Reduction of Share Capital Or a Squeeze out of minority shareholders? A Critical Analysis of Sandvik Asia Ltd. v. Bharat Kumar Padamsi and Ors

Mayur Bhandari and Purvi Dabbiru ±



Recently, the Division Bench of the Bombay High Court in Sandvik Asia Limited v. Bharat Kumar Padamsi and Ors.,[1] granted sanction to a scheme proposed by Sandvik Asia Ltd for reduction for share capital though it would extinguish the entire class of public shareholders. This decision has the potential to further encourage the disturbing trend of companies squeezing out minority shareholders in the garb of reduction of share capital under Section 100 of the Companies Act, 1956.

In this article the authors shall analyse the judgment and its implications on the rights of minority shareholders. In Part I, the authors have introduced the concept of reduction of share capital vis a vis the squeeze out of minority shareholders in the Indian Scenario. Part II traces and analyses the response of the judiciary to the abovementioned trend. Part III discusses the judgment of the Division Bench in detail, followed by a critical analysis of the judgment and its implications in Part IV. The authors in conclusion have made a few suggestions for striking a balance between corporate autonomy and the rights of shareholders.

I. Reduction of Share Capital or a Squeeze-out?

After the raising of share capital by issuing shares, the Companies Act gives a company the liberty to adapt to its changing circumstances. Hence, Section 100 of the Companies Act provides that a company can reduce its share capital in any manner.[2] The following three instances of reduction of share capital as enumerated in Section 100 are only indicative and without prejudice to the generality of this power of the company:

(i)      reducing or altogether extinguishing the liability of any unpaid shares

(ii)    with or without canceling any paid-up share capital which is lost or cancel it to the extent to which deficiency is found in the available assets

(iii)    with or without pay of any paid-up share capital which is found to be in excess of the capital requirements of the company.

Further a company proceeding under Section 100 will have to comply with the following requirements, as laid down by the Supreme Court in Punjab Distilleries India Ltd v. CIT[3]:

“Firstly, a resolution is to be passed by the General Body of a company for reduction of capital by distribution of the accumulated profits amongst the shareholders; secondly, the company will file an application in the Court for an order confirming the reduction of capital; thirdly, after it is confirmed, it will be registered by the Registrar of Joint Stock Companies; fourthly, after the registration the company issues notices to the shareholders inviting applications for refund of the share capital; and fifthly, on receiving the applications the company will distribute the said profits either by crediting the proportionate share capital to each of the shareholders in their respective, accounts or by paying the said amounts in cash.”[4]

A perusal of the provisions on reduction ie. Sections 100-104 reveals that a reduction of share capital need not necessarily be qua all shareholders of the company. This is clear from the usage of the words “any shareholders” in Section 101 of the Act. Hence any classification of shareholders for the purposes of effecting the reduction of capital is, therefore, not an act which is extraneous to the provisions of Section 101.[5]

The principles on reduction of share capital are somewhat well-settled now and the same have been cited with affirmation in the case of Reckitt Benckiser (India) Ltd.[6] The Delhi High Court, particularly relied on the principles enunciated in British and American Trustee and Finance Corporation v. Couper,[7] which has been cited with approval by the Indian courts as the leading authority on the subject of a reduction of capital.[8] The High Court listed the following principles as forming the basis of the law relating to a reduction of share capital:

(1)   The question of reduction of share capital is treated as a matter of domestic concern, i.e., it is the decision of the majority which prevails;[9]

(2)   If a majority by special resolution decides to reduce share capital of the company, it has also the right to decide how this reduction should be carried into effect;[10]

(3)   While reducing the share capital, the company can decide to extinguish some of its shares without dealing in the same manner as with all other shares of the same class. Consequently, it is purely a domestic matter and is to be decided as to whether each member shall have his share proportionately reduced, or whether some members shall retain their shares unreduced, the shares of others being extinguished totally, receiving a just equivalent.

(4)   A selective reduction is permissible within the framework of law.[11]

(5)   The Court has to be satisfied that (i) there is no unfair or inequitable transaction and (ii) all the creditors entitled to object to the reduction have either consented or been paid or secured.[12]

Thus from the above discussion, it is clear that the Tribunal cannot refuse confirmation of reduction on the grounds of “public policy” and does not go into the motive of the reduction.[13] At this juncture, it might be useful to enquire as to why such a provision was incorporated in the Act. In other words, the factors that propel a company to reduce its own share capital.

