Given the several objections raised by ITC Limited against the proposed sale of properties by Hotel Leelaventure to Brookfield, the capital market regulator is right in stalling the sale to look into the transaction. ITC has claimed in the National Company Law Tribunal (NCLT) that it is being oppressed as a minority shareholder and filed the petition under Section 241 of the Companies Act, 2013; while the company holds just short of 8% in Hotel Leela today, its stake has gotten diluted following the conversion of Rs 275 crore worth of loans into a 26% equity stake by JM Financial ARC.
Given how the performance of Hotel Leela has deteriorated over the years, a major transaction such as the one proposed—and one in which several of the hotel company’s big properties are being sold—needs a closer look. It may be recalled that even after the lenders had restructured the hotel company’s loans, it was unable to make good the dues. Also, the deal with Brookfield is understood to have been put together by JM Financial Limited which is part of the JM Financial Group.
ITC has observed in its petition that the bulk of the proceeds will go to the lenders; this seems fair because, even in the corporate insolvency resolution process (CIRP), lenders get top priority. Even operational creditors, as we have seen in several cases being heard under the IBC (Insolvency and Bankruptcy Code), are not in the same class as financial creditors. However, ITC has drawn attention to the fact that JM Financial ARC and the promoters of Hotel Leela are related parties and so should not vote on the sale proposal. Both the regulator and the NCLT need to weigh in on the rights and responsibilities of a player who is both a lender and equity holder. The transaction may or may not be above board—that will be decided by the courts and SEBI—but it will leave Hotel Leela virtually a shell company with only liabilities and no underlying business or assets. Again, any lender would look to recover dues by asking the promoters and management to sell assets but the process should be kosher since the amounts involved can be very large. In this instance, it is a hefty Rs 4,250 crore.
Also, even if it is ultimately found that there is no merit in the allegation that JM Financial ARC pressured the promoters by referring the case to the NCLT, there is no harm in investigating the circumstances. Lapses in corporate governance are not unusual in corporate India; in fact, over the past few years, there have been enough and more instances of both mismanagement and fraud.