India capital reduction regulations and Supreme Court valuation ruling

Capital reduction in India is governed by Section 66 of the Companies Act, 2013, and typically requires approval from the National Company Law Tribunal (NCLT). Once an order is received, companies must file it with the Registrar of Companies within 30 days. While the reduction itself may not trigger tax implications for the company, payments to shareholders can be treated as deemed dividends or capital gains depending on the nature of the transaction.

A recent legal debate has emerged following a Supreme Court of India ruling in Pannalal Bhansali v Bharti Telecom Ltd. The court upheld a selective reduction of capital that cancelled minority shareholders' shares, allowing a 25% discount for lack of marketability (DLOM) in the valuation.

Critics argue that the court's decision conflates ‘fair value’ with ‘fair market value’ by linking the applicability of a marketability discount to the absence of shareholder oppression. This approach may allow minority shareholders to receive discounted prices during forced exits, even when they did not seek to exit, because Section 66 does not mandate valuation by an independent valuer.