Source: http://www.indialawjournal.org/squeezing-out-the-minority.php
Timestamp: 2019-04-19 05:03:27+00:00

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Anushka Sharma analyzes the squeeze-outs effectuated under section 66 of the Companies Act, 2013 and discusses the regulatory framework governing them along with delineating the role played by regulatory bodies such as SEBI in this area. It then understands the position of the minority shareholders in this context by discussing various judicial pronouncements on the issue and highlights the need for safeguarding the interests of the minority shareholders.
This paper aims to discuss the reduction of capital under section 66 in the context of its usage to squeeze out the minority shareholders. In its discussion regarding squeeze-outs, the scope of the paper is limited to the squeeze outs engineered by reduction of capital under section 66. It aims to understand the law governing squeeze outs in India by analyzing various judicial decisions on the issue and follows the Doctrinal approach. In the course of the paper I argue that the Indian courts have sanctioned the squeezing out of minorities via selective reduction of capital as long as the shareholders are being paid a fair price and have preferred to stick to the policy of non-intervention in the internal decisions of the company that are backed by the support of the majority. Part II of the paper briefly discusses the statutory provision governing squeeze-outs by reduction while also discussing the distinction between ‘reduction’ and buy-back using judicial precedents on the subject. Part III maps the evolution of case law regarding squeeze outs in India and also discusses the court’s approach towards contentions raised by the regulatory bodies and their role under the 2013 Act. Part IV contains the observation based on the analysis of the judgements with special focus on the status of the requirement of a Majority of Minority vote in case of squeeze-outs. Part V summarizes the discussion and concludes the paper.
1. S. 66, The Companies Act, 2013.
2. Ss. 100-105,The Companies Act, 1956.
3. S.66, The Companies Act, 2013.
4. Vikramaditya Khanna and Umakanth Varottil, Regulating Squeeze Outs in India: A Comparative Perspective (2014) National University of Singapore Law Working Paper Series, 4, Working Paper Number 009/2014, National University of Singapore (2014).
7. Abhishek Sanyal, Reduction of Capital: The most effective mechanism to engineer a squeeze out, Indian Express, available at https://www.financialexpress.com/industry/reduction-of-capital-the-most-effective-mechanism-to-engineer-a-squeeze-out/794398/, last seen on 14/9/2018.
8. Rajiv Luthra, William Vivian John and Anshul Jain, Minority Squeeze-Out, Luthra and Luthra, available at http://www.luthra.com/admin/article_images/minority-squeeze.pdf, last seen on 13/9/2018.
The procedure of squeezing out under section 66 involves buying back the shares of the minority shareholders and then cancelling which leads to a consequential reduction of capital. This appears to be quite similar procedurally to a buyback of shares under section 68 (earlier section 77 of the companies act, 1956) of the Companies Act, 2013.18 An argument to that effect was raised by the petitioner in the case of In re: Reckitt Benckiser (India) Ltd19 where it was argued that since the reduction in the given case is essentially a buy back, the requirements of section 77 (Companies Act, 1956) should also be fulfilled and the company should be required to reduce its capital proportionately. However the court held that buy back and reduction operate in two entirely different fields, by placing reliance on Securities and Exchange Board of India v. Sterlite Industries.20 The court stated that by virtue of the wording of section 77 which states ‘notwithstanding anything contained in this act,’ buy back under section 77 and reduction under section 100 (Companies Act, 1956) are two separate provisions, independent to each other.21 Hence, there can be no requirement of the reduction under section 100 to be proportionate22 and it can be ‘in any manner’ (which includes a selective reduction) as provided under the section.23 Another distinction between the two includes that for a buy back there is no requirement of NCLT approval. However the distinction between the two is merely procedural in nature as both of them invariably lead to a reduction in capital.
9. A Ramaiya, Guide to the Companies Act, ch.4, 7 (Vol 1, 18th ed., 2015).
11. S.66, The Companies Act, 2013.
14. Vikramaditya Khanna and Umakanth Varottil, Regulating Squeeze Outs in India: A Comparative Perspective (2014) National University of Singapore Law Working Paper Series, 4, Working Paper Number 009/2014, National University of Singapore (2014).
