PANNALAL BHANSALI versus BHARTI TELECOM LIMITED & ORS.

Summary

The Supreme Court dismissed appeals by minority shareholders of Bharti Telecom Limited against confirmation of a selective reduction of share capital under Section 66 of the Companies Act, 2013, holding that the NCLAT bench composition was lawful, Section 66 does not require a valuation report so the notice was not a 'tricky notice', the valuer was not shown to be biased, and applying a discount for lack of marketability to unlisted, illiquid shares was not unreasonable; the price of Rs.196.80 per share fixed by the NCLT was fair.

Issues

1. Whether the NCLAT order was vitiated because the bench had two Technical Members and one Judicial Member.
2. Whether the reduction was vitiated by procedural infractions: an unsupported reference to shareholders' request for exit, non-circulation of the valuation and fairness reports (a 'tricky notice'), valuation by an affiliate of the internal auditor, and both reports bearing the same date.
3. Whether application of a Discount for Lack of Marketability (DLOM) in valuing shares cancelled in a selective capital reduction was impermissible, and whether the price fixed was unfair or prejudicial to the identified shareholders.
4. Whether a status quo order in other proceedings involving a Custodian affected the reduction.

Provisions considered

• Section 66, Companies Act, 2013Permits reduction of share capital in any manner by special resolution with Tribunal confirmation; unlike Sections 62, 230, 232 and 236 it does not require a valuation report, and the Tribunal scrutinises whether the reduction is fair, not unreasonable and not unfairly prejudicial. (¶¶ 24, 29, 31, 32, 41, 42, 44)
• Proviso to Section 66(3) and Section 133, Companies Act, 2013The Tribunal must be satisfied, on the auditor's certificate, that the accounting treatment conforms to the accounting standards under Section 133; Ind AS 113 treats fair value as a market-based measure, so the scheme does not exclude DLOM. (¶¶ 35, 44, 45)
• Section 423, Companies Act, 2013The appeal lies only on a question of law; concurrent findings of the NCLT and NCLAT are not reappreciated save for perversity. (¶ 29)
• Sections 418A and 419, Companies Act, 2013Require NCLAT and NCLT benches to include at least one Judicial and one Technical Member but do not require a judicial majority on larger benches. (¶¶ 17, 19, 21)
• Section 244, Companies Act, 2013The appellants did not by number or holding constitute a group able to allege oppression, and no oppression was complained of, so the reduction was not examined as an oppression buyout. (¶ 40)
• Section 138 with Rule 13, Companies (Accounts) Rules, 2014, Companies Act, 2013An internal auditor appointed under these provisions is an independent in-house check, and its appointment does not make it or its affiliate valuer biased towards the company. (¶ 34)

Held

• The NCLAT bench of one Judicial and two Technical Members, which was unanimous, was lawful; the present provisions do not require a majority of Judicial Members, and Technical Members permitted by the legislature to sit cannot be treated as lower in status. (¶¶ 16, 17, 18, 19, 20, 21, 22)
• A status quo order binding a Custodian, to which the company was not a party, did not affect the capital reduction; the reduction proceeds for shares held by the Custodian go to the Custodian subject to further orders. (¶ 22)
• Since Section 66 does not require a valuation report, the reports were not material whose non-circulation made the notice a 'tricky notice'; the notice disclosed the price, and the reports were kept for inspection at the registered office, which suffices, especially as the appellants were seasoned investors and one had inspected them. (¶¶ 25, 26, 27, 28, 29, 30, 31, 32, 37)
• Bias must be real and present, not a mere probability; a valuer affiliated to the company's independent internal auditor was not shown to be biased, the valuation was endorsed by an unrelated fairness report and by two other agencies, and the same date on both reports showed only the date of issue. (¶¶ 33, 34, 35, 36)
• Kiri Industries does not reject DLOM in all situations; it declined DLOM in a court-ordered buyout on oppression, whereas here no oppression arose and the reduction was approved by special resolution, with most identified shareholders present and voting in favour; abstainers are taken to leave the decision to those who vote. (¶¶ 38, 39, 40, 43)
• Reduction of share capital is a domestic matter for the majority and may be selective; the Tribunal asks whether the reduction is unfair, unreasonable or unfairly prejudicial, and prejudice means more than receiving less than a shareholder wants. A plausible valuation is not rejected merely because the objector holds another view, and valuation is best left to experts. (¶¶ 42, 46, 47, 48, 50)
• Given BTL's delisting, absence of dividends and marketability, past offers, the 2016 rights issue at par that multiplied holdings, and that the strategic investor's allotment price was not comparable, applying DLOM was valid and Rs.196.80 per share was fair and reasonable. (¶¶ 46, 48, 49)

Result

Appeals dismissed; NCLAT order upholding the NCLT's confirmation of the reduction of share capital at Rs.196.80 per share maintained; pending applications disposed of.