the same in the setting of the present proceedings, even the objection raised by an individual shareholder as to the reasonableness of the price fixed has to be looked into, which pertinently is not in a setting of oppression.”

5. The Standard of Fairness and the Role of Related Party Transactions in Valuation

(i) The Bias and Independence Standard

A significant holding of the Supreme Court relates to the permissibility of engaging valuation agencies that have some tangential relationship to the company or its internal auditor, provided that the valuation itself is conducted with professional standards and is subject to affirmation by truly independent entities. The Court held: “It has been held in N.K. Bajpai v. Union of India that bias should be demonstrably real and present to vitiate an action. Where it is shown that there exists a real danger of bias the action would attract judicial chastisement while, if it is only a mere probability or even a preponderance of probability it cannot affect the action adversely, was the law declared.“

This holding establishes that the legal test for bias in the valuation context is not merely the appearance of a relationship or the possibility of bias, but rather the existence of a demonstrably real and present danger of bias. The Court found no such real danger in the present case because:

• • The valuation agency, while affiliated with the internal auditor, is an external agency with no financial dependence on the company;
  • The Internal Auditor is itself mandated by statute to be an independent agency that functions on accepted accounting norms;
  • The valuation was further affirmed by entirely independent agencies (ICICI Securities and SBI Caps Securities) with no connection whatsoever to BTL or its internal auditor;
  • The auditor’s certificate confirming compliance with accounting standards has been filed with the Tribunal; and
  • Professional standards and regulatory oversight (ICAI standards) provide adequate safeguards against any potential bias.

For corporations proposing capital reduction, this holding suggests that it is permissible to engage valuation agencies that have existing relationships with the company’s auditors or other service providers, provided that:

• • The valuation is conducted in strict accordance with accepted accounting standards;
  • The valuation is subsequently affirmed by independent agencies with no relationship to the company;
  • The overall process is subject to regulatory oversight and compliance with accounting standards; and
  • No demonstrably real danger of bias is evidenced in the actual conduct of the valuation.

However, best practice suggests that corporates should seek to minimize even the appearance of bias by engaging valuation agencies that have no pre-existing relationships with the company or its service providers. The judgment should not be read as an endorsement of related party valuations, but rather as a recognition that such relationships, while suboptimal, do not per se vitiate the valuation process if adequate independent affirmation and professional standards are in place.

1. 1. The Character and Sophistication of Shareholders as a Determinative Factor

(i) The Court’s Analysis of Investor Sophistication

A striking aspect of the Supreme Court’s judgment relates to the characterization of the shareholders and the corresponding implications for the standard of fairness applicable to the capital reduction. The Court observed: “The appellants herein are not wary investors, cautious retirees or mere speculators, but seasoned retail investors who blend in equal measure prudence with quite calculation.“

The Court further noted that the shareholders:

• Were aware that BTL’s only business consisted of investment in the listed BAL;
• Could easily access information regarding the share price of BAL, a listed company;
• Were knowledgeable regarding the previous offers made for the purchase of their shares;
• Were aware of the price at which SingTel, a strategic investor, had been brought in;
• Had participated in or were aware of the rights issue which had exponentially increased the aggregate value of their shareholdings; and
• Were in a position to make informed and calculated decisions regarding whether to accept the capital reduction offer.

This analysis suggests that the standard of fairness applicable to capital reduction may vary depending on the sophistication and knowledge of the shareholders subjected to the reduction. Where shareholders are seasoned investors who have had ample opportunity to familiarize themselves with the company’s affairs and the basis of valuation, a somewhat more relaxed standard of scrutiny may be appropriate. Conversely, where shareholders are uninformed or unsophisticated individuals who lack access to material information, a more stringent standard of fairness and transparency would be expected.

This differentiated standard reflects a practical recognition of the varying capacities of different categories of shareholders to protect their interests. However, corporates should be cautious in relying on this principle, as it essentially constitutes a fact-specific determination that may vary from company to company and from shareholder to shareholder. The safer approach is to ensure that all shareholders, regardless of their sophistication, are provided with comprehensive and transparent disclosure regarding the valuation methodology and the basis for the price offered.

6.The Relationship Between Shareholder Vote and Judicial Scrutiny

(i) The Significance of Overwhelming Shareholder Approval

The Supreme Court placed considerable weight on the fact that the capital reduction was approved by 99.90% of total shareholders and 76.35% of the identified shareholders present and voting. The Court observed: “The special resolution was passed by not only the majority shareholders but also by 3/4th of the majority individual shareholders, present and voting, identified for the purpose of reduction of share capital, which makes it consensual.”

This overwhelming approval, coupled with the fact that even the appellant who held the largest minority shareholding voted in favor of the resolution, substantially influenced the Court’s assessment of the fairness of the capital reduction. The Court noted: “Even the appellant in C.A. No.7655 of 2025, who holds the majority of the minority shareholding voted in favour of the special resolution.”

(ii) The Democratic Principle in Corporate Governance

The Court’s reasoning reflects a recognition of the fundamental democratic principle that in corporate governance, decisions of the majority, duly made in accordance with statutory procedures, should command respect and deference from the judiciary, absent clear evidence of oppression, fraud, or illegality. The Court stated: “Then, the others thought it fit to abstain and in a democratic set up where the will of the majority reigns supreme, the abstainers are deemed to have left the choice to those who vote and they acquiesce to the majority will of those present and voting in the extraordinary general meeting.”