The need for reducing the capital may arise on account of various reasons like to distribute assets to shareholders, to remedy deficit, to reduce the basis for taxes, make up for trading losses, heavy capital expenses, or to buy out dissident shareholder groups etc. Also, sometimes companies may have more capital resources and reserves than they can profitably employ, giving rise to the need to readjust the relation between capital and assets by reduction of capital.[14]

A reduction may not always be paid back in cash but can also be effected by transferring to its shareholders shares of another company or by creating a reserve which can then be set off against that surplus on consolidated account.[15] The money thus released can be then used to purchase the company’s own shares or to convert ordinary shares into redeemable shares.[16]

Though the companies can reduce their capital in any manner, buy back of shares has been one of the most preferred means. In fact, before Section 77A, which enables companies to buy-back their shares, was introduced, companies often took the route of Section 100 to buy-back their shares and thereby reduce their share capital. However, this is not to say that after the introduction of Section 77A, buy-back of shares is not possible via the Section 100 route. The non-obstante clause in Section 77A merely means that notwithstanding the provisions of Sections 77, 100-104 and 391, a company is still capable of buying back its shares subject to compliance with the conditions mentioned in Section 77A, without approaching the court under Sections 100-104 or Section 391.[17]

At times however, these above said reasons for reduction of capital can also act as a veil for more objectionable reasons.[18] For example, when Madura Coats Limited announced a scheme of reduction under Section 100, one of its objectives was to "to reduce the related administration costs like printing and posting annual reports".[19] But, as Garjia points out, for a company whose profits run in crores, an expenditure of a few thousand rupees is hardly a material change.[20]

In reality what the companies often try to achieve under the garb of reduction of share capital is to convert themselves from a public limited company to a private limited company and thus be subject to fewer regulations. Even more interesting are the companies, as in the case of M/s Sandvik Asia, that delist themselves but continue to remain a public company and thereby are able to invite participation of the very public at higher prices.  Moreover, they also reap the benefits of being a complete subsidiary of the promoters.

Thus the reasons are varied, some are plain and genuine, while the others are not. But it is the manner in which the reduction is carried out that raises concerns. This is all the more true in cases where such reduction of share capital under Section 100 tantamounts to nothing but a squeeze out of minority shareholders.

A squeeze-out is a transaction in which a controlling shareholder buys out the minority shareholders in a publicly traded corporation, for cash or the controller’s stock.[21] In other words, a “squeeze-out” refers to a mechanism that effectively entitles the controlling block to acquire the shares held by the minority shareholders in a company.[22]

It is pertinent to note that most jurisdictions confer powers on controlling (or majority) shareholders to squeeze out minority shareholders. So does the Indian company law. Section 395 of the Companies Act, 1956 allows controlling shareholders, in certain circumstances, to compel minority shareholders to sell their shares and exit a company. However, this Section has hardly been resorted in practice as it is riddled with a number of difficulties. Not only are the conditions in this provision onerous on controlling shareholders (thereby diminishing its utility in practice), but also leave several matters ambiguous and uncertain.[23]

So in essence, the companies circumvent the requirements of Section 395 by resorting to other provisions in the Companies Act. Hence they not only achieve the purpose of squeezing out the minority shareholders and thereby fortifying the majority’s control, but also escape the rigours and ambiguities of Section 395. And since Section 77A does not contain the only mode of buy-back of shares, companies prefer using Section 100 and terming the same as reduction of share capital. 

In our analysis of the practice prevailing over the past few years, we came across many instances wherein the amount of excess capital, as decided by the company, corresponded to the non-promoter holding while all the promoter shares remain untouched. Does this always happen to be a mere coincidence? The natural conclusion that one often arrives at is: the objective to use Section 100 was to force out the remaining minority shareholders and gain absolute control over the target company.

Also, initially the companies used to propose schemes of arrangement for purchase of equity shares and the consequent reduction of share capital under Section 100 read with Section 391 of the Act. However, soon the companies started proceeding solely under Section 100. One of the reasons for such a shift may have been to avoid the requirement of separate class meetings contained in Section 391(2) for the purpose of approving the scheme. The next section traces and analyses the response of the judiciary to this trend of squeezing out minority shareholders under Section 100.

