By Yashasvi Mohanram | Sumnima Kataruka
Over the past few years, the Securities and Exchange Board of India has made commendable strides in liberalising the framework for take-private transactions involving listed companies. The 2021 amendments to the Takeover Regulations enabled consolidated takeover and delisting offers. More recently, last year’s introduction of a fixed-price delisting regime in the Delisting Regulations addressed a long-standing industry demand. However, the absence of a reliable squeeze-out mechanism continues to frustrate controlling shareholders aiming for full ownership. This gap is particularly stark in the context of delisted firms where minority shareholders linger despite multiple exit opportunities.
Recent cases underscore the problem. In September 2024, the National Company Law Tribunal (NCLT) in Kolkata rejected Philips India’s capital reduction scheme that would have resulted in the Dutch parent increasing its shareholding from 96% to 100%. Philips India has since filed an appeal before the National Company Law Appellate Tribunal (NCLAT). In contrast, Bharti Telecom secured a favourable NCLAT ruling in April to purchase the 1% stake held by minority shareholders, overturning a 2019 denial by the NCLT, Chandigarh. However, the spectre of further appeals and delays remains even for Bharti Telecom. Both companies have been delisted for over two decades, but the controlling shareholders, despite providing numerous exit opportunities, still face hurdles in achieving full ownership. Other companies like Syngenta and Cadbury have faced similar delays previously.
The primary reason for the uncertainty and delays can be attributed to the exclusive reliance on the capital reduction mechanism under Section 66 of the Companies Act to compulsorily buy out public shareholders who choose not to sell in a delisting offer. Capital reduction schemes are required to follow an elaborate process involving an application to the NCLT, representations from statutory authorities and interested parties, and finally an NCLT approval. Given the contentious and long-drawn-out nature of NCLT proceedings, capital reduction is not effective as the default mechanism for controlling shareholders seeking to acquire 100% shareholding in their delisted subsidiaries.
Unfortunately, the alternative mechanisms under the Delisting Regulations and the Companies Act involving a direct acquisition of the minority shareholding are not adequate to reliably ensure a full sell-out. The Delisting Regulations provide a “right” — but not an “obligation” — for the remaining shareholders to sell their shares to the controlling shareholder at the delisting price for up to one year from the delisting date. Section 236 of the Companies Act, which ostensibly allows controlling shareholders holding 90% or more to acquire minority stakes, is riddled with ambiguity. Besides providing that the minority shareholders “may” — rather than “shall” — sell their shares, its placement within the chapter on schemes of arrangement further clouds its applicability post-delisting. The need of the hour is a clear mechanism akin to Chapter 3 of the UK Companies Act, 2006, which provides for a structured squeeze-out mechanism to be triggered by a controlling shareholder upon reaching the 90% threshold in a takeover offer. India would benefit greatly from a similar calibrated approach that balances rights and obligations on both sides.
Valuation disputes are the most contentious obstacle in minority buyouts. While controlling shareholders rely on independent valuers and fairness opinions, minority shareholders often counter with their own inflated valuations. Despite clear judicial precedents which limit the role of courts and tribunals in valuation scrutiny, in practice, valuations for capital reduction are frequently challenged and overturned. Minority shareholders often use the valuation exercise as a negotiating tactic to extract a bargain from controlling shareholders. The variance is of the order of several multiples in contested cases, a result of the valuation methods that are deployed (discounted cash flow, net asset value, comparable multiples, etc.) and the varying underlying valuation assumptions.
The Delisting Regulations offer some relief by anchoring post-delisting exits to the delisting price for one year. Subject to the rules being amended to provide a corresponding right for the controlling shareholder to purchase the shares of minority shareholders, the delisting price serves as a benchmark to avoid potential valuation mismatches. But a shorter window — say, three months rather than one year — would better balance certainty for acquirers and fairness for minority shareholders.
While the Companies Act requires capital reduction schemes to be approved by way of only a special resolution (that is three-fourths majority), in practice the extent of minority shareholders’ support often influences the NCLT. For the sake of consistency in dealing with capital reduction schemes, it would be prudent to avoid insisting on a “majority of minority” approval from the shareholders.
In contrast, the Delisting Regulations already require two-thirds approval from voting public shareholders. Accordingly, no further approval of shareholders would be necessary to approve the purchase of the remaining shares by the controlling shareholder in the limited window period post-delisting. Only controlling shareholders who choose not to acquire the remaining shares during such a period would risk any subsequent attempts being subject to the vagaries of a capital reduction exercise.
The divergent outcomes in recent cases illustrate not only a lack of judicial consistency but also the broader risks that companies face when relying on the capital reduction route. The procedural delays and uncertainties associated with NCLT proceedings serve as a deterrent, raising the transaction cost and execution risk for controlling shareholders. A bespoke mechanism allowing controlling shareholders to acquire the remaining public shareholders at the delisting price in the immediate aftermath of a delisting exercise cannot come any sooner.
The writers are respectively partner and senior associate, Touchstone Partners.
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