A selective capital reduction is a route by which a company can buy out a minority shareholder and cancel the shares, leaving the majority in control. The route is available under Section 66, but it is subject to the NCLT's scrutiny, and the Supreme Court's decision in Pannalal Bhansali v. Bharti Telecom Ltd. confirms that the Tribunal must examine the fairness of the valuation and the process.
The Section 66 Procedure
The company must pass a special resolution approving the reduction, and it must apply to the NCLT under the Reduction of Share Capital Rules, 2016. The application must be accompanied by the special resolution, the list of creditors, the audited financial statements, and the proposed reduction scheme. The NCLT issues notices to the creditors, the ROC, the Income Tax Department, and the other statutory authorities, and it examines the objections.
The creditor protection requirement is the principal hurdle. Section 66(3) requires the company to discharge or determine the debt or claim of every creditor, or to secure it, or to obtain the creditor's consent. The NCLT Chennai has held that an unsecured loan that was neither discharged nor consented to is a bar to the confirmation of the reduction.
The Minority Protection
The Supreme Court has held that the NCLT must scrutinise the valuation and the process, and that the minority's interests must be protected. The valuation must be conducted by a registered valuer, and it must reflect the fair value of the shares. The process must give the minority a reasonable opportunity to dissent and to be heard.
The NCLT has declined to interfere with a reduction where the objecting minority had exercised its statutory right to dissent and was outvoted. The Tribunal's role is to examine the fairness, not to substitute its own commercial judgment for the majority's.
The Consultant's Role
A capital reduction consultant coordinates the valuation, the special resolution, the creditor consents, the NCLT application, and the response to objections. The consultant also advises on the tax consequences and the accounting treatment. The squeeze-out is a technically demanding transaction, and a defect in the valuation or the process can result in the NCLT rejecting the reduction.
Call to Action
Anuj Desai & Associates advises companies and minority shareholders on selective capital reduction—from the valuation and the special resolution to the creditor protection and the NCLT confirmation. If you are planning a minority squeeze-out, we can help you structure a process that meets the Tribunal's scrutiny.
📧 office@anujdesaiassociates.com
📞 9619456656
🌐 https://anujdesaiassociates.com
🔗 linkedin.com/in/ca-anuj-desai-122547230
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