SAT Dismisses ITC’s Appeal In Sale Of Hotel Leela’s Assets To Brookfield

The Securities Appellate Tribunal rejected ITC Ltd.’s appeal in the sale of Hotel Leelaventure Ltd.’s assets to Brookfield Asset Management.

The cigarette-to-hotel conglomerate had moved the SAT after the Securities and Exchange Board of India rejected its contention that the sale of Hotel Leelaventure’s assets to Brookfield Asset Management should not be allowed because of related-party transactions. SEBI had allowed JM Financial Asset Reconstruction Company Ltd., which owns 26 percent in Leela, to vote on the Rs 3,950-crore deal.

A bench, presided over by Justice Tarun Agarwala, also vacated an earlier stay order where it had directed Leela not to declare the postal ballot results till the matter was pending before the tribunal. Besides, it rejected ITC’s plea to suspend the tribunal’s order for two weeks to allow the conglomerate to appeal before the Supreme Court.

Background

Leela said it would sell four hotels in Bengaluru, Chennai, Delhi and Udaipur to a Brookfield-sponsored private real estate fund as the company aims to pare its Rs 3,800-crore debt. The proposed sale, including transfer of intellectual property owned by Leela and all hotel management contracts in operation as well as for those under development, was supposed to be completed in March.

But the deal hit a roadblock as Leela’s minority investors—ITC and Life Insurance Corporation of India—approached SEBI alleging that the sale to Brookfield Asset Management violated the securities laws such as related-party disclosures and takeover code. They alleged that JM Financial Asset Reconstruction Company was a related party and could not vote on the board resolution approving the deal.

In June, the market regulator said JM Financial Asset Reconstruction Company could not be treated as a related party under the Companies Act, 2013 or the SEBI regulations. The stressed company, it said, has no other interest than using the proceeds for repaying debt.

SEBI sought additional disclosures from Leela’s promoters on the proposed deal. It called for fresh voting on the asset sale, along with transfer of intellectual property.

Grounds For Dismissal Of ITC’s Appeal By SAT

The Securities Appellate Tribunal consolidated the arguments made by ITC and had framed the following issues to examine ITC’s appeal:

Breach of Takeover Regulations

Voting by JM Financial Asset Reconstruction Company in the proposed postal ballot resolutions was critical to the success of the sale transaction as it held 26 percent shares. Exclusion of JMFARC could have derailed the sale process.

ITC’S Arguments: The acquisition of a 26 percent stake by JMFARC in Hotel Leela pursuant to the conversion of debt into equity was against the provisions of Sebi’s takeover regulations. JMFARC was not entitled to an exemption in making an open offer for acquisition of shares.

As JMFARC failed to obtain an exemption, acquisition of stake in ITC amounted to a breach of takeover regulations and therefore, JMFARC must desist from voting in the postal ballot resolutions.

SAT’s Conclusion: SAT examined the findings made by SEBI in its June order, where the regulator had concluded that there was only a ‘technical violation’ by JMFARC in this case.

The law grants exemption to an acquirer from seeking an exemption if the shares are acquired in pursuance of a corporate debt restructuring scheme. SAT concluded that JMFARC’s purchase of 26 percent stake was as per the law and hence entitled for exemption. It therefore dismissed ITC’s submission made on this ground.

Related-Party Transactions

As per the Listing Obligation and Disclosure Requirement Regulations, related parties cannot vote to approve such resolution categorised as a material related party transaction. Related Parties are prohibited from voting in a resolution even if is a related to a particular transaction or not.

ITC’s Arguments: Promoters of Hotel Leelaventures had vested interests in the transaction as they would make a gain of Rs 300 crores from the proposed transactions. Similarly, the proposed sale would allow JMFARC to make a gain of Rs 70 crore.

On account of this, promoters along with JMFARC must be declared as related parties and disallowed from voting on the postal ballot resolutions.

SAT’s Conclusion: SAT dismissed this argument by ITC on the ground that the proposed transactions were between the company - Hotel Leelaventures Ltd. and Brookfield. After examining the structure of the transaction, SAT concluded that the definition of related-party transactions only contemplates transactions between a company and related party. The definition of related party cannot be widened to include ‘perceived gains’.

Previously, ITC had also made following arguments in supporting its case against Hotel Leela:

• Splitting of a composite asset sale transaction into multiple transactions was outside SEBI’s powers.
• The deal affected ITC’s rights as a minority shareholder; it tilted more in the favour of promoters.
• Promoters of Leela favored asset sale to Brookfield due to their vested interests.

SAT dismissed all the arguments today.

Shareholders Approve Postal Ballot Resolutions

Leela declared the voting results of the postal ballot today after the SAT vacated its earlier stay order on the move.

Pursuant to SEBI’s orders, the special resolution for sale of each hotel was put to vote separately for approval by Leela’s shareholders.

The shareholders approved the resolutions in the following proportion:

• Sale of Delhi Hotel Undertaking: 89.12 percent votes in favour.
• Sale of Bengaluru Hotel Undertaking: 89.13 percent votes in favour.
• Sale of Chennai Hotel Undertaking: 89.13 percent votes in favour.
• Sale of Udaipur Hotel Undertaking: 89.12 percent votes in favour.
• Paring of stake in Leela Palaces and Resorts Ltd.: 89.12 percent votes in favour.

Case Pending In NCLT

ITC has also challenged Leela’s proposed sale of hotels at the National Company Law Tribunal, alleging oppression and mismanagement. The transaction, it argued, would make Leela asset-less.

The case is still pending at the tribunal.