16. Supra 4, at 16.
17. S. 66(5), The Companies Act, 2013. See also, In Re: Walker & Smith Ltd., (1903) 88 LT 792 (Ch D).
18. Ss. 66, 68, The Companies Act, 2013.
19. In Re: Reckitt Benckiser (India) Ltd, MANU/DE/3902/2011.
20. SEBI v. Sterlite Industries (India) Ltd  45 SCL 475 (Bom).
22. In Re: Reckitt Benckiser (India) Ltd, MANU/DE/3902/2011.
23. S. 66, The Companies Act, 2013.
The matter of reduction of share capital is a domestic concern of the company.
If the majority decides to reduce the share capital and passes a special resolution to that effect, it also has the right to determine the manner of the reduction.
Selective reduction of capital is permitted within the same class of shares, and it is entirely a domestic matter so as to whether the share of each member would be reduced proportionately or whether shares of certain members will be extinguished entirely leaving others untouched.
Court has to ensure that the transaction is fair and equitable and all the creditors have gotten the right to object or have been paid, secured or have consented.
24. British and American Trustee and Finance Corp v. Couper  A.C. 399.
26. Sandvik Asia v. Bharat Kumar Padamsi (2009) 3 Bom CR 57, ¶ 8, See also Kartikey Jain, Pankaj Rathi, Squeeze-out by way of reduction of capital in India: an analysis in the light of the recent decision in Cadbury India case 26(8), International Company and Commercial Law Review, 260, 445(2015).
26. Ramesh B. Desai v. Bipin Vadilal Mehta (2006) 5 SCC 638. See also In Re: Elpro International Ltd 2008 (86) SCL 47 (Bom), ¶ 14.
27. Reckitt Benckiser (India) Ltd. v. Unknown, 122 (2005) DLT 612.
28. Ibid, at ¶ 10.
29. Ibid, at ¶ 31.
30. Reckitt Benckiser (India) Ltd. v. Unknown, 122 (2005) DLT 612, ¶ 33.
31. In Re: Elpro International Ltd 2008 (86) SCL 47 (Bom).
32. Ibid, at ¶ 15.
33. Sandvik Asia v. Bharat Kumar Padamsi  50 SCL 413 (Bom). See also Kartikey Jain, Pankaj Rathi, Squeeze-out by way of reduction of capital in India: an analysis in the light of the recent decision in Cadbury India case 26(8), International Company and Commercial Law Review, 260 (2015).
36. Sandvik Asia v. Bharat Kumar Padamsi, 2009 (3) Bom CR 57.
38. In Re Organon (India) Limited, (2010) 98 CLA 480 (Bom.). See also Kirthana Singh, Squeezing Out Minority Shareholders- An Indian Perspective, Jurip, available at http://jurip.org/wp-content/uploads/2018/01/Kirthana-Singh.pdf, last seen on 14/9/2018.
39. In Re Organon (India) Limited, (2010) 98 CLA 480 (Bom.).
41. Chetan G Cholera v. Rockwool (India) Limited, (2010) 155 Comp Cas 605 (AP).
42. Ibid, at ¶ 30.
44. In re: Reckitt Benckiser Ltd, MANU/DE/3902/2011, ¶ 43.
45. In re: Reckitt Benckiser Ltd, MANU/DE/3902/2011, ¶ 43.
47. In Re: Cadbury India Limited, MANU/MH/2681/2014.
48. Kartikey Jain, Pankaj Rathi, Squeeze-out by way of reduction of capital in India: an analysis in the light of the recent decision in Cadbury India case 26(8), International Company and Commercial Law Review, 260, 445(2015).
50. Securities & Exchange Board of India v. Sterlite Industries, 2003 25 SCL 475 Bom.
54. S. 66(2), The Companies Act, 2013.
55. Supra 4, at 26.
58. S. 66(2), The Companies Act, 2013.
59. Supra 4, at 27.
Another common characteristic in all the above cases regarding a squeeze out via section 66 is the fact that the majority of minority (hereinafter ‘MoM’) has supported the reduction in all these instances. The courts have also laid down the support of ‘overwhelming majority of the minority (non-promoter) shareholders’ as being one of the factors for approving selective reduction of capital which wipes out the minority shareholding. Therefore even though the statute allows for the company to selectively reduce its share capital without any requirement of the approval of the MoM, there hasn’t been an instance so far in which they have opposed the proposed reduction. So can this be understood to mean that in case the MoM does not vote in favour of the proposal they can be allowed to retain their shares in the company? Does the court have the authority to disallow a reduction on this ground when the statute does not prohibit selective reduction?
