Deciding a batch of appeals arising from Bharti Telecom's selective reduction of share capital, the Supreme Court held that Section 66 of the Companies Act, 2013 can lawfully be used to selectively extinguish the shareholding of a class of minority shareholders, provided the statutory conditions in Section 66 are satisfied and the affected shareholders are not prejudiced. The Court clarified that a formal valuation report is not a mandatory precondition under Section 66 itself, and laid down that judicial and NCLT scrutiny of such a capital reduction must focus on the fairness of the process and the reasonableness of the valuation offered, rather than second-guessing the commercial wisdom of the reduction.
Legal Background
Section 66 of the Companies Act, 2013 allows a company to reduce its share capital by a special resolution, subject to confirmation by the National Company Law Tribunal after notice to creditors, the Central Government and the securities regulator where relevant. A reduction can be done in several ways, including by cancelling shares, and questions arise where it is applied to one class of shareholders only. The ruling reported here considers the standard of review for such a reduction, and the judgment should be read for its reasoning.