The legal framework under the Companies Act, 2013 (“2013 Act”), has not enacted adequate provisions for ‘squeeze-out’ of minority shareholders. Under the circumstances, selective capital reduction has emerged as an interesting and legally viable option for companies that intend to give an exit to the minority shareholders. Selective capital reduction is also very useful for giving an exit option to minority shareholders in specific scenarios, such as to the remaining shareholders, post the completion of delisting process. Many multinational companies, which chose to delist their securities, have adopted this route to give an exit to the remaining minority shareholders, who did not participate in the delisting process.
This article examines some of the vexed legal issues that arise under the current statutory framework for selective capital reduction.
Section 66 of the 2013 Act, read with the National Company Law Tribunal (Procedure for Reduction of Share Capital of Company) Rules, 2016 (“NCLT Rules”), sets out the legal framework governing the reduction of share capital by Indian companies. A reduction of capital is the reduction of the same proportion of shares of the company on similar terms and conditions offered to each shareholder whose shares are being reduced. On the other hand, a ‘selective’ capital reduction differentiates between shareholders of the same class by resulting in compulsory extinguishment of the shares of some shareholders, without affecting the other shareholders of the same class.
Section 66 of the 2013 Act provides that a company limited by shares or limited by guarantee and having a share capital may reduce its share capital by special resolution in any manner, and in particular, may –
a. extinguish or reduce the liability on any of its shares in respect of the share capital not paid-up; or
b. either with or without extinguishing or reducing liability on any of its shares:
- cancel any paid-up share capital which is lost or is unrepresented by available assets; or
- pay off any paid-up share capital which is in excess of the wants of the company,
alter its memorandum by reducing the amount of its share capital and of its shares accordingly:
Reduction of share capital in “any manner”
Section 66 of the 2013 Act broadly corresponds to the erstwhile Section 100 of the Companies Act, 1956 (“1956 Act”), which provided that the company may, by a special resolution, reduce its share capital in “any way”. In Reckitt Benckiser (India) Ltd (“RBIL”), the Delhi High Court held that Section 100 of the 1956 Act permits a company to reduce its share capital in any manner, which shall include a selective reduction of capital. The NCLT, in Re: Tamanna Hotels Private Limited, and the NCLAT, in its recent decisions in Devinder Parkash Kalra v. Syngenta India Limited (“Syngenta India”) and Brillio Technologies v. Registrar of Companies, Karnataka (“Brillio Technologies”), held that as Section 66(1) of the 2013 Act uses the words “any manner” – the statute permits a company to frame a scheme for selective reduction of capital. In Brillio Technologies, the NCLAT held that the manner of reduction of capital provided in Sections 66(1)(a) and 66(1)(b) of the Act is a mere illustration, and is not the only manner in which a company may reduce its share capital.
Selective capital reduction: Principles enunciated through case law
In RBIL, the Delhi High Court (“Delhi HC”) held that while reducing its share capital, in accordance with Section 100 of the 1956 Act, the company may extinguish some proportion of its shares, without dealing in the same manner with the other shares of the same class. It was noted that before confirming the proposed reduction, the Court should be satisfied that there is no unfair or inequitable transaction, and if there is a ploy to oust inconvenient shareholders – the Court can, in a particular case, treat the same as unfair and inequitable, and reject the proposed reduction of capital.
In Sandvik Asia Limited v. Bharat Kumar Padamsi, the Bombay High Court (“Bombay HC”) held that once it is established that the non-promoter shareholders (whose shares are being extinguished pursuant to selective capital reduction under Section 100 of the 1956 Act) are being paid fair value of their shares, and when an overwhelming majority of non-promoter shareholders have voted in favour of the resolution, the Court shall not be justified in withholding sanction to the same. A similar view has been taken by the NCLT in Re: Ansa Decoglass Private Limited, wherein the NCLT rejected a scheme for selective capital reduction under Section 66 of the 2013 Act, on the ground that the shareholders whose shares were being extinguished were not being paid any cash consideration for their shares.
In Re: Cadbury India Limited (“Cadbury”), the Bombay HC held that a scheme for reduction of share capital under Section 100 of the 1956 Act should not unfairly discriminate against, or prejudice a class of shareholders. It was noted that the Court shall not ordinarily interfere with the valuation of the shares arrived at by an independent expert. Before the Court declines to sanction a scheme for reduction of capital on account of valuation, the objecting shareholder should show that the valuation was ex-facie unreasonable, which implies that the valuation should be egregiously wrong in the minds of a fair-minded and reasonable person. It was held that the rationale adopted by the valuer cannot be discarded solely because the objecting shareholder has a different view.
A similar view was adopted in RBIL, where the Delhi HC, after referring to the Supreme Court (“SC”) decision in the Hindustan Unilever case, held that if the valuation is conducted by an independent expert in a reasonable manner, and has been approved by the shareholders, the Court shall not interfere with the valuation.
While Courts have broadly settled the law relating to valuation, the recent decision of the NCLAT in Syngenta India has given rise to interesting questions on the grounds on which the Tribunal can order a fresh valuation of shares, pursuant to a scheme for selective capital reduction.
NCLAT decision in Syngenta India – Is pendency of court proceedings a ground for ordering fresh valuation of the shares?
In Syngenta India, the company filed an application for selective capital reduction before the NCLT in 2017, and the application was approved by the NCLT on October 27, 2020, which was more than three years after the application was filed. For determining the fair value payable to the minority shareholders whose shares were being extinguished, the NCLT accepted the valuation report prepared by an independent valuer in 2017. Before the NCLAT, the minority shareholders contended that a fresh valuation of the shares should be undertaken, as there was a significant improvement in the financial health of the company between 2017 and 2020.
The company contended that once the valuation report prepared in 2017 was found to be fair and reasonable, the Court cannot order a fresh valuation on account of the time-gap between the date of filing of the application, and the date of NCLT approval. Reference was made to the principle of ‘actus curiae neminem gravabit’ (i.e. ‘act of Court shall prejudice no man’), to argue that if the company has taken reasonable steps to obtain NCLT approval, it cannot be obligated to undertake a fresh valuation, on account of pendency of judicial proceedings.
The NCLAT directed that a fresh valuation of the shares should be conducted, based on the latest available audited financial statements of the company, as the public shareholders are entitled to expect the best price for their shares, which takes into account the performance of the company. The NCLAT referred to the decision of the Supreme Court in Bacha F. Guzdar v. CIT, Bombay, and held that as the company has made significant profits and improved its financial position in the intervening period (between 2017 and 2020), the fair value of the shares should take into account the increase in profits, and the shareholders should not be deprived of the same.
While it can be argued that the decision in Syngenta India is restricted to the specific facts of the case (where there was a significant improvement in the company’s financial health), this decision may lead to additional litigation in situations where there is a delay in proceedings before the NCLT. If the delay in obtaining NCLT approval under Section 66 of the 2013 Act exceeds one or more financial years, the shareholders whose shares are being extinguished may petition the Court for a fresh valuation of the shares, if there is a significant improvement in the financial position of the company. This decision may accordingly have significant implications for other pending applications relating to selective capital reduction.
(It may be noted on July 1, 2021, the SC granted an interim stay on the NCLAT’s direction to Syngenta India, to conduct a fresh valuation of the shares.)
Utilisation of securities premium account for selective capital reduction
In its recent decision in Brillio Technologies, the NCLAT held that Section 52(1) of the Act permits a company to utilise the Securities Premium Account for paying fair value to the shareholders whose shares are being extinguished, pursuant to a scheme of selective capital reduction.
Section 52(1) of the Act provides that the provisions of the Act relating to reduction of share capital shall, except as provided in Section 52, apply as if the Securities Premium Account were the paid-up share capital of the company. Section 52(2) of the Act provides that notwithstanding anything contained in Section 52(1), the Securities Premium Account may be applied by the company for the purposes specified in Sections 52(2)(a) to 52(2)(e).
The NCLAT held that Section 52(2) of the Act enlists the situations where the Securities Premium Account can be utilised without complying with the requirements of Section 66 of the Act. According to the NCLAT, if a company intends to utilise the Securities Premium Account for any purpose that is not provided in Sections 52(2)(a) to 52(2)(e), the company must comply with the requirements of Section 66 of the Act. It was held that the Securities Premium Account may be utilised for paying fair value to the shareholders whose shares have been extinguished pursuant to selective capital reduction, after obtaining prior approval of the NCLT.
The recent NCLAT judgment in Syngenta’s case has changed the paradigm on the valuation of shares of minority shareholders due to delay. We must await the outcome of appeal filed by Syngenta in the Supreme Court. Attractiveness of this option will depend on the verdict of the Supreme Court.
 In Re: Reckitt Benckiser (India) Ltd, (2005) 122 DLT 612 (Delhi High Court).
 In Re: Tamanna Hotels Private Limited, Company Petition No. 1995 of 2018 (NCLT, Mumbai Bench).
 Devinder Parkash Kalra and Ors v. Syngenta India Limited, Company Appeal (A.T.) No. 220 of 2020 (National Company Law Appellate Tribunal).
 Brillio Technologies Limited v. Registrar of Companies, Karnataka, Company Appeal (AT) No. 293 of 2019 (National Company Law Appellate Tribunal).
 Sandvik Asia Limited v. Bharat Kumar Padamsi, 2009 (3) Bom CR 57:2009 (4) BOM LR 1421 (Bombay High Court).
 In Re: Ansa Decoglass Private Limited, Company Petition No. 79 of 2018 (National Company Law Tribunal, Mumbai Bench).
 In Re: Cadbury India Limited,  125 CLA 77(Bom) [Bombay High Court].
 Hindustan Lever Employees Union v. Hindustan Lever Limited, AIR 1995 SC 470 (Supreme Court).
 Bacha F. Guzdar v. Commissioner of Income Tax, Bombay, AIR 1955 SC 74.
 While taking this view, the NCLAT heavily relied on In Re: Nestle India Limited, (2008) 4 Comp LJ 490 (Delhi High Court) and In Re: Vaibhav Global Limited,  201 CompCas 32 (Rajasthan High Court).