The Supreme Court’s decision in Pannalal Bhansali v. Bharti Telecom is an important precedent with respect to capital reductions involving minority exits.
The Court confirmed that S. 66 carries no statutory valuation mandate, that the Cadbury four-limb test is the substantive fairness standard, and that a discount for lack of marketability is not prohibited where illiquidity is genuine. What it did not address is the quantum of DLOM i.e., 25% was accepted on the facts without calibration, which means that question remains open for the next case.
What the judgment does not change is the regulatory architecture around the exit price. S. 50CA imposes a tax floor. FEMA imposes a ceiling on non-resident payouts. The payout itself bifurcates between deemed dividend and capital gains. These constraints exist independently of whether a valuation report is required.
The practical outcome is that the absence of a mandatory report does not reduce the importance of a fair valuation for providing exit. The price still needs to be defensible from the perspective of commercial fairness, regulatory fetters, and tax floor price.
A short deck on the judgment, the open questions, and the structuring considerations is attached below: