ITC takes Hotel Leela to NCLT over 'oppression' in JM ARC, Brookfield deals

Barely a month after Canadian private equity player Brookfield closed a deal to buy four hotels and a property of Hotel Leelaventure, ITC, which has a 8.72 per cent stake in the hospitality firm, has filed a petition in the National Company Law Tribunal (NCLT), accusing the company of oppression and mismanagement.  

The confectionery-to-tobacco giant, which is classified as a public shareholder in the beleaguered hotel, has also filed two applications seeking urgent hearing and the waiver of the requirement of minimum threshold of 10 per cent shareholding, Hotel Leelaventure said in its stock exchange filing. 

According to sources, ITC has petitioned for cancelling the issue and allotment of 163.9 million equity shares in September 2017, which constitute 26 per cent of the issued capital of Hotel Leelaventure (Leela), to JM Financial Asset Reconstruction Company (ARC). JM Financial ARC had converted part of its loan amounting to about Rs 275 crore. 

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 also sought mandatory injunctions restraining Hotel Leela, its promoters, directors and JM Financial from the implementation of the decisions taken at Leela’s board meeting on March 18, where it approved the sale and transfer of assets of four hotels and one property to Brookfield for Rs 4,250 crore. The proposed transaction with Brookfield, according to ITC's petiton, 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, Rs 2,950 crore would be paid to the lenders while Rs 1,960 crore was being paid to JM Financial, and Rs 300 crore would go to the promoters. 

According to the ITC petition, 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. If the petition goes through it could lead to an injunction and a potential spanner in the works for the deal, said one corporate lawyer who declined to be named. 

Executives at Leela, JM Financial and Brookfield did not respond to queries. A spokesperson from ITC said the matter was sub judice and, therefore, would not comment.

A source close to the Brookfield-Leela deal said, "While it was a done deal with Brookfield, with lenders too having no problem with it, a deal of this size would expectantly see a question or two float to the surface." The acquisition by Brookfield is the largest for the hospitality sector in recent times.