2025 (4) TMI 522 - AT - Companies Law

Reduction of capital under Section 66 of the Companies Act 2013 - shares got extinguished after passing special resolution by the Respondent No. 1 - selective capital reduction in terms of Section 66(1)(b)(ii) of the Code - Appellants minority shareholders could have been compelled to be ousted from the equity holding by passing resolution by majority of shareholders despite unwillingness of the minority shareholders - valuation of shares -valuation done by E Y Merchant banking division was really Independent or was biased - applicability of SEBI (Issue of Capital and Disclosure Requirements) Regulations 2009 - 25% Discount for Liquidity of Marketability (DLOM) was permitted and justifiable or not - minority shareholder who supported the Respondent company right from inception were entitled to receive Control Premium instead of DLOM - failure to disclose and attach the required documents in the explanatory statement enclosed along with the notice for acquisition of shares from minority shareholders was issued - violation of Section 102 of the Companies Act 2013 making the resolution passed for the approval of the scheme of reduction of share capital void and illegal or not. Whether reduction of capital by the Respondent No. 1/ BTL was in accordance with Section 66 of Companies Act 2013? - Whether selective capital reduction was permissible in terms of Section 66(1)(b)(ii) of the Code? - Whether the Appellants minority shareholders could have been compelled to be ousted from the equity holding by passing resolution by majority of shareholders despite unwillingness of the minority shareholders? - HELD THAT - In Punjab Distilling Industries Ltd. v. CIT 1965 (2) TMI 6 - SUPREME COURT the Hon ble Supreme Court of India outlined the process of capital reduction i.e. the company s general body must pass a resolution approving the reduction of capital often involving the distribution of accumulated profits to shareholders. An application for court (now NCLT) approval must be submitted. Once the court (now NCLT) confirms the reduction it must be registered with the Registrar of Companies. Notices are issued to shareholders inviting applications for refunds of share capital and finally upon receiving these applications the company distributes the refunded amount. Just like CoC in Corporate Insolvency Resolution Process under Insolvency and Bankruptcy Code 2016 the Shareholder of the company are true owners and understand what is in interest of the company as well as owners (shareholders) and therefore shareholders have exclusive jurisdiction to decide on the issue of capital reduction in any manner including selective capital reduction and if so in what manner. There are no conditions attached to the terms in any manner as stipulated under Section 66 of the Companies Act 2013. There is no vested right of minority shareholders to continue as shareholders in case of reduction of share capital and therefore they can be ousted from shareholding if a special resolution is passed by the majority of the equity shareholder which happened precisely in the present case where special resolution was passed by 99.92% of voting shares. The reduction of capital by the Respondent No. 1/ BTL was in accordance with the Section 66 of the Companies Act 2013. We also held that the selective capital reduction was permissible in terms of Section 66(1)(b)(ii) of the Companies Act 2013. We further hold that Section 66 is applicable in case of any capital reduction be it listed company or non listed company and therefore the Respondent No. 1 was supposed to comply with Section 66 of the Companies Act 2013 - there are no error in the Impugned Order on this account. Whether valuation of the shares carried out by E Y @ Rs. 196.80 was correct and in accordance with law along with established valuation practices done keeping in view the valuation of the same company done @ Rs. 310 few months back while allotting preferential shares to SingTel? - Whether the valuation done by E Y Merchant banking division was really Independent or was biased? - Whether SEBI (Issue of Capital and Disclosure Requirements) Regulations 2009 (ICDR Regulations 2009) were applicable in the present case? - HELD THAT - Share valuation under the Companies Act 2013 involves the process of determining the value of shares which is crucial in various corporate transactions. This process is governed by several provisions of the Act particularly emphasizing the role of registered valuers. Valuation is essential in ensuring that shares are issued at a fair price preventing undervaluation or overvaluation that could impact shareholder rights. The valuation of shares involves determining the fair value of a company s shares which is significant for both listed and unlisted companies. This valuation can be used and becomes desirable in cases like selling a business securing loans using shares as collateral mergers and acquisitions converting share types and compensating shareholders in case of capital reduction like the present case. The contentions of the Appellants that share valuation as done by the E Y Merchant Banking Division in the present case was not appropriate and this Appellate Tribunal should reject the same. In this connection reference made to ratio laid down in the case of Cadbury India Ltd. 2014 (5) TMI 1189 - BOMBAY HIGH COURT which noted that before a court can decline sanction to a scheme on account of valuation an objector to the scheme must first show that the valuation is ex-facie unreasonable i. e. so unreasonable that it cannot be accepted. It was also held that plausible rationale provided by a valuer is not be readily discarded merely because an objector has a different view. It was held that valuation is not an exact science and all valuations proceed on assumptions and to dislodge a valuation it must be shown that those assumptions as such as could never have been made and that they are so patently erroneous that the end result itself could not but be wrong unfair and unreasonable - the ratio laid down in case of Cadbury India Ltd. is quite explicit and hardly leaves any scope for interference by this Appellate Tribunal on the issue of valuation. Noting that ICDR Regulations 2009 do not apply to the Capital Reduction in question the current position with respect to period to be considered for the purpose of pricing has changed from 26/2 weeks to 90/10 days under the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations 2018 (as amended in 2022) further shortening the period to examine the days for the purpose of valuation wherein 26 weeks was noted to be too long a period to value