Oppression or Involuntariness? Reassessing the Marketability Discount in Bharti Telecom

Earlier this year, the Supreme Court of India in the case of Pannalal Bhansali v Bharti Telecom Ltd upheld a selective reduction of capital under section 66 of the Companies Act 2013, which cancelled shares of the company’s minority shareholders and approved a 25% discount for lack of marketability (DLOM) in valuing those shares. 

This post builds on the contention that because the court found no oppression, it treated ‘fair value’ and ‘fair market value’ as similar, thereby allowing a marketability discount. It argues that it is the wrong trigger, and the approach is too broad. Under the same logic, a minority shareholder who never wanted an exit could also receive a discounted price simply because the majority chose to use section 66, under which there is no requirement of mandatory valuation by an independent valuer. Bharti Telecom, converts a fact-sensitive inquiry into a legal rule by making the applicability of a DLOM dependent upon the existence of oppression.

The Decision and the Discount

The minority shareholders argued that a fair value for a forced exit cannot be equated with the fair market value and that the discount was invalid because the exit was involuntary. They relied on the judgment of the Singapore Court of Appeal in Kiri Industries Ltd v Senda International Capital, where a DLOM imposed on a court-ordered buyout had been set aside. The Indian Supreme Court distinguished Kiri on the ground that the discount was not allowed because the proceeding was an oppression action; since here there was no oppression, as the eleven appellants could not meet the oppression threshold, it concluded that no distinction could be drawn between ‘fair value’ and ‘fair market value’.The court’s reasoning assumes that this distinction belongs to the fact that there was oppression; instead, it relates to the fact that there was a forced transfer, of which oppression buyouts are only one kind. 

Valuation of a Forced Exit: A Comparative View

A reduction of capital under section 66 requires a special resolution and the subsequent approval of the National Company Law Tribunal (NCLT). However, it does not require a report from a registered valuer, and the Indian Supreme Court confirmed the same in Bharti Telecom. Although the Companies Act, 2013 is silent on the standard of valuation, the courts have not treated the valuation as beyond review. The Tribunal’s confirmation is contingent on its satisfaction that the scheme is ‘fair and just and not unreasonable’ and not ‘unfairly prejudicial’ to any class of shareholders, as held in Re Cadbury India Ltd. The judicial review is, however, deferential. Valuation is treated as an expert exercise and a scheme is confirmed unless the valuation is ‘egregiously wrong’, a threshold adopted in Cadbury, which places an exceptionally high burden on an objecting shareholder. This was effectively affirmed in Bharti Telecom.

The Indian Supreme Court, reading Kiri and Liew Kit Fah v. Koh Keng Chew as an authority that a DLOM is unfair only in an oppression buyout and that marketability is a real factor in valuing illiquid private shares, held that, oppression being absent, fair value and fair market value are similar, and the discount was valid. The consequence is that a marketability discount may be applied even where the minority is compelled to exit through a selective reduction, provided the transaction does not involve oppression; and given the deferential standard of review, the resulting price will ordinarily be upheld unless shown to be egregiously unfair.

Other jurisdictions have approached the valuation of a forced exit differently, but there is a common principle: none adopts a rigid rule tying the discount to a particular cause of action. Instead, the question is treated as a fact-specific inquiry, to be determined either by the court or an independent valuer, with involuntariness as the operative consideration rather than the presence or absence of oppression. In Kiri, the Singapore Court of Appeal set aside a DLOM applied to a court-ordered buyout, reasoning that a fair market value approach assumes a transaction between parties who are ‘willing but not anxious’, and that where the seller is forced out, that assumption falls. Thus, it seems the Indian Supreme Court read Kiri narrowly, treating the refusal of a discount as an oppression remedy. The fairness rubric in Kiri is indeed exercised under section 216(2) of the Singapore Companies Act, the oppression provision. While oppression was the jurisdictional trigger for the Singapore Court of Appeal, the rationale the Court adopted for setting the discount aside was the involuntariness of the transaction, as a person forced to sell is not the willing seller that a market price assumes. Even Liew Kit Fah, on which the Indian Supreme Court relied, supports the argument. Unlike Kiri, it was not an oppression case and the buyout proceeded with consent; the Singapore Court of Appeal treated the applicability of discount as a fact specific one, observed that the decision whether to apply the discount is best left to an independent valuer. However, unlike Singapore, the Indian Companies Act does not make the appointment of an independent valuer a statutory requirement in such cases.

The same approach is reflected in the UK decsion in Re Bird Precision Bellows Ltd, decided under UK’s unfair-prejudice petition; the court held that an ‘unwilling vendor’ bought out other than by free choice must be valued pro rata, without discount. The unfair prejudice was just the context for the buyout, but it was the compulsion that warranted excluding the discount. Similarly, in Delaware, a shareholder cashed out in a merger may claim ‘fair value’ without any finding of oppression; in Cavalier Oil Corp v Harnett, the Delaware Supreme Court held no marketability discount applies since it would impose a penalty for lack of control. 

Indian and comparative jurisdictions thus share the premise that a compelled minority should receive a fair value, but differ on what it entails. In comparative jurisdictions, applicability of the discount depends on the facts of each cases, determined by a court or a valuer, not on a rule tied to the cause of action, ie oppression; Bharti Telecom, on the other hand made it dependent on the presence of oppression. 

The Implication of the Decision

On the facts, the deference shown to the majority’s valuation in Bharti Telecom was not consequential. The problem, however, is with the rule. By tying the availability of a marketability discount to the presence of oppression, the Indian Supreme Court has converted what ought to be a fact-specific question, into a legal rule:, where there is no oppression, fair value and fair market value coincide, and a discount is permissible. As a result, the very factor that comparative authorities regard as decisive, whether the shareholder is being compelled to exit, is never even considered.

The NCLT’s confirmation jurisdiction already requires it to determine whether a reduction is fair and just, an inquiry broad enough to ask whether a willing-seller discount can be imposed on a shareholder compelled to exit. Now Bharti Telecom, risks changing that inquiry. A Tribunal may uphold a DLOM whenever oppression is not established, without independently examining the facts of each case. The concern is further exacerbated by the absence of any statutory requirement, unlike in Singapore, for valuation by an independent valuer, whose report could be used by the Tribunal. 

While Bharti Telecom may have reached the correct outcome on its facts, its reasoning risks establishing a principle that treats the absence of oppression as sufficient to justify such discounts. Unless future courts focus on the involuntary nature of the exit rather than the presence or absence of oppression, the precedent may leave minority shareholders vulnerable to the action of majority shareholders.

Hardik graduated with BA LLB (Hons) from the National Law School of India University, Bengaluru.