Supreme Court Upholds Reduction of Share Capital by a Closely Held Company Under Section 66 of the Companies Act 2013

Kaustav Chowdhury
Aug 15
6 min read

The Supreme Court of India, in Pannalal Bhansali v. Bharti Telecom Limited, (2026) 6 SCC 397, delivered on 10 March 2026, upheld the selective reduction of share capital by a closely held company under Section 66 of the Companies Act, 2013. A bench of Justices P.V. Sanjay Kumar and K. Vinod Chandran dismissed appeals filed by eleven minority shareholders, ruling that Section 66 does not mandate a valuation report from a registered valuer as a condition for reducing share capital. The judgment also affirmed that the Discount for Lack of Marketability (DLOM) is a legitimate valuation adjustment when applied to unlisted and illiquid shares. The decision has significant implications for corporate restructuring, minority shareholder rights, and the scope of judicial review in capital reduction proceedings.

Background and Facts

Bharti Telecom Limited (BTL) is a closely held, unlisted company that was delisted from the stock exchanges between 1999 and 2000. Its primary business consisted of holding a significant investment in Bharti Airtel Limited (BAL), a listed entity. Individual shareholders held approximately 1.09% of BTL's total shareholding.

BTL initiated a selective capital reduction under Section 66 of the Companies Act, 2013, proposing to cancel 28,457,840 equity shares held by identified minority shareholders at Rs. 163.25 per equity share of Rs. 10 each. The valuation applied a 25% Discount for Lack of Marketability, and a separate fairness opinion was obtained from an independent advisory entity. BTL had conducted a rights issue in 2016, offering 115 shares at par for every one share held, which exponentially increased each shareholder's total holdings while diluting the per-share monetary value.

The proposed capital reduction received overwhelming shareholder support. More than 99.90% of shareholders approved the special resolution at the Extraordinary General Meeting. Significantly, 76.35% of the identified minority shareholders who were present and voting also voted in favour of the resolution.

The National Company Law Tribunal (NCLT) examined objections from certain shareholders and approved the scheme, but directed that Dividend Distribution Tax should not be deducted from the consideration payable. The payout was accordingly enhanced to Rs. 196.80 per share. Thirty-five shareholders who had initially voted in favour subsequently filed appeals before the National Company Law Appellate Tribunal (NCLAT), which dismissed the appeals. Eleven appellants then approached the Supreme Court.

Issues Before the Supreme Court

The appellants framed their challenge around three grounds, described in the judgment as "the manner, the method, and the matter." They challenged: the procedure, alleging a "tricky notice" because the valuation report was not attached and the valuer was affiliated with the internal auditor; the valuation methodology, specifically the application of DLOM; and the exit price as unreasonably low. A preliminary issue also arose regarding the NCLAT bench composition of two technical members and one judicial member.

Key Holdings of the Supreme Court

No Mandatory Valuation Report Under Section 66

The most significant holding concerns the statutory requirements of Section 66. The Court held that the provision does not require a valuation report from a registered valuer as a condition for capital reduction. This conclusion was reached by comparing Section 66 with other provisions that expressly require independent valuation. Section 62(1)(c) on preferential allotments requires a valuation report. Similarly, Sections 230 and 232 on schemes of arrangement and amalgamation mandate a valuation report, as does Section 236 on minority buyout mechanisms. The legislature's deliberate omission of such a requirement under Section 66, while prescribing it under these other provisions, established that no such obligation exists.

The Court observed that "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." It noted that BTL's voluntary decision to obtain both a valuation report and a separate fairness opinion reflected good corporate practice. Companies considering capital reduction should note that voluntarily obtaining a valuation can reduce litigation risk, particularly alongside other compliance obligations under the ROC Section 454 penalty framework.

Selective Capital Reduction Affirmed

The Court reaffirmed the well-established principle, following Re: Reckitt Benckiser (India) Ltd. (2005 SCC Online Del 674) and British and American Trustee and Finance Corporation v. Couper ((1894) SC 399), that selective capital reduction is permissible. A company may extinguish some shares while retaining others, even within the same class. The reduction can be in any manner, and even if it is selective, it remains permissible. This principle is particularly relevant for closely held companies seeking to rationalize ownership or provide exits to minority investors.

