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SEBI justifies intervention in PNB Housing-Carlyle deal, citing need for independent valuation

The regulator told the Securities Appellate Tribunal that it had to step in before the EGM to protect the interests of minority shareholders

July 16, 2021 / 07:31 PM IST
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India’s market regulator defended its decision to intervene in the PNB Housing case before the company’s extraordinary general meeting, saying it was necessary for shareholders to get the correct valuation at which investors led by the Carlyle Group would acquire shares and management control.

Concluding its arguments before the Securities Appellate Tribunal on Friday, the Securities and Exchange Board of India said PNB Housing should have got an independent valuation report prepared and acted on that, as prescribed by the company’s articles of association.

The SAT will next hear the matter on July 19.

SEBI maintained that the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018, (ICDR Regulations) provided for a floor price below which shares cannot be issued, but that level could not be construed as a price ceiling.

The regulator said the board of PNB Housing had violated the articles of association and SEBI was bound to intervene in the matter before the EGM took place. PNB Housing should have ensured that an independent valuation report would be presented to shareholders so that they could decide whether to approve the proposed deal.


SEBI also raised concerns over a valuation report that was prepared by the partner of the company’s statutory auditor, with the regulator’s counsel saying that a certified valuer submitting a report in a day was a matter of serious concern.

A legal expert said the SAT was rightly troubled by the timing of the letter sent by SEBI, just before the EGM, but the regulator could not have stood by without taking any action.

“It (the SAT) is equally concerned by the fact that SEBI didn’t wait for the general body of shareholders to decide and vote for themselves,” said the lawyer who specialises in securities laws, asking not to be identified. “However, SEBI is right in its own way, conceding that it would fail in its duty if it were to remain a mute spectator and not come in to protect retail shareholders who may be misguided due to lack of information.”

Also Read: Complied with all regulations in Rs 4,000-crore Carlyle deal, PNB Housing tells tribunal

This account of the proceedings was pieced together from conversations with people familiar with the matter who did not want to be identified.

At the previous hearing on July 13, SEBI told the appellate tribunal that the ICDR regulations do not stop with prices alone and also cover the rights of shareholders. There is no conflict between the articles of association, the ICDR regulations and the Companies Act, it said.

SEBI had the right to intervene in this case because it went against the interests of minority shareholders, the regulator argued. If the articles of association had clearly prescribed an independent valuation, then why didn’t PNB Housing get it done, it had asked.

A former SEBI official also defended the regulator’s intervention. “From the arguments at SAT, it appears that an impression is being created against SEBI’s action, that the regulator intervened just before the EGM and tried to stop it. If one looks at SEBI’s communication as reported, all it said was not to act on the resolution relating to preferential offer; It did not stop the EGM or shareholder voting or even declaration of result. It was SAT which prohibited declaration of result,” he told Moneycontrol on condition of anonymity.

“PNB Housing has been reportedly arguing that the articles of association are outdated and have no relevance after IPO. This, once again, is a very weak argument. First, if the relevant article is existing today, it has to be complied with. But most importantly the articles were changed at the time of IPO and the article in question was retained, in all probability to protect PE investors against cheap dilution without valuation report. Therefore, it appears that what was designed to protect PE investors is coming in handy to protect minority investors,” the person pointed out.

The former SEBI official observed that the ball is in SAT’s court and expressed hope that the Tribunal would not disappoint minority public shareholders. “With PNB now asking PNB HFL board to comply with the SEBI order, should there not be a new vote? Or should the proposed allottee be allowed to benefit even though the current promoter and the person in control realised the mistake? Should law support such beneficiaries?” he asked.

The Carlyle deal

The case pertains to PNB Housing’s plan, approved by the board on May 31, to raise funds through a preferential allotment of shares worth Rs 3,200 crore and warrants worth Rs 800 crore to Carlyle, General Atlantic and Salisbury Investments, an entity owned by Aditya Puri, a senior advisor at the Carlyle Group and former managing director of HDFC Bank.

The price of the shares and warrants was fixed at Rs 390 apiece, which was Rs 6 higher than the floor price under ICDR norms. For the warrants, 25 percent of the amount needed to be infused on the allotment and the remaining was to be paid within 18 months.

Also Read: Lessons from the PNB Housing Finance fiasco

According to proxy adviser Stakeholders Empowerment Services, the proposed transaction was unfair to the company’s public shareholders.

Four days before the EGM on June 22, SEBI directed the company to stop the allotment unless the valuation was carried out by an independent valuer.

The regulator, in a letter to the company dated June 18, said the proposal to issue securities and other related matters was ultra vires of the articles of association.

SEBI said the proposal should not be acted upon until the company undertakes the valuation of shares as prescribed under 19 (2) of articles of association “for the purpose of preferential allotment from an independent registered valuer as per the provisions of applicable laws. The said report shall be considered by the company’s board while deciding on the preferential issue of shares and warrants.”

The appellate tribunal allowed the EGM to go ahead on the condition that the voting outcome would not be disclosed until the matter was resolved.

Last week, PNB Housing Finance said its promoter Punjab National Bank asked it to consider restructuring the proposed Rs 4,000 crore capital infusion deal.
Tarun Sharma
first published: Jul 16, 2021 05:37 pm

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