ITC challenges Hotel Leela sale to JM ARC and Brookfield in NCLT

24 Apr 2019


Diversified conglomerate ITC has moved the National Company Law Tribunal (NCLT) against Hotels Group Leelaventure, accusing the latter of oppressing minority shareholders and mismanagement, putting a spoke in the Rs4,250-crore deal to transfer most of its hotel properties to JM Financial Asset Reconstruction Company (ARC) and Canadian buy-out fund Brookfield.

ITC, which owns 8.72 per cent in Leela, moved a petition against the sale of the hotel group to Brookfield and JM Financial ARC before the Mumbai bench of the NCLT, claiming “oppression and mismanagement” by Leela management. 
ITC also claimed that the deal between Leela and Brookfield is against the interests of the company and its minority shareholders.
In its petition, filed nearly a month after Canadian private equity player Brookfield closed a deal to buy four hotels and a property of Hotel Leelaventure, ITC claims itself as a public shareholder while also seeking a waiver of the 10 per cent threshold for intervention by a minority shareholder.
In fact, ITC has filed two applications, one seeking urgent hearing of the matter and another for waiver of the requirement of minimum threshold of 10 per cent shareholding, as per a stock exchange filing by Hotel Leelaventure. 
ITC had, in September 2017, sought cancellation of allotment of 163.9 million equity shares that constitute 26 per cent of the issued capital of Hotel Leelaventure, to JM Financial ARC. 
JM Financial ARC had converted part of its loan amounting to about Rs275 crore to Hotel Leelaventure.
ITC has also sought the removal of Leela promoters Vivek Nair and Dinesh Nair and directors Vinay Kapadia and Vijay Sharma from the board. Further, ITC wants the appointment of an administrator to conduct and manage the affairs of Hotel Leela.
ITC has sought mandatory injunctions restraining Hotel Leela, its promoters, directors and JM Financial from the implementing the decisions taken at Leela’s board meeting on 18 March, at which it approved the sale and transfer of assets of four hotels and one property to Brookfield for Rs4,250 crore. 
The proposed transaction with Brookfield, according to ITC's petition, is skewed in favour of the promoters and JM Financial ARC and opposed to other shareholders, including itself.
The petition goes on to say the proposed transaction would have the effect of transferring a substantial part of Leela's assets in favour of Brookfield. Of this, Rs2,950 crore would be paid to the lenders while Rs1,960 crore was being paid to JM Financial, and Rs300 crore would go to the promoters.
Further, the ITC petition states that Leela's revenue stream was being diverted to Brookfield and it would be left with no real business prospects while it retained large liabilities, which it would not be able to service.
ITC has sought inspection of the documents and agreements referred to in the postal ballot notice and the explanatory statement, but said it was allowed inspection of only some documents.
ITC said the promoters and JM Financial had not been identified as "related parties" and were entitled to vote in favour of the resolutions.
Proxy advisory firm SES advised shareholders to vote against the sale of Leela’s assets to Brookfield as it has not provided a valuation report on how the consideration for the slump sale was arrived at. It said there was lack of clarity on the future of the company and cast doubts over parallel transactions between the buyer and promoters. According to SES, the promoters should not cast their vote on the resolution as a good governance practice.
After the promoters and JM Financial ARC, ITC is the largest shareholder, but its shareholding has come down from 11.78 per cent in June 2017 to 8.72 per cent.
Under the Companies Act, a minimum shareholding of 10 per cent is required to file a petition for oppression and mismanagement. 

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