Discount for Lack of Marketability Upheld

The appellants relied on the Singapore Court of Appeal's decision in Kiri Industries Ltd. v. Senda International Capital Ltd. ([2022] SGCA(I) 5), where DLOM was rejected in a court-ordered forced buyout arising from an oppression finding. The Supreme Court carefully distinguished that decision, observing that the present case involved no finding of oppression and arose within a statutory framework under Section 66 rather than a court-ordered buyout.

The Court recognized DLOM as a legitimate adjustment for unlisted and illiquid shares, relying on Indian Accounting Standard (Ind AS) 113 on fair value measurement, which requires entities to account for restrictions on the sale or use of an asset. The ICAI Valuation Standard 103 similarly recognizes that "an asset which is readily marketable commands a higher value than an asset which requires longer period or more efforts to be sold." The statutory scheme under Section 66, read with Section 133, contemplated a market-based measurement of fair value rather than an entity-specific one, making DLOM a permissible adjustment.

"Tricky Notice" Doctrine Found Inapplicable

The Court traced the doctrine of "tricky notice" to its origins in Kaye v. Croydon Tramways Co. ([1898] 1 Ch 358) and Baillie v. Oriental Telephone Co. ([1915] 1 Ch 503), holding that such a notice arises only where material facts are deliberately concealed or misrepresented. Since a valuation report is not required under Section 66, its non-circulation could not invalidate the resolution. The exit price was clearly disclosed, and valuation documents were available for inspection at the registered office.

NCLAT Bench Composition Held Valid

The appellants contended that the NCLAT bench violated principles in Union of India v. Madras Bar Association, (2010) 11 SCC 1. The Court rejected this challenge, holding that under Sections 418A and 419 of the Companies Act, 2013, there is no requirement that judicial members must outnumber technical members. The provisions require only that a bench include at least one judicial member, which was satisfied. Technical members contribute meaningfully through their expertise in corporate and financial matters, and the unanimous decision further weakened the challenge.

Limited Scope of Judicial Review: The Four-Part Test

Drawing from Re: Cadbury India Limited (2014 SCC Online Bom 4934), the Court articulated a four-part test for evaluating the substantive fairness of a capital reduction scheme. The Tribunal must consider the following:

Whether a fair and reasonable value was offered to minority shareholders.
Whether the majority of non-promoter shareholders voted in favour of the resolution.
Whether a fair-minded and reasonable person, without microscopic scrutiny, would find the scheme egregiously wrong, offending judicial conscience.
Whether the valuer went so far off-track that the valuation result can only be wrong.

The Court found all four tests satisfied. The price was reasonable in light of the rights issue that had significantly increased each shareholder's total holdings, prior offers, and independent validations by ICICI Securities and SBI Caps Securities. Citing Mihir H. Mafatlal v. Mafatlal Industries Ltd., (1997) 1 SCC 579, the Court noted that valuation is an expert exercise best left to professionals, and courts will not interfere unless the valuation is egregiously wrong. This approach parallels the judicial restraint exercised when confirming schemes of arrangement under Sections 230 to 232 of the Companies Act, where the tribunal similarly examines fairness without substituting its commercial judgment.

Significance for Companies and Practitioners

For closely held companies, the decision provides greater flexibility in structuring capital reduction transactions. While valuation reports are not legally required, obtaining them voluntarily enhances transparency and reduces litigation risk. For minority shareholders, the ruling underscores the importance of substantiating objections with concrete evidence of prejudice or arbitrariness. Mere disagreement with valuation methodology will not suffice where the scheme enjoys overwhelming shareholder approval.

For compliance professionals managing obligations such as identifying and reporting significant beneficial owners under Section 90 of the Companies Act, the judgment is a reminder that Section 66 carries its own distinct procedural safeguards, relying on shareholder approval and NCLT confirmation rather than mandatory valuation reports. Companies navigating broader corporate compliance, including through the MCA Corporate Mitra Scheme 2026, should note these requirements when considering capital reduction as a restructuring tool.

Conclusion

The Supreme Court's judgment in Pannalal Bhansali v. Bharti Telecom Limited strikes a measured balance between corporate autonomy and minority shareholder protection. It confirms that capital reduction under Section 66 remains a flexible and legitimate corporate restructuring tool, while the NCLT retains the authority to intervene where a proposed reduction is demonstrably unfair, discriminatory, or oppressive. By settling long-standing questions about valuation requirements, disclosure standards, and the scope of judicial review, the decision provides essential guidance for companies, shareholders, and practitioners navigating capital reduction under the Companies Act, 2013.