II. The Judicial Trend Prior to the Sandvik Asia Ltd Case (2009)

There have been several instances over the past few years of companies using the Section 100 route for achieving outcomes that mirror a squeeze out of minority shareholders. The issue prominently came to the fore in 2002, when Sterlite Industries (India) Limited proposed a scheme of arrangement under Section 391 read with Section 100. A peculiar feature of the scheme was that the shares of all shareholders would be bought back unless they specifically intimated the company otherwise in writing. In other words, silence of the shareholders would be treated as an offer or deemed/negative consent. This scheme was approved by honb’le D.K. Deshmukh, J. of the Bombay High Court.[24]

Appeals were filed by SEBI and the Central Government before the Division Bench of the Bombay High Court[25] challenging the aforementioned order. The principal challenge in the appeals was based on Section 77A. It was contended on behalf of the appellants that Section 77A provides the only mode for buy-back of equity shares of a company and the court had no power to approve such a scheme under Section 391 read with Section 100 after the introduction of Section 77A. Moreover, treating the silence of shareholders as an offer was contrary to the well established principles of transfer of shares.

Apart from holding that SEBI had no power to challenge such a scheme, the court observed that there was nothing in Section 77A to indicate that the jurisdiction of the court under Section 391 and Sections 100-104 has been taken away or substituted. On the contrary, Section 77A was introduced as merely an alternative route to buy-back upto 25% of its total paid up equity capital. [26]

The court dismissed the appeals and held that the scheme would stand unchanged. As regards the contention of treating the silence of shareholders as an offer, the court did not delve into it as the objection was raised at a very belated stage. But the court left it open for the Central Government to raise objections to other schemes with provisions of deemed or negative consent that had been filed before the Company Judge.[27]

This judgment had two immediate ramifications. First, having realized its inability to intervene in such schemes of arrangement/reduction of capital, SEBI amended the Listing Agreement by a Circular dated May 8, 2003.[28] By virtue of the new provisions introduced, a public listed company would need prior approval of the Stock Exchange before initiating any scheme of arrangement/reduction of capital. The Company had to also ensure that no provisions of securities laws were being violated or circumscribed by the said scheme. Second, there was a spate of judgments where similar schemes were approved by different High Courts based on the same line of reasoning.[29] All these cases involved schemes containing provisions of deemed or negative consent. 

While the debate about the fairness of such schemes was still on, some companies, particularly the unlisted ones, went a step further. They proposed buy-back schemes which would effectively squeeze out the non-promoter shareholders, essentially the minority shareholders, without even providing an option of retaining the shares. One such scheme was considered by the Bombay High Court in Sandvik Asia Ltd.[30] In an unprecedented decision the Single Bench of the Bombay High Court struck down the scheme.

In this case, the promoters (viz. Sandvik AB & Sandvik Finance BV) held 95.54 per cent of the share capital. A scheme of reduction of capital was proposed under which the 4.46 per cent shares held by the public would be bought back at Rs 850 a share. [31] The case was different from the previous cases discussed in two aspects. First, the scheme was proposed solely under Section 100 of the Act. Second, the minority shareholders had no option to remain in the company. They were simply given a cut-off date and were told to accept the offer or leave the company after being paid the relevant consideration. Apart from the blatant unfairness of the scheme, the principal grievance of the minority shareholders was that there ought to have been a scheme under Section 391 of the Companies Act and not only by way of Section 100 whereby the statutory protection offered to minority shareholders is denied.[32]

The Court upheld the contention of the shareholders that there ought to have been a scheme under Section 391 of the Companies Act and not only under Section 100 whereby the statutory protection offered to minority shareholders is denied. It categorically declared that when there were two distinct groups, "the meeting ought to have been convened separately for the non-promoters group, otherwise the meeting would be rather absurd and would result in injustice. Further, given the absence of an option to retain the shares, the court found it inequitable and unfair that the promoters group could virtually bulldoze the minority shareholders and purchase their shares at the price dictated by them in such a manner.[33] The court also distinguished the decision in SEBI v. Sterlite Industries (India) Ltd,[34]  on the ground that the scheme in that case had an option for shareholders to sell their shares or continue to remain in the company.  Hence the company petitions were dismissed.

An appeal was soon filed by Sandvik Asia Ltd before the Division Bench of the Bombay High Court. While the stakeholders in the case and the corporate community at large were eagerly waiting for the issue to be put to rest by the Division Bench, there were other notable cases on this issue. For instance, in Reckitt Benckiser (India) Ltd[35], the petitioner company filed a petition under Sections 101 – 105 of the Companies Act, seeking a reduction of share capital. The primary objection raised was that the proposed reduction was discriminatory, unfair and mala fide as it was an attempt to extinguish the class of public share holders, so that the entire control of the company would rest with the promoter and its subsidiary company by acquiring 100% equity.

