Minority Squeeze-Out Under Indian Company Law: Balancing Majority Control And Minority Protection

i. Section 61(1)(b): Consolidation and Division of Share Capital

Section 61(1)(b) of the CA 2013 permits a limited company to consolidate or divide its share capital into shares of a higher denomination. In effect, consolidation involves combining multiple lower-value shares into a single share of higher face value, for instance, converting 1,00,000 equity shares of Rs. 10 each into 10,000 equity shares of Rs. 100 each, without altering the overall share capital.

This process requires an alteration in the capital clause of the Memorandum of Association and approval by an ordinary resolution in a general meeting. Where the consolidation results in a change in voting rights or class rights, prior approval from the National Company Law Tribunal (NCLT) is required in accordance with Rule 71 of the NCLT Rules, 2016. These rules mandate public notice, opportunity for objections, and judicial scrutiny to safeguard shareholder interests.

The process is often structured to achieve the objective of minority squeeze-out through consolidation. Such consolidation typically results in fractional shareholdings for minority shareholders, which are aggregated and thereafter sold or encashed at a fair value determined by the company, thereby facilitating the exit of minority shareholders. Any failure to deal with fractional entitlements in a fair, transparent, and equitable manner may expose the consolidation scheme to allegations of oppression and render it vulnerable to judicial invalidation.

The judicial approach to consolidation-based squeeze-out under Section 61(1)(b) was examined by the National Company Law Appellate Tribunal (NCLAT) in Re Chembra Peak Estates Limited [(2020) 218 Comp Cas 10]. In this case, the NCLT, Bengaluru Bench, relying on the report of the Registrar of Companies, had refused to sanction a scheme involving consolidation of share face value coupled with an exit offer to public shareholders. The NCLT held that the scheme was prejudicial to minority shareholders, contrary to public policy, and was, in substance, an attempt to reduce public shareholding, which ought to have been undertaken under Section 68 of the Act.

On appeal, the NCLAT set aside the order of the NCLT and sanctioned the scheme. The Appellate Tribunal noted that more than 95% of the shareholders had approved the consolidation at the extraordinary general meeting, reflecting overwhelming shareholder support. It further recorded that most of the objecting shareholders had exited during the pendency of the appeal, leaving only a negligible residual public shareholding, whose rights continued to remain protected. In these circumstances, the NCLAT held that the grounds relied upon by the NCLT for rejecting the scheme lacked substantive merit.

The decision in Chembra Peak Estates underscores that consolidation under Section 61(1)(b) is not per se impermissible as a mechanism resulting in minority exit. However, its validity hinges on demonstrable overwhelming shareholder approval, fair treatment of fractional entitlements, and the absence of any element of unfair prejudice or statutory circumvention.

ii. Section 66: Reduction of Share Capital

Section 66 empowers companies to reduce their share capital through a scheme authorized by a special resolution and sanctioned by the NCLT. The reduction can be general or selective, allowing companies to extinguish or reduce capital liability either for all shareholders or for specific classes—a provision especially relevant in minority squeeze out scenarios.

For the reduction to be valid, three conditions must be satisfied: (a) the company's Articles explicitly authorize the reduction; (b) shareholders approve it by passing a special resolution; and (c) the NCLT confirms the reduction.

Further, Section 66(1) specifies methods by which reduction may be effected:

1. extinguishing or reducing liability on the unpaid portion of any share;
2. cancelling paid-up capital which is lost or not represented by assets; or
3. paying off any paid-up capital in excess of the company's needs, with consequent alteration of the Memorandum.

Notably, while some view these methods as exhaustive, the opening words of the Section 66, particularly the phrase "in any manner", clearly indicates legislative intent to grant companies unrestricted flexibility to reduce capital by any means they choose. The Supreme Court, in Shiv Kripal Singh v. V.V. Giri (AIR 1970 SC 2097), affirmed that specific provisions do not limit the general power conferred.

The process of reduction of share capital under Section 66 requires filing an application before the NCLT with disclosures including creditor details, valuation reports, and shareholder approvals, and is subject to close judicial scrutiny to ensure fairness and absence of prejudice. While selective capital reduction targeting minority shareholders continues to attract scrutiny, it is increasingly upheld where statutory safeguards—such as transparent valuation, fair consideration, and due process under the CA 2013.

Judicial Approval of Selective Capital Reduction

In Sandvik Asia Limited v. Bharat Kumar Padamsi [(2009) 3 Bom CR 57], the Bombay High Court upheld a scheme of selective capital reduction under Section 66, emphasising that the non-promoter shareholders were being paid fair value for their shares and that there was no allegation that the consideration offered was inadequate. A similar approach was adopted by the Delhi High Court in Reckitt Benckiser India Ltd. [(2005) 122 DLT 612], where the Court approved a reduction of share capital, holding that capital reduction is primarily a matter of internal corporate governance. The Court accorded due deference to the commercial wisdom of the majority, particularly where:

1. The resolution had received overwhelming shareholder approval;
2. The valuation methodology adopted was fair, reasonable, and resulted in sufficiently attractive consideration; and
3. The scheme did not involve a coercive or forced exit, as objecting minority shareholders were permitted to retain their shares.

This reasoning has been reiterated in recent jurisprudence, including by the NCLAT in Reliance Retail Limited (Company Appeal (AT) No. 155 of 2025), reflecting a consistent judicial trend in favour of upholding selective reductions that meet statutory and fairness benchmarks.

In Cadbury India Limited [(2015) 125 CLA 77 (Bom)], the Bombay High Court further refined the judicial approach by holding that a scheme of reduction is not bound by the ipse dixit of the majority. While the commercial wisdom of shareholders is a relevant consideration, the Court must independently satisfy itself that the scheme is fair, just, reasonable, and not contrary to law or public policy. On valuation, the Court observed that valuation is inherently an exercise of estimation and judgment, and interference is warranted only where the assumptions adopted are patently erroneous or result in an unfair or unreasonable outcome.

Limits on Section 66: When Capital Reduction Becomes a Disguised Buy-Back

While courts have shown willingness to uphold selective reductions, they have drawn a clear line where Section 66 is misused as a substitute for a buy-back or as a mechanism to compulsorily eliminate minority shareholders without satisfying statutory requirements.

In Philip India Limited (CP/312(KB)/2023), the NCLT, Kolkata Bench rejected a scheme of selective capital reduction that sought to extinguish approximately 3.87% of the public shareholding. The company justified the proposal on grounds of providing liquidity to minority shareholders post-delisting and reducing administrative costs. The Tribunal held that these objectives did not fall within the permissible scope of Section 66(1), as the proposal neither involved extinguishment of unpaid capital nor cancellation of lost or excess capital.

The NCLT further held that the scheme was, in substance, a buy-back of shares, with capital reduction being merely incidental—an approach expressly prohibited under Section 66(6), which mandates that buy-backs must be carried out strictly in accordance with Section 68. The Tribunal also noted a significant valuation dispute, observing a huge disparity in the values arrived at under the respective valuation methods, which raised concerns regarding the transparency and reliability of the assumptions adopted.

On these grounds, the Tribunal dismissed the petition, holding that Section 66 cannot be employed as a backdoor mechanism for compulsory minority exit, and that where a company intends to purchase its own shares, it must adopt the specific statutory route prescribed under Section 68.

iii. Section 236: Purchase/Sell of minority shareholding

Section 236 operates in two situations, both arising from corporate or statutory events. It is triggered where an acquirer or group crosses the ninety per cent shareholding threshold pursuant to events such as amalgamation, share exchange, or conversion of securities, or where such threshold is reached by operation of law through similar restructuring mechanisms. In either case, the majority shareholder is required to notify the company of its intention to acquire the remaining minority shareholding.

The buyout price must be based on a valuation conducted by a registered valuer, in accordance with Section 247 and the Valuation Rules, ensuring that the exit consideration is fair and independently determined.

The provision is also designed to work in reverse. The Act recognizes that situations may arise where minority shareholders themselves wish to exit once ownership becomes highly concentrated. Accordingly, Section 236 permits minority shareholders to initiate the process by calling upon the majority shareholder to purchase their shares at the same fair value determined under the statutory valuation process. This ensures that the exit right is not solely at the discretion of the majority, but is equally available to minorities when continued participation becomes impractical or inequitable.

Subsections (4) to (9) of Section 236, prescribe the procedural steps, deposit of consideration, timelines, and transfer mechanics, while Rule 27 of the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 provides the valuation methodology for both listed and unlisted companies.

Constitutional Perspective on Section 236

Section 236 of the CA 2013has occasionally attracted constitutional scrutiny on the ground that it enables compulsory divestment of property, potentially infringing Article 300A of the Constitution of India, which protects the right to property. A forced transfer of minority shareholding, even when accompanied by consideration, raises concerns regarding deprivation without consent and the adequacy of statutory safeguards against arbitrariness.

However, Indian constitutional jurisprudence has consistently recognised that deprivation of property is permissible "by authority of law", provided such law is non-arbitrary, serves a legitimate public purpose, and incorporates procedural fairness. Section 236 seeks to balance majority control with minority protection by embedding safeguards such as an independent valuation by a registered valuer, mandatory deposit of consideration, prescribed timelines, and reciprocal exit rights for minority shareholders. These features mitigate the risk of unfair expropriation and align the provision with constitutional requirements of reasonableness and due process.

Judicial Limits on the Invocation of Section 236

The contours of Section 236, particularly the circumstances in which its compulsory transfer mechanism may be invoked, came up for consideration before the NCLAT in S. Gopakumar Nair & Ors. v. OBO Bettermann India Pvt Ltd (2019 SCC OnLine NCLAT 402). In this case, the majority shareholder sought to invoke Section 236 to compulsorily acquire the remaining minority shareholding, even though its 90% shareholding had been attained through gradual and incremental acquisitions pursuant to contractual arrangements such as put and call options.

The NCLAT rejected the invocation of Section 236, holding that the provision can be triggered only when the acquirer reaches the 90% threshold by virtue of a specific qualifying event, such as amalgamation, share exchange, conversion of securities, or "any other reason" of a similar nature. Applying the principle of ejusdem generis, the Tribunal held that the expression "any other reason" cannot be interpreted expansively to include ordinary or piecemeal acquisitions undertaken in the normal course of business.

Since the acquirer's shareholding had increased gradually and not as a consequence of any single qualifying event contemplated under Section 236, the Tribunal concluded that the statutory trigger had not been satisfied. The NCLAT emphasised that Section 236, being a provision enabling compulsory transfer of shares, must be strictly construed and cannot be deployed as a general squeeze-out tool to eliminate minority shareholders in the absence of a clearly identifiable statutory triggering event.

The decision in S. Gopakumar Nair thus reinforces that while Section 236 provides a powerful statutory mechanism for minority exit, its invocation is circumscribed by strict statutory pre-conditions and cannot be used to legitimise forced exits arising from routine or contractual share acquisitions.