PNB Now Does a U-Turn on Whether It Objected to PNB Housing Finance-Carlyle Deal
Moneylife Digital Team 03 August 2021
Almost a month after State-owned Punjab National Bank (PNB) asked PNB Housing Finance (PNBHFL)’s board to "reconsider restructuring" its fund-raising plans, CS Mallikarjuna Rao the managing director (MD) and chief executive officer (CEO) of PNB, said the lender never objected to the deal struck by its subsidiary with a consortium of investors led by the US-based The Carlyle Group. 
Speaking to reporters on a media conference call after the Bank's first-quarter quarterly earnings announcement Mr Rao said PNB Housing Finance’s decision to raise Rs4,000 crore from a consortium of investors led by private equity fund Carlyle, was within regulatory norms. 
“When SEBI issued the letter, we asked the board to restructure the deal in line with the same,” Mr Rao said. The Bank will follow whatever directions are issued by the SAT (Securities Appellate Tribunal) in this case, he added.
"The decision taken by PNB Housing board was within SEBI's (Securities and Exchange Board of India) guidelines. Considering the issues raised by the regulator in its June 18 letter, the PNB board had written to PNB Housing Finance's board to follow the regulator's guidance," Mr Rao, who is also the non-executive chairman of PNBHFL, said. 
"As per SAT order the results of the vote are in a sealed envelope, where it will remain till further instructions. We await SAT's final order in the matter and will proceed accordingly," Mr Rao stated. 
When asked what specific restructuring was sought, Mr Rao responded that PNB had "merely asked PNB Housing Finance to follow SEBI's direction and not directed any specific changes."
"The legal opinion which we had sought from a legal luminary indicated that there was no confusion between the Articles of Association (AoA) and SEBI's pricing guidelines. So the decision taken by the PNB Housing Finance board was not without due diligence," Mr Rao clarified.
However, when asked if PNB still backed its housing arm’s transaction, Mr Rao refused to respond. 
"Our vote is in the sealed envelope and will only come out when the SAT order comes. I have already discussed the events which have happened in a lot of detail, I would not like to say anything further," Mr Rao hurriedly ended. 
Incidentally, Mr Rao, the current MD and CEO of PNB, was appointed in October 2019 and is set to retire on 18 September 2021. There were reports earlier that the finance ministry was looking to extend his tenure till 31 January 2022 when he turns 60 and attains superannuation. 
However, last week the Bank Boards Bureau again called for applications for the post. The Bureau had last invited application for the post in June. The current deadline for submitting application is 10th August. The sudden flip-flop in the stance (within a month) of PNB with respect to the PNBHFL -Carlyle deal sounds strange. 
The deal, which was announced on 31st May, is currently facing uncertainty and awaiting SAT’s verdict. If SAT upholds the SEBI ruling, PNB and Carlyle may have to go back to the drawing board to work on the deal structure and valuation.
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. 
SEBI said that the notice given on 31st May 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.”
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 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 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 PNB should have opted to give up it's right for a price determined on stock exchange where such entitlements are traded. 
SEBI sent a couple of letters to PNBHFL raising objections with respect to its proposed deal, 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.
PNB, in a letter on 4th July (one day before the scheduled SAT hearing), had 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. PNBHFL moved the SAT after the SEBI stay on the transaction. 
The PNBHFL-Carlyle deal, which is in limbo at the moment, is also casting a long shadow on other preferential share deals, which are under way—including Reliance Industries' (RIL's) deal to buy out JustDial, LIC Housing Finance and even Barbeque Nation. 
Kamal Garg
3 months ago
I think a small issue has been blown out of proportion by the business media. It is very clear by law that wherever there is a conflict between some internal guidelines which are in contravention to any set and established legal position, then, legal position/law will prevail upon such incidents. Why there is a fuss now and for what.
SEBI or for that matter any regulator cannot interpret the legal positions in its own way. That's the way, India Inc. has been signing deals in the past and making preferential allotment with no eyebrow raised by the regulator. Then, why in the instant case.
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