After discussing several principles of reduction of share capital, the court held that the scheme was valid. It was observed that the majority would have the right to decide the manner in which the shareholding is to be reduced and in the process a particular group could be targeted. Thus, the Court concluded that such a step could not be treated as buying back the shares and consequently the provisions of Section 77A of the Act would not be attracted. It was further held that the question of following provisions of Section 391 doesn’t arise, although in the instant case even the procedure prescribed therein had been substantially followed.”[36]    

In course of the hearing of the case, a statement was made by Counsel for the petitioner that if the objectors did not want to part with their equities, the company would not insist upon the same. In view of this statement, the objectors would not be affected by the proposed reduction of share capital, because their share would remain intact and they would continue to remain as share holders. But with regards to other shareholders who did not raise objections to the move of the petitioner, an inference was drawn by the court that they had no objection to part with their shares at the offered rates.  In our opinion such an observation once again raises the fundamental question as to whether silence of shareholders can be treated as an offer.

In early 2009, the court approved a scheme of reduction proposed by Elpro International Ltd, a public listed company, under Sections 100-105.[37] The court noted that since the scheme provided for return of capital only to such shareholders that "either assent or do not object by postal ballot to the proposed reduction", an exit opportunity was provided by the Company. It would not be possible to hold the opportunity that was offered as inequitable or unjust. It appears that the Sandvik Asia Ltd. decision was not brought before the attention of the Court or at least it was not discussed. However the court clarified that the order would not preclude the Stock Exchanges from taking action against the company with reference to violation of clause 24(f) of the Listing Agreement or otherwise.

The discussion above is merely illustrative of only a few important cases, amongst the several occasions when such schemes have been proposed and have been challenged by the minority shareholders. Curiously, such schemes have hardly been struck down by the courts. This observation comes with maybe extremely limited exceptions. In fact, this comes with no exception at all. For example, the Single Bench in Sandvik Asia Ltd case diverted from the path that the courts had been following and struck down the scheme. However, the diversion was futile because the Division Bench in appeal inevitably went back to the same path treaded upon all along. This case has been discussed in greater detail in the next section.

III. M/s Sandvik Asia Limited case – Division Bench[38]

In the instant case, M/s. Sandvik Asia Limited went in appeal to the Division Bench of the Bombay High Court against the order of the Single Bench striking down the proposed scheme of reduction of capital. The facts of the case and the decision rendered by the Singe Bench have been discussed in the preceding section.

At the appellate stage, the parties raised the following contentions. The appellants contended that the three instances of reduction of share capital enumerated in Section 100 are only indicative and therefore, every possible method of reduction of share capital of a company is duly encompassed under said Section 100. The courts could reject the scheme only if the provisions of Sections 100 to 104 of the said Act are not complied with by the company or if the proposed reduction is unfair or inequitable. The appellant contended that it had complied with the requirements under Section 100 and that the said Section does not require separate class meetings of distinct classes of shareholders. Even assuming that the aforesaid separate meetings are required, the appellant contended that the resolution was passed by an overwhelming majority of 99.95%.

Since the Appellant had been delisted from 9th September 2002, the non promoter equity shareholders were provided with a valuable and reasonable mode of exit as equity shares could not be traded any longer. Further the proposed price of Rs. 850/- per equity share was contended to be a lucrative price as it was much more than Rs. 687/- per equity share (the book value of an equity share of the Appellant as on 31st August, 2003 was Rs. 687/- per equity share).

The respondents on other hand contended that the Appellant, although an unlisted public limited Co., was intending to continue to remain a public company and therefore be able to invite participation of the very public after having forced out the erstwhile public. The whole scheme was only in order to facilitate the real object of the scheme, which is to make the company a 100% subsidiary of the Promoters and extinguish the class of public shareholders. In this regard, the Respondents argued that while interpreting Section 100, the overwhelming legislative policy and intent should be given due consideration. The legislative policy being, to prevent the forced acquisition of shares of the public or the extinguishment of the entire class of public shareholding.

It was also submitted that the right to transfer shares freely, includes the right to retain or hold shares under Section 111A(2) of the Companies Act. A scheme of reduction that forcibly acquires shares of the entire class of public shareholding, would abrogate this basic principle.

The respondents argued that the very purpose of having a mandatory requirement of confirmation of a reduction of capital by the Court is nothing but a statutory safeguard for the protection, inter alia, of the minority shareholders. Hence the Court had to consider whether the reduction of capital was fair and equitable qua creditors, shareholders (of every class individually and collectively), and in the interest of the public. The fairness and equity standards applicable were to be understood in the broad sense and not in the technical and narrow sense. In this inquiry it would have to be considered whether the affected shareholders were treated as a separate sub-class for the purpose of meetings to approve the scheme or whether the scheme contained any other safeguard to prevent a forced acquisition of shares of the targeted shareholders.

The respondents laid emphasis on the fact there was an overwhelming majority only because the majority of the shareholders were Promoters and were in fact excluded from the scheme of reduction. The inequity was manifest in the fact that while the Promoters (majority) were being treated as a class apart and were outside the ambit of the scheme of reduction, that classification was not maintained for voting on the scheme. Alternatively, it was proposed a fair scheme would have been one where all other shareholders, (other than the Promoters), who wanted to retain their shares, were excluded from the Resolution.

The High Court began with an analysis of Section 100 of the Companies Act. The tone of the judgment is set with the very first observation of the Court after perusing Section 100, that a company could reduce its share capital in any way. The court noted that the objections raised to the scheme were only directed towards the fact the whole class of non-promoter shareholding was being eliminated. However the parties did not allege the non-conformity with the procedural requirements under Section 100.

In the course of the judgment, the court placed reliance on several leading Indian and English cases. The court relied on British and American Trustee and Finance Corpn. v. Couper,[39] wherein, on similar facts, the House of Lords held that there was no statutory prescription of the manner in which the reduction of capital is to be effected, nor was the Court limited in its power to confirm the scheme, except that it was to be satisfied that all the creditors entitled to object to the reduction have either consented or been paid or secured. The legislative policy was clearly to entrust the prescribed majority of the shareholders with the decision whether there should be a reduction of capital, and if so, how it should be carried into effect. However, any scheme which does not provide for uniform treatment of shareholders whose rights are similar would be most narrowly scrutinized.

 In Poole and Ors. v. National Bank of China Limited,[40] a scheme for reduction of capital share was resulting in extinguishment of the entire class of founder shareholders. The House of Lords clearly laid down the following points of enquiry when considering schemes of this kind: (i) Ought the Court to refuse its sanction to the reduction out of regard to the interests of those members of the public who may be induced to take shares in the company? and (ii) Is the reduction fair and equitable as between the different classes of shareholders?.

Since the dissenting shareholders did not demand better pecuniary terms, but only insisted on retaining their holdings, which in all reasonable probability can never bring any profit to them, and may be detrimental to the company, the House of Lords chose not to interfere and approved the scheme.

The Division Bench was of the view that the observations of the House of Lords from its judgment in the case of Poole & ors, squarely applied to the present case. It was reasoned that as unfairness of price of their shares was never a ground for their objection and the special resolution was approved by an overwhelming majority, it would not be justified to withhold its sanction to the special resolution. Hence placing special reliance on the jurisprudence of the various courts, the Court granted sanction to the special resolution, though it would extinguish an entire class of shareholders.

IV. Critical Analysis of the Judgment

The decision rendered by the Division Bench stands on a very strong footing in so far as a plain reading of Section 100 is concerned. It is a well established principle that the language of a statute is to be read as it is and attention should be paid to what has been said as also to what has not been said.[41]  A company can thus reduce its share capital in any manner subject to authorisation in its articles of association and the passing of a special resolution approving the reduction. While any group or class of shareholders can be targeted by such schemes, separate class meetings for the purpose of approving the scheme are clearly not a requirement under this Section. Thus the decision of the court is definitely in accordance with the letter of law. However, it is most respectfully submitted that the decision was against the spirit of law as the court failed to take into account the unfairness of the scheme in question.

It is an established principle that when considering an application for confirmation of a reduction of capital, the Court has to consider whether the reduction of capital is fair and equitable towards the creditors and shareholders of the company.[42] In the instant case, the fairness of the scheme was only evaluated with respect to the price offered to the shareholders in return for their shares. The court did not deal with the contention raised that the scheme was unfair and discriminatory as there was no option given to the shareholders in the scheme to retain the shares. On the contrary, the Single Bench had clearly held the scheme to be unfair and inequitable for this very reason.[43]

Thus, the main issue actually involved (but overlooked by the court) is not about whether the price paid for the shares was fair, but whether an owner of shares has a vested right to keep his property, or can be forced by other shareholders to divest his property.[44] It is respectfully submitted that the Court should have considered the fairness of the scheme in greater depth and not focussed on merely the price offered. Even with regards to the price offered, it is surprising that the respondents did not raise the contention that the share price being offered was unfair despite the fact that the Single Bench had found the share price to be unfair.[45]  But in any case, our main objection remains that the court ignored the absence of an option of retaining the shares in the scheme. It is only logical that a shareholder who enters a company by choice and mutual agreement should be entitled to exit of his own accord and free will.[46]

The respondents in the instant case had also contended that the unfairness of the scheme was manifest in the fact there was no separate class meeting for the sub-class of those shareholders who were affected by the scheme for passing the special resolution. The court was of the opinion that the special resolution had been passed in accordance with the procedure laid down by the Companies Act, thus implying that separate class meetings are not a requirement under Section 100. Moreover, it is to be noted that the scheme in the instant case had been approved by an overwhelming majority of shareholders (inclusive of majority of the non-promoter equity shareholders). Even if separate class meetings had been held, the result would have remained the same. Therefore, as far as the facts of this case are concerned, the judgment of the court cannot be criticized in this respect. 

