Check this out: Hotel Leela’s asset monetisation deal

With the Securities and Exchange Board of India (SEBI) restraining Hotel Leelaventures from selling its hotel properties to Brookfield Asset Management pending further investigation, the long-delayed resolution of the company’s debt looks set to be pushed further. SEBI’s move to stonewall a transaction approved by a company’s board and voted on by its shareholders is unusual and has very few precedents no doubt. But SEBI’s intervention in this case is timely and quite welcome, given that the concerns flagged by the company’s minority shareholders merit scrutiny.

Saddled with high debt and insufficient cash flows, Hotel Leela has been attempting to resolve its financial woes since 2012 and has been a defaulter ever since its lenders assigned their debt to JM Financial Asset Restructuring Company. The proposed asset monetisation deal with Brookfield, which envisages the sale of its prime hotel properties in Delhi, Bengaluru, Chennai, Udaipur and Agra for around ₹3,950 crore will allow the company to make substantial inroads into its debt pile. But while the transaction is much-needed for lenders, it raises three red flags for the company’s minority shareholders. One, after the sale of key revenue-generating assets, Hotel Leela will effectively be a shell company with little residual value for equity shareholders. Two, in the absence of a detailed valuation for this ‘slump sale’, shareholders also have no means of knowing if the company has negotiated a fair price for their key assets. Three, while public shareholders are unlikely to receive any payout from this deal, promoter entities are set to pocket at least ₹300 crore through parallel transactions with Brookfield for intellectual property and business expansion services. The Companies Act prohibits companies from disposing of a substantial part of their business without seeking the approval of 75 per cent of their shareholders through a special resolution. While Hotel Leela has put this deal to vote through postal ballot, minority shareholders hold no real power to veto it given that the promoters and JM ARC who together control 73.3 per cent of equity, are likely to be all for it. There’s a clear conflict of interest between JM ARC’s role as a public shareholder and that as a lender gaining from this deal. That’s why institutional shareholders such as ITC and LIC appear justified in lodging complaints with the NCLT and SEBI, calling for the deal’s scrutiny as a related-party transaction.

Minority shareholders may have little to gain from the final verdict, given that Hotel Leela’s net worth of ₹48 crore is inadequate to service the debt of over ₹3,700 crore. But the regulatory rulings in this case will help settle important points of governance on companies disposing of their cash cows, and on voting rules for related-party transactions. It is good to see domestic institutions voicing their opinion on the postal ballot, instead of mutely rubber-stamping management decisions as they usually do.

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