Proxy advisory firm SES raises corporate governance issues in PNB HF deal, questions PNB for surrendering control to Carlyle at depressed price

PNB CEO SS Mallikarjuna Rao told CNBC-TV18 on June 8 that the pricing of the deal was decided as per SEBI’s formula (Image: Wikimedia)

In a scathing report, proxy advisory firm Stakeholders Empowerment Services has raised several questions about Punjab National Bank’s preferential allotment to Carlyle, which gave the private equity firm control over PNB Housing Finance.

SES raised the following points, questioning the legitimacy of the transaction and alleging corporate governance lapses.

> Why did PNB willingly surrender control, without extracting fair compensation?

> Why did the board agree to a preferential offer at a discount to book value?

> Was rights issue a better proposition? Has PNB sacrificed ₹ 2,000+ crore?

> 85% of the shareholders were part of the deal, only the public was left out

> Independent directors’ affiliation – did it impede independence?

> Pricing - a convenient refuge under ICDR

> Deceptive objectives of the issue

> Speculative disclosures by the company

> Transaction could be ultra vires AoA of PNB HFC

Deal at a Fair Value?

SES is of the view that a rights issue would have been the best method of raising capital unless it was for a strategic reason. In this case, 85% of the shareholders were the decision-makers or participants in the capital raising, what harm would it have caused if all the shareholders were offered a rights issue? The only harm would be that PNB would not have been able to gift away control to Carlyle without a premium.

Questions Raised on Articles of Association

SES is of the opinion that the proposed resolution is not in accordance with provisions of the company’s AoA and is ultra vires. The valuation provided by the registered valuer or that under the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, whichever is higher, should be the minimum issue price. While there is disclosure of the pricing as per SEBI ICDR in the notice, there is no mention of the price obtained from the valuer and the valuation report. Hence, the AoA appear to have been violated in the proposed resolution.

Independence of the Board Questioned

SES is of the opinion that the company’s board of directors did not have the power to reappoint Mr. Chandrasekaran Ramakrishnan and Mr. Nilesh S Vikamsey as independent directors for a second term.

PE Sources to Moneycontrol

Deal is a bailout for PNB Housing

PNB did not have funds to invest. There was lack of institutional investor interest in PNB Housing stock but Aditya Puri’s investment has added optimism to the stock

Deal provides immediate injection of funds

What PNB Housing Finance sources say

PNB is not ceding control and will continue as promoter of PNB HF

> To ensure that PNB continues to have the ability to provide valuable support, it will have the right to appoint two directors to the board of PNB Housing Finance even as its ownership falls below 26%. The company’s AoA are being amended accordingly.

> As informed by the company on various occasions, PNB wanted to participate in the company’s capital-raising plan but did not receive regulatory approval.

> Capital infusion was critical and various rating companies and research houses had raised this matter in their reports.

> The company has undertaken all regulatory and compliance-based due diligence while executing this deal.

> The funds raised will strengthen the company’s balance sheet by bringing down leverage and increasing capital adequacy. It will help in accelerating growth in the retail segment, including self-employed and affordable housing loans such as the Unnati segment.

> After PNB did not get approval to participate in the rights issue, the company evaluated all the best options available.

Comments From Parties on the Deal

Comments From Parties on the Deal

Carlyle in an e-mail response declined to comment.

PNB did not respond to email queries. PNB CEO SS Mallikarjuna Rao told CNBC-TV18 on June 7 that the pricing of the deal was decided as per SEBI’s formula and PNB Housing’s requirement of funds had increased due to Covid-19.

PNB Housing Finance said in a statement:

“The key objective of raising capital is to augment capital adequacy, reduce gearing and accelerate growth with a focus on retail housing including self-employed and affordable housing loans such as the Unnati segment. As a responsible company, PNB HFC has consistently striven for sound business practices along with excellent corporate governance. The company has, over the period, successfully demonstrated through its performance its ability to grow and compete."

PNB will continue as promoter of PNB HF

“We are confident this will take the company forward to its deserving success and growth and expected to unlock value for all the stakeholders including minority and retail investors.”