Governance experts have questioned the proposed transaction between PNB Housing Finance and US private equity firm Carlyle. Here is a primer on the deal and why the capital markets regulator has put a spanner in it.
What is the deal between Carlyle and PNB Housing Finance?
On May 31, 2021, the board of PNB Housing Finance approved a preferential allotment of shares and warrants to entities including the Carlyle Group, General Atlantic, Salisbury Investments Private Ltd. and Alpha Investments to raise Rs 4,000 crore. Salisbury Investments is former HDFC Bank CEO Aditya Puri’s family investment vehicle.
Of this amount, Rs 3,200 crore would come through the issue of equity shares and Rs 800 crore through warrants. The allotment was proposed at a price of ₹390 per share/warrant compared with the then prevailing market price of about Rs 525 per share.
The planned deal would make Carlyle the majority owner of the housing finance entity and reduce original promoter Punjab National Bank’s holding to about 20 percent from the existing 32.64 percent.
If it is a preferential allotment, why the controversy?
Soon after the announcement, proxy advisory firm Stakeholders Empowerment Services questioned the manner of raising funds and the price at which the shares were to be issued. It stated that while the proposed transaction would be unfair to the company’s minority shareholders, it would be all the more detrimental for shareholders of PNB who would have willingly surrendered control “without extracting fair compensation.”
SES said that since state-owned PNB was the promoter, the housing finance company was looked upon as a public sector undertaking and attracted a much lower PE multiple than its private sector peers. With Carlyle becoming the majority owner, a rerating of the stock was bound to happen and PNB should have factored in the control premium. It contended that the deal was not in compliance with the articles of association of PNB Housing.
How has the capital markets regulator reacted to this issue?
The Securities and Exchange Board of India barred PNB Housing from going ahead with the preferential allotment. The regulator said the proposed resolution is ultra-vires of the articles of association and should not be acted upon until an independent registered valuer determines the allotment price.
The company filed an appeal with the Securities Appellate Tribunal, which allowed the company to go ahead with shareholder voting on the resolution on June 22, but barred it from declaring the result until the final order on the matter is issued. The tribunal will take up the matter for final disposal on July 5.
What is the stance of PNB Housing Finance?
The housing finance company is of the view that it followed all applicable regulations with respect to the preferential allotment and the pricing. The company stated that it firmly believes the deal has not violated the company’s articles of association and that the preferential allotment is “in the best interests of the company, its shareholders and all relevant stakeholders.”
It contested the view of SES – and also that of SEBI – that the pricing of the allotment was unfair to minority shareholders and needs to be vetted by an independent valuer. It said that it had obtained a valuation report from its statutory auditor. PNB Housing also highlighted the fact that SEBI rules only lay down a formula to ascertain the minimum price for a preferential allotment and the price at which the shares are being offered is higher than the floor price.
What is the way ahead?
While the decision of the appellate tribunal is key to resolving the matter, it is likely that the outcome will be challenged by the losing party. In its interim order on June 21, the tribunal said the crux of the matter was whether a valuation report from a registered valuer is needed for the deal to be compliant with the articles of association.
While the tribunal will only look at this specific legal aspect, the SES report stated that the preferential allotment was being made to select shareholders to ensure that the resolution is passed. It said a rights issue would have been a better option because that would have been fair to all shareholders.
The regulator could also look into the role of the PNB board, which said in January 2020 that the bank would maintain a minimum shareholding of 26 percent in PNB Housing. If the board subsequently agreed to reduce its stake to below 20 percent, then such price-sensitive information should have been officially disseminated to shareholders. Governance experts view this as a failure to comply with listing and disclosure norms.
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