Sebi orders pause on Leela’s deal with Brookfield

Mumbai: Ahead of the postal ballot for sale of assets by Hotel Leelaventure Ltd to Canadian fund Brookfield on 24 April, Securities and Exchange Board of India (Sebi) has put a pause on the hotel chain’s plans.

In a stock exchange filling Leela said that they have received a letter from Sebi that the transaction should be put on hold till further directions from the regulator.

Leela plans to sell assets of Hotel Leelaventure comprising key hotel properties in Delhi, Bengaluru, Udaipur and Chennai for ₹3,950 crore to Canadian alternative asset management company Brookfield. The company had called for a shareholder approval on 24 April.

Spokesperson for Brookfield and Leela declined to comment as the matter is subjudice. ITC is yet to comment on queries from Mint.

As per the deal, promoters and affiliates would be entitled to a consideration of ₹300 crore from Brookfield on account of any intellectual property held by them and also for certain business expansion services that the promoters have agreed to provide the investor.

Sebi’s letter to Leela is on the basis of complaints filed by tobacco major – ITC Ltd and Life Insurance Corporation (LIC). ITC alleged that the transaction violated provisions of related party transactions. LIC’s objections through the ministry of finance could not be ascertained immediately.

“While Sebi is examining the representations in view of paucity of time and interest of the 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,” said Sebi in the letter to Leela.

Separately ITC has also approached National Company Law Tribunal (NCLT) alleging oppression and mismanagement by Leela. ITC holds 7.92% stake in Leela. NCLT will hear the matter today. NCLT heard the matter today and owing to Sebi relief the matter has now been posted for 22 June.

The petitioner’s have been asked to approach NCLT if anything changes in terms of Sebi relief or company proceeding with the transaction.

ITC’s petition is seeking exemption from 10% threshold for filing such a petition.

“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 interest of the other shareholders of Leela,” said a lawyer familiar with the matter.

According to the petition in 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, the corporate debt restructuring (CDR) lenders to Leelaventure assigned about ₹4,150 crore of debt to asset reconstruction companies and about 95.6% of the debt was assigned to JM Financial ARC with 1% being assigned to Phoenix ARC.

In September 2017, JM Financial acquired 26% of the share capital of Leelaventure by converting a part of their 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 passed without the consent of JM Financial. It is this conversion that resulted in ITC shareholding coming down from 11.78%,” the petition says.

Also this is one comprehensive deal, not the way it is being projected to shareholders.

“One deal involving purchase of business from the listed company and purchase of IPR (intellectual property rights) and other assets from the promoter. One integral comprehensive deal,” the lawyer said.

“There is also the issue that a listed company is selling out everything without obtaining a valuation report,” he added.