(iii) The Remaining Role of Judicial Scrutiny Despite Shareholder Approval

However, the judgment also makes clear that overwhelming shareholder approval does not eliminate the tribunal’s obligation to scrutinize the reduction for fairness. The Court held: “It is the said principle that is enshrined in the Act of 2013 where even when a special resolution is passed the Tribunal is required to scrutinise a reduction in capital under Section 66, after hearing all the stake holders, ex debito justitiae.“

This principle reflects the understanding that corporate democracy requires not merely majority rule, but majority rule constrained by fairness and respect for minority interests. The statutory requirement that the tribunal must scrutinize capital reduction schemes “after hearing all the stake holders, ex debito justitiae” (i.e., as a matter of justice) preserves a meaningful role for judicial review even where overwhelming majorities have approved the scheme.

7. The Applicability of Higher Standards of Fairness to Forced Exits

The appellants contended that the reduction of share capital, which effectively forces identified shareholders to divest their holdings, should be subject to a higher standard of fairness than would be applicable to voluntary exits or exits accomplished through negotiated compromise. The Court noted: “The reduction of the share capital then made was intended at edging out the investors from amongst the public, who were in a minority, in which circumstance there should have been a higher standard of fairness and transparency applied.”

The Supreme Court did not entirely reject this proposition; rather, it refined and qualified it. The Court acknowledged that “even when a special resolution is passed the Tribunal is required to scrutinise a reduction in capital under Section 66, after hearing all the stake holders, ex debito justitiae,” thereby recognizing that a higher standard of scrutiny applies in the tribunal context. However, the Court held that this heightened scrutiny does not translate into the rejection of valuation methodologies (such as DLOM) that would be permissible in voluntary exit contexts.

Rather, the Court’s approach suggests that the “higher standard of fairness” applicable to forced exits operates at the level of ensuring that:

• The procedure followed is fair and provides shareholders with adequate notice and opportunity to voice objections;
• The valuation methodology, while methodologically sound and grounded in accepted standards, is applied in a manner that is not egregiously or demonstrably unfair to the exiting shareholders;
• The price offered is not divorced from market-based considerations and is defensible by reference to comparable transactions or historical offers;
• The process is not tainted by fraud, collusion, or demonstrable bias; and
• There are no oppressive aspects to the scheme that discriminate unfairly between different classes of shareholders.

Significantly, the Court rejected the argument that Section 66 capital reduction should employ a “fair value” (entity-specific, enterprise value-based) standard rather than a “fair market value” (market-participant-based) standard. The Court held: “Thus there is no oppression setting in the present case and there can be no distinction drawn from the statutory words employed of a ‘fair value’ and a ‘fair market value’.”

This holding is particularly important because it suggests that the statutory language of Section 66 (which does not specify “fair value” or “fair market value” but merely refers to fair value in the context of reduction of capital) does not import the specialized jurisprudential distinction developed in the American oppression context (as analyzed by Professor Douglas Moll). Rather, in the Indian context, fair value in the Section 66 context is determined in accordance with Indian Accounting Standards (Ind AS 113), which defines fair value as market-based and not entity-specific.

8. Implications for Board Decision-Making and Capital Reduction Schemes

(i) The Burden of Substantiation Regarding Prejudice

A critical implication of the judgment for corporate boards is that once a capital reduction scheme has been approved by an overwhelming majority of shareholders and has been subjected to tribunal scrutiny, the burden of establishing prejudice shifts substantially to the objecting shareholders. The Court held: “If the rates offered in the scheme of reduction is more than the past offers then, the burden on the objector is exponentially high when raising the plea that the offer is unfair or unreasonable, to establish real prejudice, palpable bias and demonstrable arbitrariness.”

(ii) The Test for Substantive Fairness

The Supreme Court articulated a four-part test for evaluating the substantive fairness of a capital reduction scheme:

• • “A fair and reasonable value was offered to the minority shareholders?”
  • “The majority of the non-promoter shareholders have voted in favour of the resolution?”
  • “The resolution read by any fair-minded and reasonable person, without microscopic scrutiny, finds it to be egregiously wrong offending the judicial conscience?”
  • “The valuer has gone so off-track that the result of valuation return can only be wrong?”

For corporate boards, this test suggests that capital reduction schemes are defensible if they satisfy these criteria, and objections based on mere disagreement with the valuation or the price offered (absent evidence of egregious wrongness or procedural unfairness) are unlikely to succeed.

9. CONCLUSION

In conclusion, the Pannalal Bhansali judgment provides a balanced and nuanced framework for capital reduction in India. While it empowers companies to effect capital reduction by offering shareholders market-based fair value determinations (including appropriate valuation adjustments such as DLOM), it simultaneously preserves the tribunal’s obligation to scrutinize such schemes for substantive fairness and procedural regularity. This balance reflects the recognition that corporate democracy must be subject to constitutional protections and judicial oversight to ensure that the majority does not exploit its power to oppress the minority, while simultaneously recognizing that courts should not second-guess reasonable business decisions made in accordance with statutory procedures and shareholder approval.