Listen to this post
From Ambiguity To Authority: Supreme Court Affirms Selective Capital Reduction

Summary: The Companies Act, 2013, under Section 66, permits the reduction of share capital by a company “in any manner”, subject to passing a special resolution and attaining a confirmation from the National Company Law Tribunal. Whether this flexibility can be extended to permit selective reduction of share capital wherein the shares of only a particular class/category of shareholders is reduced is a question the High Courts and the tribunals have answered in the past, albeit with some contradictions. The Supreme Court in its recent judgment in Pannalal Bhansali v. Bharti Telecom Limited & Ors. has conclusively settled this issue and upheld the validity of selective capital reduction.

INTRODUCTION

    Section 66 of the Companies Act, 2013 (“Companies Act”), permits a company, subject to confirmation by the National Company Law Tribunal (“NCLT”), to reduce its share capital “in any manner” by way of a special resolution. A key question that arises is whether this implies that the provision allows a company to selectively reduce its share capital, i.e., reduce the share capital held by only a select class or category of shareholders, without interfering with the holdings of the other shareholders. The rationale behind the opposition to such selective capital reduction is that it may be coercive and unfair qua minority shareholders and that capital reduction under Section 66 ought to be uniform and non-discriminatory.

    The Supreme Court of India settled these concerns in its recent judgment in Pannalal Bhansali v. Bharti Telecom Limited & Ors.[1] by reaffirming that selective reduction is permissible under Section 66 of the Companies Act.

    JUDGEMENT OF THE SUPREME COURT IN PANNALAL BHANSALI

      In Pannalal Bhansali (supra),the respondent company, by way of a special resolution passed by a 99.90 per cent majority, decided to reduce its share capital by cancelling shares held by certain minority shareholders. The minority shareholders filed appeals contending that they had been relinquished of their shareholding arbitrarily and that the valuation of their shares was unreasonably low.

      The Court, while affirming that the valuation was fair and reasonable, relied on Delhi High Court’s decision in Re Reckitt Benckiser (India) Ltd.[2] to delineate the following principles regulating reduction of share capital:

      • Reduction of share capital is a strictly domestic concern depending on the decision of the majority.
      • If reduction of share capital is approved by a special resolution, the majority also has the right to decide how it should be carried out.
      • Reduction of share capital can be achieved by extinguishing some shares while retaining others even in the same calls or applying proportionate reduction for all or some, or totally extinguishing it for others.

      On the basis of these principles, the Supreme Court conclusively held that the reduction of share capital may be carried out in any manner, affirming that even selective capital reduction is permissible under Section 66 of the Companies Act.

      ANALYSIS AND COMMENTS

        In Pannalal Bhansali (supra),the Supreme Court upheld the impugned judgment of the National Company Law Appellate Tribunal (“NCLAT”),[3] thereby making it final and binding by way of the doctrine of merger. Before the NCLAT, the minority shareholders had specifically challenged the selective capital reduction by the company as being unfair and coercive, and argued that Section 66 of the Companies Act mandates uniform reduction of capital.

        The NCLAT, however, conclusively held that the mode of capital reduction specified under Section 66 was only illustrative and non-exhaustive and that it was the prerogative of the majority shareholders to conduct the reduction of share capital, provided it complied with the applicable law and the articles of association. The minority shareholders could be ousted and would have no vested right in the company, if the majority passed a special resolution. The NCLAT also observed that the Companies Act only mandates the passing of a special resolution by equity shareholders and does not stipulate passing of separate class of resolutions or equal reduction across all shareholders of a company. It further emphasised that the reduction of share capital is a purely commercial and business decision of equity shareholders and that the tribunals cannot interfere with it.

        While upholding these findings in its judgment, the Supreme Court reaffirmed previous decisions of the High Courts/tribunals that recognised selective capital reduction. For instance, in Sandvik Asia Ltd. v. Bharat Kumar Padamsi,[4] the Bombay High Court had permitted a share capital reduction by paying off non-promoter equity shareholders through a special resolution. The High Court observed that Section 100 of the Companies Act, 1956 (corresponding to Section 66 of the Companies Act) permitted reduction of share capital in any manner. Moreover, considering the shares were valued fairly, it would not have been justified to withhold the sanction to the resolution.

        Similarly, in Elpro International Ltd., In re,[5]the Bombay High Court held that the reduction of share capital need not necessarily be qua all shareholders and may take place from one or more among the body of shareholders. The Delhi High Court in RS Livemedia (P) Ltd., In re[6]also concluded that it is permissible for a company to reduce its share capital in a disproportionate manner and that the mode, manner, and incidence of reduction must be regarded as a matter of domestic concern, with no restriction under the Companies Act curtailing a company’s discretion to reduce its share capital.

        The Supreme Court in Pannalal Bhansali (supra) also resolved the conflict created by the judgment of the NCLT, Kolkata, in In the matter of Philips India Limited.[7]In this case, the NCLT had rejected the scheme for selective capital reduction for buying out shares held by the minority shareholders on the ground that Section 66 could not be invoked in situations where the capital reduction merely facilitates the acquisition of minority shareholding. With an appeal against the decision still pending before the NCLAT,[8] the determination will now be in line with the Supreme Court’s decision in Pannalal Bhansali (supra).   

        Accordingly, the judgment in Pannalal Bhansali (supra) has reaffirmed the validity of selective capital reduction under Section 66 and now stands as the leading authority for future disputes pertaining to capital reduction qua a specific class/category of shareholders.

        [1] Civil Appeal No. 7655 of 2025.

        [2] 2005 SCC OnLine Del 674.

        [3] Company Appeal (AT) No. 273 of 2019.

        [4] (2009) 151 Comp Cas 251.

        [5] (2009) 149 Comp Cas 646.

        [6] (2014) 187 Comp Cas 243.

        [7] CP/312(KB) 2023.

        [8] Philips India Ltd v. Sudhir Haribhai Patel & Anr Comp. App. (AT) No.367 of 2024.