PNB Housing Finance-Carlyle Deal: SEBI Raises Issue of Corporate Governance in New Letter
Moneylife Digital Team 13 July 2021
Market regulator Securities and Exchange Board of India (SEBI) has sent another letter to PNB Housing Finance Company with respect to its proposed deal with American private equity investor The Carlyle Group Inc asking the housing finance company why all its shareholders were not given equal opportunities and why the common shareholders have been ignored.  SEBI’s second letter also termed the proposed deal an 'apparent transgression of law' and asked PNB Housing Finance to explain why action must not be taken against it. 
In its examination letter, SEBI has also raised issues related to the corporate governance of the company.
In the letter, SEBI said, “On the basis of material available on record, it is evident that the company has failed to comply with the principles governing disclosures and obligations of a listed entity as enshrined in the listing obligations and disclosure requirements (LODR) regulations and the Company Act, 2013.” 
"Keeping in view the apparent transgression of law, the company and the board of directors are called upon to explain as to why it should not be construed that the directors have failed to discharge responsibility cast upon them in law and consequently why appropriate actions in terms of law be not considered for such failure," the letter added.
The whole matter relates to the 31st May decision of the PNB Housing Finance board approving raising of funds through a preferential issue of shares and share warrants worth Rs4,000 crore from Carlyle, General Atlantic and Salisbury Investments Pvt Ltd.
The capital is being raised by PNB Housing Finance to augment its capital adequacy, reduce gearing and accelerate growth with a focus on retail housing.
As part of this transaction, Salisbury Investments, the family investment vehicle of Aditya Puri, senior Advisor for Carlyle in Asia and former managing director (MD) and chief executive (CEO) of HDFC Bank, would also invest in the capital raise. Mr Puri was also expected to be nominated to the PNB Housing Finance board as a Carlyle nominee director in due course.
The price of the preferential issue of shares and share warrants was fixed at Rs390 per share, which was only Rs6 (marginally) higher than the floor price under the SEBI issue of capital and disclosure regulations (ICDR). 
For the share warrants issue of Rs800 crore, only 25% is needed to be infused on allotment, the remaining to be infused within 18 months. 
Proxy advisory firm Stakeholders Empowerment Services (SES) had alleged that through this preferential issue, PNB Housing Finance was ceding management control to Carlyle and persons acting in concert (PAC). 
SEBI ICDR only indicates past prices at which the stock was traded and need not necessarily indicate the value, SES had further explained, adding, “The company cannot take shelter under SEBI ICDR pricing guidelines stating that Rs384.6 (floor price) is the fair value for every share of a company that is having Rs530 as book value," SES said. Floor price is 'not fair value'.
The valuation report from BR Maheswari and Co LLP – provided by PNB Housing Finance to SES – is not legally tenable as it appears that the chartered accountancy (CA) firm is not a registered valuer and the report furnished by it does not meet ICAI (Institute of Chartered Accountants of India) valuation standards 2018, SES said. 
However, the objection to the transaction was that there was a violation of the articles of association (AoA), and that the preferential issue of shares was unfair to minority shareholders as only 15% of current shareholders were largely impacted. 
SES insisted that PNB Housing Finance should have come up with a rights issue and Punjab National Bank (PNB) should have opted to give up it's right for a price determined on stock exchange where such entitlements are traded. 
SEBI had earlier sent a letter to the housing finance company on 18th June saying “The current resolution bearing item no. 1 (issue of securities of the company and matters related therewith) of extraordinary general meeting (EGM) notice dated 31 May 2021 is ultra-vires of AoA and shall not be acted upon until the company undertakes the valuation of shares as prescribed under 19(2) of AoA, for 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.”
PNB Housing Finance told the Securities Appellate Tribunal (SAT) that SEBI has issued a second letter to the independent directors on 25th June asking why they failed in saving the interest of the minority shareholders.
SEBI then directed PNB Housing Finance to stop the allotment unless the valuation was done by an independent valuer.
Moneylife had reported last week that PNB Housing Finance and its parent Punjab National Bank are on different pages when it comes to the housing finance company's proposed preferential issue worth Rs4,000 crore to entities led by Carlyle group.
Punjab National Bank (PNB), in a letter on 4th July (one day before the scheduled SAT hearing), said that its board of directors is of the view that the board of PNB Housing Finance should take cognizance of SEBI's order and reconsider restructuring the deal in line with the regulator's directive.
PNB Housing Finance however, decided to wait for the SAT order, which is expected to be pronounced this week.
"Further to deliberations on the PNB letter, the board of the company, by a majority resolution passed on 6 July 2021, decided that since the issue involved relates to interpretation of law and is sub-judice before the SAT, the board will await the SAT's order on this issue," PNB Housing Finance had said in a regulatory filing. 
During the SAT hearing on Monday, PNB Housing Finance told the tribunal that SEBI was focusing more on the articles of association, which is an agreement between two shareholders and even cited a similar deal between LIC Housing Finance and Barbeque Nation to prop up its case. 
The housing finance company argued that SEBI has no jurisdiction to direct a listed company to stick to its articles of association. It also contended that SEBI issued two letters without giving the mortgage lender any chance to explain its position and, hence, it is against the principles of natural justice. 
The lender also pointed that there were other companies, which are not following their AoA but ICDR regulations, and pointedly asked why it is being singled out. 
PNB Housing Finance emphasised that it had complied with all provisions under the ICDR regulations in the deal.
The hearing will continue on Tuesday when SEBI is expected to present its arguments.  
Sources suggest that SEBI may direct exchanges to conduct a preliminary inquiry and seek an explanation from the two companies named by the mortgage lender as a precedent during its arguments, i.e., LIC Housing Finance and Barbeque Nation.
2 years ago
Very well researched document on the failure of corporate governance.
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