Pannalal's DLOM: Judicially Sanctioned Minority Expropriation?

[Devesh is a student at Chanakya National Law University.]

Company law has always balanced majority freedom against the minority protection. On 10 March 2026, the Supreme Court in Pannalal Bhansali v. Bharti Telecom Limited (Pannalal), sat uncomfortably close to that line, not because the court interpreted the law on its facts in a wrong way, but the framework it validated can be exploited in ways that the judgement never analyzed. 

At the heart of Pannalal is the Discount for Lack of Marketability (DLOM), a percentage reduction which is usually applied to share values when shares are difficult to sell. The court upheld its applicability to the minority shareholders in Bharti Telecom Limited (BTL), grounding the endorsement in Indian Accounting Standards, making this as one of the most important rulings in Pannalal case. Existing commentaries treat it as an valuation technicality, it is in reality a structural invitation for the promoter controlled companies where they can deliberately create conditions that make DLOM applicable, by delisting, diluting, trapping minority shares with no independent exit and then invoke Section 66 of the Companies Act 2013 (reduction of share capital) to cancel those shares at the DLOM suppressed price, with full judicial scrutiny at every step. 

This blog names that invitation, pinpoints the analytical flaw that makes it possible, examines where India stands relative to global jurisprudence on DLOM in compelled exits, and puts forward two focused reforms to address it.

The Pannalal Sequence: Capital Reduction as a Structured Exit Mechanism

The corporate history of BTL, if read as a sequence rather than a timeline of isolated decisions, reveals an internal logic that the court tried to examined step by step but never as a whole. BTL was delisted from all stock exchanges, in 1999-2000. From that moment BTL’s public minority shareholders had no independent exit. For them the only liquidity event was when BTL choose to buy, which it did once at INR 96 per share in 2001, and never again for roughly two decades. BTL conducted a rights issue in 2016, offering shareholders 115 new shares per share held at a face value of INR 10. Gradually, its share base expanded enormously and per share value fell proportionately. Minority shareholders who could not afford to participate were further trapped. In 2018, BTL brought in Singapore Telecommunications (SingTel) as a strategic investor at INR 310 per share, a price that anchored what BTL was genuinely worth as a holding company of listed BAL. This price was determined in line with the FEMA regulations and reflected what BTL was actually worth as a going business. No DLOM was applied to SingTel’s entry price. 

After the invocation of Section 66 by BTL to cancel the public minority shares, which is roughly around 1.09% of the total equity, at INR 196.80 per share, after the important improper tax deduction by National Company Law Tribunal. A 25% DLOM was incorporated at this price because BTL’s shares were unlisted and therefore were deemed illiquid. 

Now, here is the question which the court never asked: who made the BTL’s shares illiquid? BTL did, in 1999. The minority did not choose illiquidity it was imposed upon them by the company’s own delisting decision and then charged back to them, twenty years later as a 25% exit reduction in their exit price. SingTel meanwhile entered at the same time and invested in the same underlying asset paid a price which is nearly 60% higher, anchored to the enterprise value. The DLOM that compressed the minority’s price was not simply applied to the investor the promoter himself chose to price differently. 

Each step in itself is individually defensible. Cumulatively, they constitute a replicable blueprint i.e. delist to trap the minority, dilution to reduce per share value, bring in a strategic investor at enterprise value, invocation of Section 66 with a DLOM, illiquidity you created now fully justifies. 

The Orderly Transaction Standard and Its Misapplication: DLOM in Compelled Exits

The court further grounded DLOM’s validity in IND AS 113, which defines fair value as the price in an orderly transaction between willing market participants. The reasoning followed naturally as BTLs shares were illiquid, market participants would discount them, DLOM is therefore consistent with fair value measurement. 

This reasoning fails for a Section 66 cancellation as the cancellation per se is not an orderly transaction between willing participants. It is a compelled extinguishment not a voluntary, arm's length transaction by any measure. Ind AS 113, a standard designed for voluntary arm’s length transactions is applied to a statutory mechanism that is precisely opposite of voluntary transactions is considered as a misapplication of its standard language. 