shares especially as price can be very volatile over a period of 26 weeks. Therefore it is the judgement of a valuer on the historic price to be considered of a volatile listed share that would represent the value of such shares correctly. This seems quite logical. The allegation that Ernst Young LLP on account of being the internal auditor of BAL and therefore amenable to influence by Respondent No. 1 is found to be untenable - the Tribunal has correctly complied the same in the present appeal and there are no merit in the pleading of the Appellants on this ground. Whether 25% Discount for Liquidity of Marketability (DLOM) was permitted and justifiable in determining the valuation for the purpose of offering the minority shareholders? - Whether the minority shareholder who supported the Respondent company right from inception were entitled to receive Control Premium instead of DLOM ? - HELD THAT - The valuation of shares is rather intricate and subjective matter for experts who has got domain knowledge of not only the valuation methodology but also have fair knowledge about relevant industry for which valuation is being done with the help of the relevant financial facts and figures. While doing these valuations there may be more challenges in case of valuation of unlisted companies like the Respondent No. 1/ BTL as the relevant market shares dates is not available - By no stretch of imagination someone can expect that the court/ tribunal shall have such expertise to go into the correctness or otherwise of the valuation done by the independent valuers. The only duty of the court/ tribunal is to ensure that the whole process has been fair and unbiased and has not caused any prejudice to the rights of shareholders including and especially the minority shareholders. In the present case there are no such reason to come to the conclusion that whole process has been biased or unfair. It is the case of the Appellants that instead of DLOM the valuation should have provided Control Premium since promoters acquired shares from the minority shareholders forcefully. Hence it would be desirable to understand the concept of Control Premium and its applicability in the present case - Equity Shares may be subject to premium or discounts depending upon the context of valuation including whether they represent controlling or minority interests. The contention of the Appellants that Ernst Young Merchant Banking Services Pvt. Ltd. submitted flawed Valuation Report as it failed to include a control premium is not found convincing. The majority shareholders in the Respondent No. 1/ BTL already had control over majority of the shares and the remaining of 1.09% of shareholders were not in any significant position or say in the dealing with the company matters. Further this percentage of minority shareholders did not have the ability to influence any major decision of the Respondent No. 1. Thus the question of a control premium does not arise as there is no change in control of the Respondent No. 1 pursuant to the capital reduction. There is no error in the Impugned Order which allowed scheme based on Independent Valuer report which provided 25% discount for DLOM in arriving at fair value of Rs. 196.80 per shares. It is already noted that in the present case there seems to be no case of control premium which the Appellants have claimed simply as majority of shareholder has brute majority of 98.91%. Whether the Respondent company failed to disclose and attach the required documents in the explanatory statement enclosed along with the notice for acquisition of shares from minority shareholders was issued? - Whether the Respondent company BTL violated Section 102 of the Companies Act 2013 making the resolution passed for the approval of the scheme of reduction of share capital void and illegal? - HELD THAT - Uder the Companies Act 2013 Section 62 allows for a Preferential Allotment of shares like in the case of SingTel. Under Section 62(1)(c) read with Companies (Share Capital and Debentures) Rules 2014 Rule 13 it is mandatory for a company to (a) obtain a valuation report and (b) send the valuation report along with the notice under Section 102 of the Companies Act 2013. This requirement of law was duly complied for the SingTel Preferential Allotment. In contrast to the provision relating to Preferential Allotment in the case of Capital Reduction under Section 66 of the Companies Act 2013 there is no such stipulated requirement to send the valuation report along with the notice. The only requirement is to permit an inspection by virtue of Section 102 (3) of the Companies Act 2013 which was duly complied by the Respondent No. 1 company. Thus it is not convinced with the arguments of the Appellants that failure to send the valuation report together with the notice has caused legal infirmity or any prejudice to the interest of the Appellants. In fact the right to inspect was availed from by some of the Appellants as is evident from the email dated 12.07.2018 where an inspection was provided to the counsel of the Appellant. Conclusion - i) Reduction of capital by the Respondent No. 1/ BTL was in accordance Section 66 Companies Act 2013. ii) Selective capital reduction was permissible in terms of Section 66(1)(b)(ii) of the Companies Act 2013. iii) The Appellants minority shareholders could have been compelled to be ousted from the equity holding by passing resolution by majority of shareholders despite unwillingness of the minority shareholders. iv) The valuation of the shares carried out by E Y @ Rs. 196.80 was correct and in accordance with law along with establish valuation practices. v) The valuation done by E Y Merchant banking division was Independent. vi) The SEBI (Issue of Capital and Disclosure Requirements) Regulations 2009 ( ICDR Regulations 2009 ) were not applicable in the present case. vii) 25% Discount for Liquidity of Marketability (DLOM) was permitted and justifiable in determining the valuation for the purpose of offering the minority shareholders. viii) The minority shareholder who supported the Respondent company right from inception were not entitled to receive Control Premium instead of DLOM . ix) The Respondent No. 1/ BTL did not fail to disclose and attach the required documents in the explanatory statement enclosed along with the notice for acquisition of shares from minority shareholders was issued. x) The Respondent No. 1/ BTL did not violate Section 102 of the Companies Act 2013 and therefore making the special resolution passed for the approval of the scheme of reduction of share capital was valid. Appeal dismissed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment were:

