ITC, which has a 7.82% stake in Hotel Leelaventures, has approached the NCLT alleging oppression and mismangement. Here's a look at the shareholding pattern of the hotels firm. (Mint)
ITC, which has a 7.82% stake in Hotel Leelaventures, has approached the NCLT alleging oppression and mismangement. Here's a look at the shareholding pattern of the hotels firm. (Mint)

Sebi orders pause on Leela-Brookfield deal after ITC, LIC complaints

  • Hotel Leelaventures has struck a 3,950 crore deal with Canada's Brookfield Asset Management LLC to sell four of its hotel properties
  • ITC has alleged that the Leela-Brookfield deal violated provisions of related-party transactions. LIC's objections could not be ascertained immediately

Mumbai: Capital markets regulator the Securities and Exchange Board of India (Sebi) has barred Hotel Leelaventure Ltd from selling its assets, including four hotels, to Canadian investment fund Brookfield Asset Management LLC. Leela hotels, in a stock exchange filing on Wednesday, said it had received a letter from Sebi saying that the transaction should be put on hold, pending further directions from the regulator.

The company’s board had sought shareholders’ approval through a postal ballot on 24 April for the sale of its assets to Brookfield for 3,950 crore. The assets include hotel properties in Delhi, Bengaluru, Udaipur and Chennai.

Sebi’s letter to Leela hotels was issued on the basis of complaints filed by two minority shareholders—tobacco major ITC Ltd and Life Insurance Corporation of India (LIC). ITC alleged that the Leela-Brookfield deal violated provisions of related-party transactions. LIC’s objections, through the ministry of finance, could not be ascertained immediately.

When contacted, spokespeople for Brookfield and Leela hotels declined to comment, as the matter was sub judice. ITC also declined to comment on queries from Mint.

According to the proposed sale agreement, the promoters and affiliates of Hotel Leela would be entitled to a consideration of 300 crore from Brookfield on account of any intellectual property held, apart from certain business expansion services that the promoters have agreed to provide to the investor.

ITC alleged that the company had listed the transaction as an ordinary resolution, but it should be a special resolution, considering that Brookfield would become a related party after the transaction was completed.

“While Sebi is examining the representations in view of paucity of time and interest of investors in securities, you are advised that none of the transactions proposed in the PBN (post ballot notice) of 18 March are acted upon till further directions from Sebi," the markets regulator said in its letter to Hotel Leela.

The Leela-Brookfield deal is one of the few cases where Sebi has intervened on the basis of pleas by minority shareholders.

“Sebi may have seen merit in the complaints. It does not act on every complaint by minority shareholders as they may not necessarily be contravening provisions of the Sebi Act," said J.N. Gupta, managing director of Stakeholders Empowerment Services (SES), a proxy advisory firm. “In this case, Brookfield does not have regulatory approval, but just a shareholder nod. If, at a later stage, Sebi finds merit in the complaint, then it would be difficult to reverse the transaction."

SES had released a report on Tuesday advising public shareholders to vote against the Leela-Brookfield deal due to the lack of a valuation report and parallel transactions between buyer and promoters.

To be sure, even if Sebi rules there is a need for a special resolution, the transaction may still go through, given that JM Financial ARC, which holds a 26% stake in Leela, is expected to vote in favour of the asset sale.

To counter this, ITC, which has a 7.92% stake in Leela, has also approached the National Company Law Tribunal (NCLT) alleging oppression and mismanagement by Leela and its lender, JM Financial. ITC has argued that the deal is not in the interest of shareholders and has sought exemption from the 10% threshold limit for filing such a petition. NCLT heard the matter on Wednesday and posted it for 18 June.

The Mumbai bench of NCLT, comprising V.P. Singh and Ravikumar Duraisamy, issued notices to JM Financial and Leela and asked them to reply within three weeks and file rejoinders within two weeks thereafter.

The petitioners have been asked to approach NCLT if anything changes in terms of the Sebi relief or the company proceeds with the transaction.

“The charges of oppression and mismanagement are being levelled as the transaction creates a preference in favour of the promoters and lenders JM Financial ARC, as opposed to other shareholders of Leela. The deal is not in the interest of the other shareholders of Leela," a lawyer familiar with the matter said on condition of anonymity.

According to the petition before NCLT, the equity shareholding of Leela has made it impossible for any special resolution to be passed without the nod of JM Financial ARC.

In June 2014, Leela’s lenders had assigned about 4,150 crore of debt to asset reconstruction companies and about 95.6% of the debt was assigned to JM Financial, while 1% was assigned to Phoenix ARC.

In September 2017, JM Financial acquired 26% of the share capital of Leela by converting a part of its loan amounting to about 275 crore.

“With such acquisition of 26% equity shareholding, JM Financial gained significant influence over Leelaventure with no special resolution being capable of being passed without the consent of JM Financial. It is this conversion that resulted in ITC’s shareholding coming down from 11.78%," the petition said.

Darius J. Khambatta, the counsel for ITC, said the company was also seeking details of the Leela-Brookfield deal and the valuation report.

“But the company is not cooperating," he added.