BUSINESS
SEEING RED: Minority shareholders in the dark due to lack of disclosures, transparency and governance issues in Brookfield deal, says its petition
India's diversified conglomerate ITC has alleged that the management of Hotel Leelaventure indulged in 'oppression' and 'mismanagement' while entering into a slump sale agreement with Brookfield and its affiliates. Additionally, in a petition filed with the Mumbai bench of the National Company Law Tribunal (NCLT), the cigarette to hotels major also 'filed two applications for urgent hearing and waiver of minimum threshold of 10% shareholding', Hotel Leelaventure said in its filing to the exchanges.
ITC is among the major public shareholders with a 7.92% stake in Hotel Leelaventure. JM Financial Asset Reconstruction Company and LIC of India Future Plus Growth Fund are other major public shareholders with 26% and 2.36%, respectively in the Mumbai-based hotel company, as of March 2019.
When contacted by DNA Money, a Hotel Leelaventure spokesperson directed to the company disclosure being made to the stock exchanges.
In its response, an ITC spokesperson said, "The matter is sub judice and therefore we would not like to comment."
The basis for the petition appears to be a recent report by corporate governance research firm Stakeholders Empowerment Services (SES) that raised various concerns on the way Hotel Leelaventure management approached the slump sale deal with Brookfield and its affiliates. SES has recommended that the minority public shareholders vote against the special resolution seeking approval for the sale of hotel company's various assets and shareholding in its wholly owned subsidiary.
Citing governance, disclosure and transparency issues, SES said in the report that Hotel Leelaventure has not provided/ disclosed valuation report for arriving at the consideration for sale of assets and the business through slump sale. Additionally, while the promoters of the company and the buyers are presently not related to each other, SES said, "there are certain parallel arrangements / agreements (pursuant to the proposed sale) between the promoters and the buyers in which the promoters are interested party".
Accordingly, the promoters should not cast their vote on the above resolution as a good governance practice, SES said in the report, adding that while promoters have voting rights on 47.27% of equity, they have only 11% of economic interest in the company.
Hotel Leelaventure has proposed the sale of undertakings contributing almost 80% of its total revenue for fiscal 17-18 and up to 88% of the of the company's net worth, for cash consideration of Rs 3,950 crore to repay its debtors. As part of the transaction, the company and its promoters have agreed to certain exclusivity, non-compete and non-solicit restrictions with Brookfield, which are areas of concern according to SES.
Apparently, shareholders are completely unaware of the method used by the company to arrive at the consideration. While valuation may not be required in terms of law, SES is of the opinion that the company should provide the method to arrive at the valuation of the "cash consideration" for the slump sale of the assets. Also, there is no clarity on consideration of Rs 150 crore being paid by Brookfield for the intellectual property and related assignment(s), any licensing fees to be paid for using The Leela brand for the Mumbai hotel, details of the centralised services and consideration to be paid for the same.
Also, since the company is selling almost 80% of the business (revenue), it has not disclosed future plans for the shareholders. Would it continue with existing line of business, shut down the operations or venture into any new business, in the absence of such information, shareholders appear to be totally in the dark about the same.
"There is a lack of clarity in the entire proposal. Are the shareholders not entitled to know what restrictions are being imposed? Are promoters holding 11% un-encumbered shares only entitled to all vital information? It is a composite proposal for the sale of certain hotels and related assets, as well as the 'The Leela' brand and other associated brands and intellectual property rights. What value has been assigned to the brand 'Leela' is a mystery.
"All the assets have been valued separately, therefore it is not possible to include brand value in each of the assets' value. In that case the brand must be valued separately and the value should have been disclosed," said SES, adding that it does not understand as to why each asset is valued separately if the transaction is a composite one especially when no valuation report is disclosed.
SES is of the view that Hotel Leelaventure should have disclosed the impact of the sale on the company, its business, financials, shareholders and employees. And that in the absence of such vital disclosures, it is raising concerns regarding the proposed resolution, as shareholders may not be able to take an informed decision.
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