Companies Act Does Not Mandate Valuation Report For Share Capital Reduction: Supreme Court

A bench of Justices Sanjay Kumar and K. Vinod Chandran said that reduction of share capital under Section 66 can be effected through a “special resolution” passed by shareholders and confirmation by the National Company Law Tribunal.

“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.” the court observed.

The dispute arose after Bharti Telecom decided to reduce its share capital by cancelling shares held by certain minority investors and offering them an exit price. The proposal involved cancellation of 2,84,57,840 equity shares held by identified minority shareholders, with compensation fixed at Rs163.25 per share.

The company obtained approval through a special resolution passed with more than 99.90 percent shareholder support and approached the NCLT for confirmation of the capital reduction scheme. The tribunal examined the proposal and held that dividend distribution tax should not be deducted from the price payable to shareholders. It therefore directed that the exiting shareholders be paid Rs. 196.80 per share.

Several shareholders challenged the decision before the National Company Law Appellate Tribunal. They alleged that the valuation adopted by the company was unfair and that relevant documents had not been properly disclosed to investors.

The NCLAT dismissed the appeals on April 3, 2025, affirming the NCLT's approval of the capital reduction scheme.

Before the Supreme Court, the minority shareholders argued that the process was vitiated because valuation and fairness reports were not circulated to shareholders along with the notice of the meeting.

Rejecting the challenge, the top court held that the statutory scheme under Section 66 of the Companies Act does not mandate a valuation report for reduction of share capital and therefore the absence of such disclosure could not “invalidate the process."

The court also rejected the shareholders' contention that the meeting notice was defective because it did not enclose the valuation and fairness reports. According to the bench, Section 66 of the Companies Act does not make a valuation report mandatory for a reduction of share capital. In that context, the reports could not be treated as material whose absence from the notice would invalidate the process.

It noted that the documents had been placed at the company's registered office and remained available for shareholders who wished to inspect them.

The bench also examined the valuation methodology adopted by the company, particularly the application of a Discount for Lack of Marketability (DLOM). This adjustment, the court observed, reflects the reduced liquidity typically associated with unlisted shares and forms part of recognised valuation standards.

Bharti Telecom's shares were not listed and had limited marketability. In those circumstances, the court found no reason to treat the application of DLOM as unreasonable.

The court found no procedural irregularity or unfairness warranting interference with the decisions of the tribunals and dismissed the appeals.

For Appellants: Senior Advocate K. Parameshwar; Advocates Masoom K. Shah, Udit Gupta, Veda Singh, Prasad Hegde, N. Sai Kaushal, Adit Garg, Rohan Chawla, Aashvi P. Shah; Udit Kishan and Associates, AOR.

For Respondents: Senior Advocates Shyam Divan, Ramji Srinivasan; Advocate-on-Record Arti Singh; Advocates Kamal Shankar, Tanmay Sharma, Aakashdeep Singh Roda, Arjun Narang, Shivam Jain, Shefali Munde, Arjun Bhatia, Arpith Jacob Varaprasad, Ankur Singhal, Pooja Singh, B. P. Singh; Advocate-on-Record Soumya Dutta; Senior Advocate Percival Billimoria; Advocates Khowaja Siddiqui, Kshitij Arora, Rachita Sood, Priyamvada Paneru, Rahul Bhaskar; Advocate-on-Record Arvind Gupta.