While this can be a way to look at it, the absence of a MoM vote can also lead to objections from the SEBI against the company, and in light of the Rockwool judgement it might be argued that the courts might in certain instances also be inclined towards disallowing the reduction to safeguard the minority interest. The requirement of the consideration of ‘public interest’ as laid down in Cadbury also comes into play here, which can be used to contend that if an overwhelming majority of the minority has opposed the forced squeeze-out then would be against public interest to let the company to steamroll them. Various scholars have also suggested the usage of the MoM vote to determine the reduction of capital in cases of minority squeeze-outs which would safeguard their interests and would prevent the forcible acquisition of their shares by the promoters.63 Hence, the decision of the court can go either way, and there is a need of judicial clarification on this issue which has not been provided so far.
In my opinion, in order to balance the interests of the company on one hand and to safeguard the minorities on the other, there should be two votes on the issue of reduction of capital. One on the question of whether to reduce the capital or not which should be decided by a special resolution and another in which the manner in which the reduction will be engineered should be put to vote, i.e. whether the shares of all shareholders are to reduced proportionately or a selective reduction which extinguishes the shares of certain members entirely is to be done. On the second question a Majority of Minority should be required to vote in favour of the manner of reduction of capital for it to be valid.
It has also been suggested that in order to protect the interests of minority shareholders there should also be a requirement of the approval of the squeeze-out by Independent Directors whose decision cannot be influenced by the promoters/controllers of the company.64 This will act as an additional safeguard to ensure that the interests of the minority shareholders are not being manipulated for the benefit of the controllers.
60. Somasekhar Sundaresan, Minority Shareholders can be thrown out, Business Standard, available at https://www.business-standard.com/article/economy-policy/minority-shareholders-can-be-thrown-out-109050400001_1.html, last seen on 15/9/ 2018.
61. Mihir Naniwadekar, Andhra Pradesh High Court on Reduction of Capital: More Uncertainity,? India Corp Law Blog, available at https://indiacorplaw.in/2010/09/andhra-pradesh-high-court-on-reduction.html, last seen on 14/9/2018.
62. In re: Reckitt Benckiser Ltd, MANU/DE/3902/2011, See also Wartsila India ltd v. Janak Mathuradas  104 SCL 616 (Bom).
63. Vikramaditya Khanna and Umakanth Varottil, ‘Regulating Squeeze Outs in India: A Comparative Perspective’ (2014) National University of Singapore Law Working Paper Series, Paper 009/2014, 4 https://law.nus.edu.sg/wps/pdfs/009_2014_Umakanth%20Varottil.pdf accessed 15 September 2018. See also Kartikey Jain, Pankaj Rathi, Squeeze-out by way of reduction of capital in India: an analysis in the light of the recent decision in Cadbury India case 26(8), International Company and Commercial Law Review, 260 (2015).
The most feasible method to engineer a squeeze-out in India is via the reduction of share capital under section 66, as has also been illustrated by numerous cases in the recent past. The legal position on the issue is fairly settled, and the courts have had a limited intervention on the issue of squeezing out by way of selective reduction, as long as it has been backed by the support of the majority and the shareholders have been offered a fair price. The statutory provisions as well as the judicial inclination has been to regard the issue of squeezing out as matter as a domestic concern of the company, but there exists a grey area regarding the status of the Majority of Minority vote in this context. It is unclear so as to what will be the court’s approach in case the MoM refuses to support the scheme of reduction, with indications in the recent past of the court giving due consideration to public interest as well as the interests of the minority. The regulatory bodies such as SEBI have an important role to play here as well. As has been pointed out by Mr. Somasekhar Sundaresan, that the issue here is not just of the payment of a fair amount to the shareholders whose shares are being acquired coercively by the company, but is that whether he has a right to hold his shares of which he is a lawful owner, or can he be compelled to divest his property by the promoters.65 Hence, it is required on the part of the courts that due consideration is given to the interests of the minority shareholders while ensuring that they do not encroach upon the domestic matters of the companies, a careful balance must be struck between the two.
ANUSHKA SHARMA is pursuing B.A. LLB (Hons.) at the National University of Juridical Sciences, Kolkata. She may be contacted at sharmaanushka@nujs.edu.

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