Section 66 Capital Reduction: Post-Delisting Minority Shareholder Exits
Indian companies frequently raise capital through public markets and later pursue strategic delisting once promoters consolidate control.
However, when residual public shareholding continues after delisting, companies increasingly rely on Section 66 capital reduction under the Companies Act, 2013, to extinguish minority holdings and achieve complete ownership.
Consequently, minority shareholders often face forced exits through selective capital reduction schemes.
Although companies justify this approach as a cost-saving exercise, such schemes directly affect investor rights.
Therefore, understanding the legal framework, valuation principles, procedural safeguards, and judicial scrutiny governing Section 66 capital reduction becomes essential.
Table of Contents
What Is Section 66 Capital Reduction?
Section 66 permits a company limited by shares to reduce its share capital through:
Special resolution of shareholders
Confirmation by the National Company Law Tribunal (NCLT)
Moreover, the provision recognises three statutory modes:
Recognised Modes Under Section 66
- Extinguishing or reducing liability on unpaid share capital
- Cancelling lost capital not represented by assets
- Paying off surplus paid-up capital
In practice, post-delisting companies rely on clause (c) to eliminate minority shareholding while retaining promoter shares.
Why Companies Use Section 66 Capital Reduction After Delisting?
After delisting, promoters often hold over 90% ownership. However, when small public shareholding persists, companies claim that:
Compliance costs outweigh benefits
Shareholders are geographically dispersed
Servicing dividends and communications becomes burdensome
Therefore, promoters propose a Section 66 capital reduction to reach 100% ownership.
Judicial Foundation Governing Section 66 Capital Reduction
Courts have consistently held that NCLT cannot act as a rubber stamp.
Miheer Mafatlal Principle
In Miheer H. Mafatlal v. Mafatlal Industries Ltd., the Supreme Court ruled that tribunals must independently
verify:
- Fairness
- Reasonableness
- Absence of coercion
Similarly, the Delhi High Court in Reckitt Benckiser India Ltd. upheld selective reduction as permissible, provided the process remains fair.
Typical Procedure in Section 66 Capital Reduction
Board approves scheme and valuation
Explanatory statement issued under Sections 66 & 102
Shareholders vote through e-voting
Company files NCLT petition
Authorities and shareholders invited to object
Consequently, any procedural lapse can invalidate the scheme.
Valuation: The Core of Section 66 Capital Reduction
Although Section 66 does not expressly mandate valuation, tribunals insist on:
Independent registered valuer
Recognised methodologies (DCF, NAV, multiples)
No Marketability or Minority Discount
Courts reject:
Discount for lack of marketability
Minority discount
For instance, in Re Cadbury India Ltd., the court enhanced the exit price significantly after finding undervaluation.
Therefore, valuation fairness becomes the primary battleground.
Notice and Disclosure Requirements
Section 102 requires full disclosure of all material facts. However, companies often:
Omit valuation annexures
Allow inspection only at the registered office
Courts have held that such suppression vitiates consent.
Thus, shareholders must demand complete valuation reports before voting.
Miheer Six-Point Scrutiny Test
NCLT must examine:
Statutory compliance
Informed decision-making
Good faith
Proper documentation
No abuse of corporate structure
Overall fairness
If any element fails, the tribunal can refuse sanction.
Common Promoter Tactics
Delayed valuation reports
Ambiguous explanatory statements
Reliance on the majority vote alone
However, courts repeatedly clarify that majority approval does not override fairness.
How Minority Shareholders Can Protect Themselves?
Seek valuation reports before voting
Record objections during e-voting
File intervention before NCLT
Request independent valuer
Appeal to NCLAT if required
Consequently, proactive engagement significantly improves outcomes.
Legislative Gaps in Section 66 Capital Reduction
Despite extensive litigation:
No mandatory independent valuation
No annexure requirement
No minority exit thresholds
Therefore, reform remains necessary.
Conclusion
It has become the preferred route for promoters to eliminate minority shareholding after delisting.
Nevertheless, strong judicial safeguards exist. Minority shareholders who understand valuation principles, disclosure standards, and Miheer scrutiny can effectively resist unfair exits and secure fair compensation.
Anirudh Associates regularly represents minority shareholders in Section 66 capital reduction matters, securing valuation enhancements, invalidating defective notices, and protecting investor rights before NCLT, NCLAT, and High Courts.
