Hotel Leela Asset Sale: ITC Moves SAT Against SEBI Order Rejecting Related-Party Transactions
ITC Ltd. moved the Securities Appellate Tribunal against the market regulator’s order that rejected its contention that the sale of Hotel Leelaventure Ltd.’s assets to Brookfield Asset Management should not be allowed because of related-party transactions.
The Securities and Exchange Board of India, in its June 23 order, sought additional disclosures by Leela’s promoters to shareholders on the proposed deal. But the regulator concluded that voting by JM Financial Asset Reconstruction Company Ltd., which owns 26 percent in the company, on the postal ballot resolutions to approve the Rs 3,950-crore deal can’t be called a related-party transaction.
ITC, a minority shareholder in Hotel Leelaventure, challenged the regulator’s findings. Darius Khambata, counsel representing ITC argued:
Related-Party Status of JMF ARC
SEBI’s conclusion that JMF ARC was not a related party for the purpose of postal ballot was erroneous and must be set aside. SEBI wrongly relied on the fact that JMF ARC was representing the interest of debtors while determining the status of its involvement in the transaction. JMF ARC and the promoters must be treated as related parties and should not be allowed to vote on the resolutions for sale of assets to Brookfield.
Promoters are contractually bound to vote in favour of sale of assets to Brookfield which would hamper the interests of minority shareholders including ITC. SEBI turned a blind eye to Section 2(76) of the Companies Act and Listing Obligations and Disclosure Requirements regulations. A combined reading of both shows that JMF ARC is an associate company of Hotel Leelaventure as it holds 26 percent shares and must, therefore, be restrained from voting.
Splitting Single Transaction Into Two By SEBI
SEBI erred by splitting a single integral transaction into two—one involving the sale of the estate comprising of the hotel properties; and the second involving sale of intellectual property assets, including the Trademark ‘Leela’. This is contrary to the view of promoters, ITC and lenders who had deemed the transaction to be one. This action by the regulator is against the provisions of the SEBI Act and various regulations governing the securities market.
Adverse Impact Of The Sale On ITC
ITC’s interest as a minority shareholder would be affected as the proposed sale of assets comprising 88 percent of the net worth of Hotel Leela would leave the company without any material assets, eventually ending the status of Hotel Leela as a running entity, which amounts to a “cataclysmic transaction” for the shareholders.
Questionable Role Of Hotel Leela’s Audit Committee In Approvals
The approval for sale granted by the audit committee was questionable as it was granted within 30 minutes without consideration of any valuation report. This was not in the best interests of the minority shareholders and the company.
Deal Favors Promoters More Than Shareholders
Three offers were received for Hotel Leela’s assets, which could have resulted in even higher gains for the shareholders. However, Leela’s promoters favored the Brookfield deal due to their vested interests as the transaction would result more monetary gains to the promoters instead of the company. This is because the promoters would continue as consultants to Brookfield after culmination of the sale, resulting in financial gains for them at the cost of the minority shareholders.
The tribunal adjourned the matter and will hear SEBI and JMF ARC next week.
Meanwhile, sale of assets to Brookfield requires shareholder approval. After SEBI’s June order, it issued postal ballot notices to its shareholders on Aug. 13 and planned to declare results on Sept. 18.