However, it is respectfully submitted that the judgment in this aspect should not be treated as a precedent in any cases that may arise in the future and should be restricted to the facts of this case alone. The courts should analyse the need for separate class meetings on a case to case basis. Such an approach could be justified on two grounds. First, it will ensure that the meeting envisaged under Section 100 read with Section 189, for the purpose of passing a special resolution, will not lead to an absurdity. The absurdity being that though the promoters of a company may be outside the ambit of a particular scheme of reduction, they get to decide the fate of minority shareholders who form a distinct group, by voting on the scheme.

Second, it can prevent companies from defeating the very spirit of Section 100. The spirit of this Section is to enable companies to restructure their capital when necessary. It was framed at a time when stock-splits and buybacks, which also enable capital restructuring, were unheard of.[47]  To safeguard the interest of minority shareholders, consent of three-fourths of the shareholders was required in the form of a special resolution approving the scheme. But this safeguard can be rendered quite meaningless when viewed in the backdrop of the scenario prevailing today, where the dominant shareholders hold a large majority of the shares. In many cases, they might not even need the support of minority shareholders in approving such a scheme. Therefore, the promoters of the company who are looking to squeeze out minority shareholders in the garb of reduction of share capital are actually going against the spirit of the Section. The courts would only be justified in preventing the same from happening. However, since the parliamentary intention discernible from the language of the Section seems to respect corporate autonomy,[48] unless the law circumscribes it by a clear provision, the Court may not be willing to read limitations where the Legislature has not imposed them.


The judgment of the Division Bench in Sandvik Asia Ltd case has the potential to further escalate the disturbing trend of companies (mis) using Section 100 for throwing out minority shareholders. While the previous cases involved schemes with at least an option to retain the shares, though negative in nature, the company in the present case did not provide any option at all. The efficacy of the negative consent provisions in the previous schemes too is debatable, considering that such schemes run into numerous pages, in small print, filled with technical and legal jargon. While shareholders would typically not even glance at such obscure notices, it would also be difficult for them to understand and unravel the scheme in its entirety.[49]

The judgment can have severe implications on the rights of minority shareholders in India.  As far as listed companies are concerned, the Stock Exchanges are unlikely to approve such transactions when companies seek approval as required under the Listing Agreement.[50] There are other safeguards present within Section 77A of the Companies Act and the SEBI (Buy Back of Securities) Regulations, 1998. For example, buy-back of shares can only be done on a proportionate basis.[51] It is the shareholders of unlisted (private or public companies) whose rights can be easily trampled upon.

For instance, private equity investors holding small stakes without serious rights could easily be thrown out by management using such resolutions. In family-run companies, a segment of the family that holds a minority stake could be ousted by the rest of the family.[52] Such squeeze-outs would also deter small investors who buy shares of companies with the intention of holding them and seeing their investment grow with the businesses.[53] Most importantly, the manner in which companies are affecting such minority shareholders squeeze outs also leaves a lot to be desired.

Thus, it is imperative that the legislature steps in and corrects the anomalies that exist in the existing system as it would be too optimistic to solely expect the courts to ring in sweeping changes. It is submitted that Section 100 should be amended to the extent of making separate class meetings a mandatory requirement for passing the special resolution approving the scheme. In our opinion, class should be interpreted to mean a group of shareholders having the same interest. Therefore non- promoter shareholders would constitute a separate class, distinct from the promoter shareholders, for the purpose of this Section.

This would be an adequate safeguard at the time of passing the special resolution. If such an amendment is not considered feasible, the legislature should alternatively issue a directive that a scheme under Section 100 which does not give an option to shareholders to retain shares or contains negative consent provisions shall not be granted approval by the courts. Regulations should also be framed to enable fair pricing for the minority shareholders. 

At this juncture, a reference to some of the provisions of the Companies Bill, 2009 is also essential. If implemented, these could benefit the minority shareholders to a great extent. For instance, Clause 42 of the Bill, which deals with variation of shareholders rights, is one such provision. It states that where the share capital of the company is divided into different classes of shares, the rights attached to the shares of any class may be varied with the consent in writing of the holders of not less than three-fourths of the issued shares of that class or by means of a special resolution passed at a separate meeting of the holders of the issued shares of that class. This implies that separate class meeting of the minority shareholders would have to be organized for passing the special resolution approving the scheme, in the event of the scheme targeting them.  However, this would also hinge upon the question as to whether promoters and non-promoter shareholders are considered as separate classes/groups or not.

Further, the Bill also provides that notice of every application for reduction of share capital made under Clause 59(1) shall be given by the tribunal to the Central Government and to the Securities and Exchange Board, in the case of listed companies.[54] The tribunal shall also take into consideration their representations, if any, made within three months of receipt of notice. Clause 59 further clarifies that nothing contained in this Section applies to buy-back of shares under clause 61. Similarly, Clause 201, which deals with the power of companies to make compromises or arrangements, also states that no compromise or arrangement under this clause shall include any buy-back of securities as is provided under clause 61. It is thus clarified that the procedures to be followed in case of reduction of share capital or making an arrangement/ compromise need not be followed in case of buy-back under Clause 61.

Though the Companies Bill, 2009, has taken steps in the right direction, further clarity and changes as suggested by the authors should be incorporated. This would go a long way in ensuring that the squeeze-out of minority shareholders does not take place in the garb of reduction of share capital under Section 100. It is crucial that a balance is struck between corporate autonomy on the one hand and shareholder democracy on the other, which envisages respect for not only voting rights, but also the ownership rights of shareholders.


± Authors are 4th Year B.A./B.Sc. LL.B. (Hons.) students at W.B. National University of Juridical Sciences, Kolkata.

[1] Sandvik Asia Limited v. Bharat Kumar Padamsi and Ors., 2009 (4) Bom LR 1421: [2009] 92 SCL 272 (Bom).

[2] Bhimbhai v. Ishwar Das, 1894 ILR 18 Bom 152 as cited in A. Ramaiya, Guide to the Companies Act, 16th edition (Lexis Nexis Butterworths Wadhwa Nagpur: New Delhi, 2006) at 1150.

[3] Punjab Distilleries India Ltd v. CIT, (1965) 35 Com Cases 541.

[4] Ibid, at 544.

[5] In Re: Elpro International Ltd., [2008] 86 SCL 47 (Bom): [2009] 149 Comp Cas 646 (Bom); Hindustan Commercial Bank Ltd. v. Hindustan General Electric Corporation Ltd., (1960) 3 Comp Cas 367 (Cal.)

[6] Reckitt Benckiser (India) Ltd., 122 (2005) DLT 612.

[7] British and American Trustee and Finance Corporation v. Couper, (1894) AC 399. This judgment was followed by Poole v. National Bank of China, 1907 Appeal Cases 299; Thomas De la Rue & Co. Ltd. In re, (1911) 2 Ch. 361; Westburn Sugar Refineries Ltd., (1951) 1 All ER 991 (HL).

[8] Ramesh B. Desai v. Bipin Vadilal Mehta, (2006) 5 SCC 638; Hindustan Commercial Bank, supra note 5.

[9] Re. Panruti Industrial Company (Private) Ltd., AIR 1960 Mad. 537, British and American Trustee and Finance Corporation, supra note 9. Also see J. B. Lindon (ed.), Buckley on the Companies Act, 13th edn. (Butterworths & Co. Ltd.: London, 1957) at 155.

[10] British and American Trustee and Finance Corporation, supra note 7.

[11] Re. Denver Hotel Co., 1893 (1) Ch D 495.

[12] Kaashyap Radiant Systems Limited, an unreported decision of 17-6-2006 in Company Petition No. 48 of 2006; Re. Panruti Industrial Company (Private) Ltd., supra note 9. See also British and American Trustee and Finance Corporation, supra note 7.

[13] John Avery & Co. Ltd., Petitioners, (1890) 17 R 1101 as cited in G. Morse (ed.), Charlesworth

& Morse Company Law 15th edn. (Sweet and Maxwell: London, 1995) at 178.

[14] Kartikey Mahajan & Ibshita Ganguly (2008), ‘Buy-back of Shares vis-a-vis Reduction of Share Capital’, SEBI & Corporate Laws Journal, Vol 88, p. 8.

[15] Tushar Tarun, ‘Reduction of Capital – Issues, Concerns and Legal Responses’, available online at (last visited on September 06, 2009)

[16] Ibid.

[17] The Securities & Exchange Board of India (SEBI) v. Sterlite Industries (India) Ltd., [2003] 45 SCL 475 (Bom): [2003] 113 Comp Cas 273 (Bom).

