SAT | Related-party transactions only contemplate transactions between a company and related party; JMF ARC’s purchase of 26% stake as per the law

Securities Appellate Tribunal (SAT): Coram of Justice Tarun Agarwala, (Presiding Officer), Justice M. T. Joshi (Judicial Member), and Dr. C. K. G. Nair (Member), dismissed an appeal filed by ITC Ltd. against the proposed sale transaction of the substantial assets of Hotel Leelaventures Ltd. (Leela) for which the impugned Postal Ballot Notice (PB Notice) was issued and allowed the appeal filed by JM Financial Asset Reconstruction Co. Ltd. (JMF ARC).

“Leela” under financial distress, had decided to restructure its debts under the Corporate Debt Restructuring (CDR) mechanism. The majority lender institutes agreed for the same. On 20-09-2012 the CDR package of Leela was approved. Thereafter, a Master Restructuring Agreement was executed on 25-09 2012 between Leela and State Bank of India (SBI) and other lenders on the other hand. Under the said Master Restructuring Agreement, Leela was to comply with certain terms and conditions, which it could not.

Thereafter, on 25-06-2014, a Trusteeship Agreement under the SARFAESI Act was executed between JMF ARC and the lenders under which a Trust was created named as JMF ARC-Hotels June 2014-Trust. This Trust had issued security receipts to these Joint Lenders and also offer documents were issued for the private placement of the said receipts. Eventually, the CDR package was declared as failed and on 30-06-2014, majority lenders had assigned Rs.4150.14 crore of debt to the Trust. JMF ARC paid Rs.865 crores upfront and issued security receipt worth Rs.3200 crores. It filed disclosures under Regulation 29(2) of the Takeover Regulations on 25-10-2017. JMF ARC later filed a corporate insolvency resolution process before the National Company Law Tribunal Mumbai Bench (NCLT), the proceedings for which are pending.

Due to initiative of JMF ARC, a proposal was received from Brookfield for the “Asset Sale Transaction” of the Company’s assets and the additional transactions between Brookfield and some of the promoters. On 18-03-2019, the Board of Directors of Leela approved the framework agreement comprising the Asset Sale Transaction and PB Notice was issued. On 22-04-2019, the appellant ITC filed a Company Petition before the NCLT complaining of oppression and mismanagement, which too is pending before the NCLT. ITC argued that they were not allowed to obtain a copy of the Framework Agreement but could only take notes.

ITC objected that all the transactions were related party transactions which could not be generally put for the vote including the Promoters, Directors being related parties as also JMF ARC. Further, JMF ARC acting as a Merchant Banker Leela was also to gain a remuneration of Rs 70 cores besides its resolution of debt assigned to it by the lenders. Further, JMF ARC had acquired 26% of the equity of Leela against the provisions of the Takeover Regulations, 2011 it should have been prohibited by SEBI from participating in the voting under the provisions of Regulation 32 of the Takeover Regulations.

SEBI had held that the transactions in question were not related party transactions. They stated that in acquiring 26% of the equity shares of the Leela by JMF ARC, only a technical breach has occurred which could be exempted.

Aggrieved by this order of not restraining Promoters/Directors of Leela and JMF ARC from voting, ITC filed an appeal before SAT.

All the respondents submitted that the appellant was a rival company which was trying to scuttle the transaction only to compel Leela to undergo the debt resolution under the Insolvency and Bankruptcy Code. The appellant, on the other hand, submitted that the Directors and the Promoters of Respondent Leela were pushing ahead with their personal agenda of pocketing an amount of Rs 300 crores through the additional transaction.

The Tribunal answered the following issues:

  • Whether the disputed transactions were related party transactions limiting the voting rights of the directors, promoters of the Leela and of JMF ARC?
  • Whether JMF ARC could be completely prevented from voting in view of the Takeover Regulations?

The Tribunal was of the view that it was not required of them to asses the proposed transaction to find as to whether it is in the interest of the investors. In view of objection to the voting rights or limitations on the voting rights of the directors/promoters of the respondents, the reliefs can be modified in terms of the relevant regulations. The appeal filed by ITC Ltd. was dismissed by the Tribunal citing the following regulations:

Takeover Regulations:

  1. In view of the Takeover Regulations of 2011 an acquirer acquiring 25% or more shares, voting rights or control in a listed Company has to adopt the route as provided by the Takeover Regulations subject to certain exemptions. JMF ARC acquired 26% of the shares of the Company by claiming exemption as provided by Regulation 10 of the Takeover Regulations. SEBI in the impugned order held that the said acquisition was only a technical breach of the Regulations fit for exemption and did not exercise its power to issue directions as provided by Regulation 32 of the Takeover Regulations.
  2. Corporate debt restructuring scheme was announced by the Reserve Bank of India through various circulars from time to time for the purpose of restructuring the debt of financially distressed companies in an attempt to revive such Companies. The circulars provided a basic framework. Specific plans were to be worked out for a Company inter alia regarding interest moratorium, plans of payment, etc. to be worked out in the agreement which would be approved by the Empowered Group of CDR scheme. In the event of default, the agreement can provide for certain contingencies. Clause 7.2 of the Master Restructuring Agreement provided for remedy upon default. Therefore, the covenant regarding conversion right would come into picture only when the CDR scheme fails i.e. default is made by the borrower in pursuance of the CDR scheme.

LODR Regulations: Related Party Transactions:

  1. The appellant had objected the exercise of PB Notice asking all the shareholders including the respondents who are the promoters/directors of the in view of the fact that the proposed Asset Sale Transaction of the Company with Brookfield was a composite transaction to be consummated only when additional transactions with the promoters personally are also agreed. It was submitted that as the nature of the transaction was, the same would be a related party transaction attracting the provisions of Regulation 23 of the LODR Regulations.
  2. Therefore, the entire transaction was held to be a composite transaction. Further, the additional transaction between Brookfield and ITC cannot also be termed as related party transactions and, therefore, the provisions of Regulation 23 of the LODR Regulations would not be attracted.[ITC Ltd. v. SEBI, 2019 SCC OnLine SAT 185, decided on 26-09-2019]

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