The problem is further compounded by the court’s approval for the citation of ICAI Valuation Standard 103. It mandates the valuers to consider “the specific nature and circumstances surrounding the valuation” before applying any discount. A valuer who applies 25% standardized DLOM without giving any prior information related to the illiquidity being discounted, which was created by the company’s own delisting in 1999 directly infringes the Standard 103. It is the most specific and relevant circumstance to the valuation that the promoter manufactured the condition being penalized, which is precisely what Standard 103 demands to be carefully examined and what the BTL valuation left totally unexamined. 

The court validated a discount created by the very party applying it, using a standard that mandates scrutiny of that exact condition and missed the circularity entirely.

Divergence Without Departure: How Indian Tribunals Can Course Correct Post Pannalal

The analytical error identified above is not novel, it has been dealt by other jurisdictions who have confronted it directly and have consistently resolved it against the application of DLOM in compelled exits. 

In Kiri Industries Limited v. Senda International Capital Limited (Kiri), the Singapore Court of Appeal declined the application of DLOM in a court ordered minority buyout. The reasoning behind this was structural rather than factual specific i.e. a marketability discount measures what a hypothetical buyer would pay for illiquid shares on the open market. No hypothetical buyer or open market exists in a compelled exit. Therefore, discount is conceptually inapplicable and applying it allows the majority to pay less for a condition the majority itself created. 

In the United States, this distinction has been written directly into law. Most state statutes governing appraisal rights deliberately use the phrase "fair value" rather than "fair market value" a word choice that, as Professor Douglas Moll's scholarship cited in Kiri makes clear, was entirely intentional. Its purpose was to exclude marketability discounts from involuntary exit valuations and to ensure that minority shareholders receive their proportionate share of the enterprise's true worth.

Pannalal places India against this entire trend without acknowledging the divergence. That divergence is not, however, beyond repair under existing law. Pannalal held that a DLOM can only be struck down where the resulting valuation is grossly wrong a high threshold, but not a closed one. Minority shareholders in post-Pannalal disputes should therefore resist the temptation to argue that DLOM is automatically impermissible. The stronger and more durable position is procedural and evidentiary that they should require the valuer to establish affirmatively, before the Tribunal, that the illiquidity being discounted was not itself a product of any action taken by the company or its controlling shareholders. Where that showing cannot be made as in any situation replicating the BTL sequence the Tribunal's existing jurisdiction under Section 66(3) to assess whether the reduction is fair and not prejudicial is sufficient authority to reject the discount. Kiri supplies the analytical vocabulary, Indian tribunals' established receptivity to Commonwealth company law authority supplies the doctrinal opening through which that reasoning can operate.

Closing the Statutory Gaps: Mandatory Valuations and Price-Discovery Mechanisms Under Section 66

Pannalal's blueprint has two structural failures firstly, no mandatory independent valuation for selective Section 66 reductions, and secondly, no genuine price discovery when those reductions target only public shareholders. Each of these failures require a separate fix.

The legislative fix

Amend Section 66 to mandate registered valuer reports for selective reductions, mirroring the requirement already present in Section 236(2) for squeeze outs. This closes an unjustifiable statutory asymmetry. Critically, the registered valuer must disclose whether any illiquidity being discounted resulted from corporate actions delisting, face-value rights issues, dividend suspension taken by the company or promoters within a ten-year look-back period and, where promoter-created illiquidity exists, the specific comparable transactions justifying the DLOM percentage rather than a standardized figure. Simultaneously, Section 66(3) should be amended to elevate the Tribunal's review standard from Pannalal's "egregiously wrong" to whether any marketability discount reflects conditions extrinsic to the promoter's own corporate decisions a causation based standard drawn from Kiri and operationally precise for Indian tribunals.

The regulatory fix

Extend SEBI's delisting framework floor pricing and reverse book-building mechanisms under the Securities and Exchange Board of India (Delisting of Equity Shares) Regulations 2021 to any Section 66 reduction where non promoter shareholders are selectively cancelled. The structural trigger avoids proving intent: if the reduction targets only public shareholders, SEBI's mechanisms apply automatically. The floor price formula, anchored to the listed subsidiary's market price, would have rendered the 25% DLOM compression structurally impossible in BTL. These reforms work together because they address different execution points, the valuation (ensuring DLOM is independently justified) and price discovery (ensuring even justified DLOM must compete against what public shareholders will accept).

Pannalal judgement wrote an instruction manual. Indian company law must build safeguards before it is widely read.