PNB Housing Finance Vs SEBI: What next on the Carlyle deal?

The split order of Securities Appellate Tribunal (SAT) in the PNB Housing Finance Ltd Vs Securities and exchange Board of India (Sebi) case with respect to the Carlyle deal would mean the housing finance lender will have to approach  the Supreme Court if it wants to proceed with the transaction, said legal experts including a former top Sebi official.

On 9 August, the two-member SAT bench passed an indecisive verdict. Justice MT Joshi held that SEBI had issued the notification correctly and that the EGM vote cannot go ahead unless the valuation report is also obtained as per the Articles of Association and place it before the general body of shareholders.

At the same time, Justice Tarun Agarwala held that SEBI ought not to have stopped the voting at EGM since PNB board had approved issuance of shares as per ICDR and shareholders should have been allowed to vote. "In view of the difference of the opinion between the Members of the Bench we direct the interim order, dated 21st June, 2021 to continue till further orders," SAT said.

In the interim order, SAT had allowed PNBHFL to conduct EGM but asked the company not to disclose the outcome.

SEBI Order stays

But, the SAT order clearly means that the Sebi's verdict in the case stands, said J N Gupta, former executive director at Sebi and Co-founder of SES shareholder advisory firm. "Today's order clearly says that SEBI's order stands in this case and if PNBHFL needs to proceed with the outcome of the EGM, they need to get an order from Supreme Court," said Gupta.

A similar view was aired by Harvinder Singh, Partner, DSK Legal.

"Post today’s split SAT order, SEBI’s GM order dated 18th June, 2021 remains intact and so the SAT's interim order -- prohibiting PNB Housing Finance from disclosing the results of the EGM vote, therefore the parties will have to appeal to the Supreme Court, for the dispute to come to a logical conclusion," Singh said.

What is the Sebi order?

Earlier, SEBI had directed PNBHFL to halt the proposed deal until the company undertakes a fresh valuation from an independent valuer. Later, the SAT allowed the company to conduct the AGM but asked it to not announce the results of the AGM till a final order. SAT's order is pending in this case.

The market regulator said that the notice given on May 31 for Extraordinary General Meeting (EGM) is "ultra-vires of the Article of Association (AOA) and shall not be acted upon until the company undertakes the valuation of shares as prescribed under 19(2) of AOA, 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.

PNBHFL moved the SAT after the SEBI stay on the transaction. On July 7, PNBHFL informed exchanges that PNB had asked it to reconsider the structure of the Rs 4,000-crore investment proposal from the Carlyle-Aditya Puri combine in the current form and seek an alternative plan. Aditya Puri is a senior advisor at the Carlyle Group and former managing director of HDFC Bank.

However, talking to the media on August 3, PNB MD&CEO, Mallkarjuna Rao said PNB never objected to the Carlyle deal but only asked the subsidiary to follow the Sebi directions.

The Carlyle deal

The Rs 4,000 crore Carlyle deal is very critical for the fund-starved PNB HFL.

What is the deal? In an announcement on May 31, PNBHFL said that the Carlyle Group, along with its affiliates, existing investors, and Puri’s family investment vehicle will together invest up to Rs 4,000 crore in the housing finance company.

Pluto Investments, an affiliated entity of Carlyle Asia Partners IV and Carlyle Asia Partners V, has agreed to invest up to Rs 3,185 crore through a preferential allotment of equity shares and warrants, at a price of Rs 390 per share.

Existing shareholders of the company, funds managed by Ares SSG and General Atlantic, will also participate in the fund-raising. The statement added Puri will likely get nominated to the Carlyle board in due course.

Proxy advisory firm raises questions

Proxy advisory firm SES had first raised an issue on the deal. Among the questions raised by SES include:

1. a) Why did PNB willingly surrender control, without extracting a fair compensation? b) Why did the board agree to a preferential offer at a discount to book value? and c) Was the rights issue a better proposition? Has PNB sacrificed Rs 2,000+ crore?

What next?

With SAT giving a split order, it needs to be seen whether PNB HFL moves the apex court to challenge the market regulator's order.