[18] ‘The current law regarding Reduction of Capital: Its Methodology, Purpose and Dangers’, 110 U.Pa.L.Rev.723 as cited in Tarun, supra note 15.

[19] Raghuvir Srinivasan, ‘Madura Coats plans capital reduction - To repay public shareholders’, Business Line, Aug. 10, 2003, available at (last visited on September 07, 2009).

[20] Rajesh Gajra, ‘Majority Rules’, Outlook Money, Setember 30, 2004, available online at (last visited on September 07, 2009).

[21] Guhan Subramanian (2005), ‘Fixing Freezeouts’, Yale Law Journal, 115:2 available online at (last visited on September 06, 2009)

[22] Sachin Mehta, ‘Minority shareholders and the threat of squeeze-outs’,  Livemint, September 1, 2008, available online at (last visited on September 07, 2009)

[23] Divi Jain & Manisha Garg, ‘Protection to Minority/Dissenting Shareholders During Takeovers’, (2008) 3 Comp LJ 1.

[24] In Re: Sterlite Industries Ltd. (Scheme of Arrangement in the matter of Section 391 of the Companies Act), MANU/MH/0338/2002.

[25] A.P. Shah and Nishita Mhatre, JJ.

[26] Sterlite Industries, supra note 17.

[27] Ibid.

[28]Amendment to the listing agreement regarding disclosure pertaining to schemes of arrangement/merger/amalgamation /reconstruction filed before the Court, Vide SEBI/SMD/Policy/List/Cir -17/2003 dated May 08, 2003.

[29] In Re: Gujarat Ambuja Exports Ltd., [2004] 52 SCL 399 (Guj): [2004] 118 CompCas 265(Guj); In Re: T.C.I. Industries Ltd., [2004] 50 SCL 450 (AP): [2004] 118 CompCas 373 (AP); Falcon Tyres Ltd., In re., C. P. No. 14 of 2002 dated November 19, 2002 (Kar) Unreported.

[30] Sandvik Asia Ltd., [2004] 50 SCL 413 (Bom): [2004] 121 CompCas 58 (Bom).

[31] Rs. 100 by way of face value plus Rs. 750 by way of premium, per share

[32] In case of a scheme under Section 391 of the Companies Act, the Court should be satisfied that the resolutions are passed by a statutory majority in value and in number, thus, there is a two-fold protection. Thus, it was contended that by not following the proposal of a scheme under Section 391, the petitioner Company had skilfully avoided the aforesaid protection of requisite majority by way of number also.

[33] The Court noted that against the buyback price of Rs. 850, the market price had seen levels of 1650, 3050 and even 6850 in the past.

[34] Sterlite Industries, supra note 17.

[35] Reckitt Benckiser (India) Ltd., supra note 6.

[36] Ibid.

[37] In Re: Elpro International Ltd., supra note 5.

[38] Sandvik Asia Limited, supra note 1.

[39] British and American Trustee and Finance Corpn. v. Couper, supra note 7, cited with approval in Ramesh B. Desai v. Bipin Vadilal Mehta and Ors., (2006) 5 SCC 638.

[40] Poole and Ors., supra note 7.

[41] Gwalior Rayon Silk Mfg. (Wvg.) Co Ltd. v. Custodian of vested Forests, AIR 1990 SC 1747, p. 1752; State of Jharkhand v. Govind Singh, AIR 2005 SC 294, p. 296.

[42] Supra note 12.

[43] Supra note 34.

[44] Somshekaran Sundaresan, ‘Minority shareholders can be thrown out’, Business Standard, May 04, 2009, available online at (last visited on September 04, 2009)

[45] Supra note 33.

[46] Sundaresan, supra note 44.; Gajra, supra note 20; Jayant M Thakur, ‘Buyback: Where's the choice?’ October 11, 2004, available online at (last visited on September 7, 2009)

[47] Raghuvir Srinivasan, ‘Delisted companies and minority shareholders — Using 100 for 100’, The Hindu Business Line, Sunday, Aug 31, 2003, available online at (last visited on September 7, 2009)

[48] In Re: Elpro International Ltd., supra note 5.

[49] Thakur, supra note 46.

[50] Clause 24 (f), Listing Agreement.

[51] Regulation 6, Securities Exhange Board of India (Buy Back of Securities) Regulations, 1998.

[52] Sundaresan, supra note 44.

[53] Gajra, supra note 20.

[54] Clause 59 (2), Companies Bill, 2009. Clause 59 deals with the reduction of share capital.