1. Whether the reduction of capital by Bharti Telecom Limited (BTL) was in accordance with Section 66 of the Companies Act, 2013.

2. Whether selective capital reduction was permissible under Section 66(1)(b)(ii) of the Companies Act, 2013.

3. Whether the minority shareholders could be compelled to exit by a resolution passed by the majority, despite their unwillingness.

4. Whether the valuation of shares at Rs. 196.80 by Ernst & Young (E&Y) was correct and independent, considering the previous valuation of Rs. 310 for preferential shares to SingTel.

5. Whether the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 were applicable.

6. Whether a 25% Discount for Lack of Marketability (DLOM) was justified, and if minority shareholders were entitled to a "Control Premium" instead.

7. Whether BTL failed to disclose required documents in the explanatory statement, violating Section 102 of the Companies Act, 2013.

2. ISSUE-WISE DETAILED ANALYSIS

Issue No. I: Capital Reduction Compliance

The Appellants argued that Section 66 mandates a uniform approach to capital reduction, opposing selective reduction as unfair and discriminatory. The Court noted that Section 66 allows capital reduction "in any manner," including selective reduction. The majority of shareholders approved the reduction through a special resolution, fulfilling legal requirements. The Tribunal confirmed no objections from creditors, and the process was deemed compliant with Section 66.

Issue No. II: Valuation of Shares

The Appellants challenged the valuation disparity between E&Y's report and the previous valuation for SingTel. The Court recognized that market conditions had changed, affecting valuations. E&Y's valuation was based on detailed methodologies, and the Tribunal found no evidence of bias. The Court emphasized that valuation is a technical matter for experts, and judicial interference is limited unless valuation is patently unfair.

Issue No. III: Discount for Lack of Marketability (DLOM)

The Appellants contested the application of a 25% DLOM, arguing for a Control Premium instead. The Court explained that DLOM accounts for the illiquidity of unlisted shares, and the independent valuer provided detailed reasoning for its application. The majority shareholders already had control, making a Control Premium irrelevant. The Tribunal accepted the DLOM as reasonable.

Issue No. IV: Disclosure and Compliance with Section 102

The Appellants claimed that BTL failed to disclose necessary documents, violating Section 102. The Court found that BTL complied by allowing inspection of documents at its office, as required. The notice provided sufficient information for shareholders to understand the implications of the capital reduction.

3. SIGNIFICANT HOLDINGS

The Court upheld the Tribunal's decision, affirming that:

- Reduction of capital by BTL was in accordance with Section 66 of the Companies Act, 2013.

- Selective capital reduction was permissible and valid under the Act.

- Minority shareholders could be compelled to exit through a majority resolution.

- The valuation by E&Y was correct, independent, and complied with established practices.

- SEBI Regulations were not applicable to the unlisted company.

- The 25% DLOM was justified, and a Control Premium was not warranted.

- BTL did not violate Section 102, and the resolution was valid.

All appeals were dismissed, and the Tribunal's order was upheld as fair and compliant with legal standards.