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The Securities Appellate Tribunal (SAT) today dismissed an appeal filed by ITC Limited relating to a grievance raised against the sale of the assets of Hotel Leela to real estate company Brookfield.
ITC had challenged an order passed by the Securities and Exchange Board of India (SEBI) which had green signalled certain aspects relating to the transaction.
By way of background, Hotel Leela Ventures Limited, being under financial distress, decided to restructure its debts under the Corporate Debt Restructuring (CDR) mechanism. 14 out of 17 of its lender institutes had agreed for the same. The company entered into a Master Restructuring Agreement with State Bank of India in September 2012. However, it could not comply with the same.
In June 2014, the Joint Lenders Forum of Hotel Leela decided to declare the CDR package as failed and invoked the default clause as per the Master Restructuring Agreement. A Trusteeship Agreement under the provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 was executed between JM Financial Asset Reconstruction Company Limited and the lenders. This Trust had issued security receipts to the joint lenders. In October 2017, equity shares converting the debt were issued to JM Financial.
Various proposals and counter proposals were received for resolution of the assets of Leela Hotels. One of these was made by Brookfield, for the “Asset Sale Transaction” of the company’s assets and additional transactions between Brookfield and some of the promoters.
In March 2019, Hotel Leela’s Board of Directors approved an agreement for the same. Under this agreement, the additional transactions between Brookfield and the promoters included the sale of the Hotel Leela’s establishments in Delhi, Bangalore, Udaipur, and Chennai.
ITC then filed a complaint with SEBI contending that JM Financial, which owns 26 percent in Hotel Leela Ventures, ought to have been barred from voting on the sale of assets, as it had obtained its stake in violation of Regulation 32 of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011.
It was also contended that the directors and promoters of the company are attempting to gain through “additional transactions” which are not part of the proposed resolution. It was argued that these transactions were related party transactions.
However, SEBI held that the transactions in question cannot be called as related party transactions. SEBI held that the acquisition of shares by JM Financial is only a technical violation of the Takeover Regulations and is fit for exemption.
Thus, ITC approached the SAT in appeal against SEBI’s findings. JM Financial filed a separate appeal contesting the SEBI’s finding that it was in technical violation of the Takeover Regulations.
Before the SAT, it was argued by Hotel Leela and other respondents that ITC was a rival company which is trying to scuttle the transaction only to compel the Hotel Leela to undergo debt resolution under the Insolvency and Bankruptcy Code.
ITC, on the other hand, submitted that the directors and the promoters of Hotel Leela were pushing ahead with their personal agenda of pocketing an amount of Rs.300 crore through additional transaction and certain intangible benefits as well.
At the outset, the SAT Bench of Justice Tarun Agarwala, Justice MT Joshi and DR CKG Nair noted,
“In our view this Tribunal is not required to asses the proposed transaction to find as to whether it is in the interest of the investors. It is to be noted that the same is being put to vote before the shareholders to take a decision. Our exercise would be limited to verification that sufficient information is provided to them to facilitate them to take an informed decision.”
It thus proceeded to dismiss the appeal filed by ITC, while allowing the appeal filed by JMC Financial.
Noting that JM Financial made all necessary disclosures during the process, the Bench held that it did not violate Regulation 32 of the Takeover Regulations.
“Therefore in our considered view the conversion of the part of the debt by the Trust of Respondent no.17 JMF ARC in terms of Clause 7.2(e) is in fact in pursuance of CDR scheme and, therefore, fit for exemption under Regulation 10 read with sub-Regulation 6…”
To deal with the question of whether the case involved related party transactions, the Bench delved into the definitions of “related party” under the SEBI (Listing Obligations and Disclosure Requirements) Regulations as well as the Companies Act, 2013. Ultimately, it held,
“Through the interpretation, the scope of the definition cannot be widened to bring in its scope any transaction in which the directors etc would have some real or perceived interest. The Parliament as well as the regulator SEBI did not intend to bring such transactions within the scope of the restrictions put on the related party transactions. Considering all these aspects on record we find that the transaction cannot be termed as related party transaction.”
After the judgment was pronounced, counsel for ITC sought a suspension of the SAT so as to enable the company to approach the Supreme Court. However, the SAT Bench refused the same.
“Considering the circumstances, we do not find any substantial questions of law arising in the matter requiring us to suspend our order. The oral request is, thus, rejected.”
ITC was represented by Senior Advocates Darius Khambata and Pesi Modi, along with Advocate Somasekhar Sundaresan. They were briefed by Bharucha & Partners.
Senior Advocate Kevic Setalvad appeared for SEBI. He was briefed by a team from K Ashar & Co.
Senior Advocate Navroz Seervai appeared for Hotel Leela and some of its Board members. He was briefed by a team from Veritas Legal.
Senior Advocates Ravi Kadam and Gaurav Joshi appeared for other Leela directors and one of the company’s subsidiaries. They were briefed by Ganesh & Co.
Senior Advocate Janak Dwarkadas appeared for JM Financial. He was briefed by Khaitan & Co.
Read the judgment: