SEBI Proposes A Fix For PNB Housing-Preferential Issue Kind Of Situation

Much of PNB Housing Finance Ltd.'s time this year has been spent in a litigation battle, which ended anti-climatically, with the market regulator. At the centre of it was a preferential issue proposed by the housing financier which the regulator objected to on pricing. Now, the regulator's primary market advisory committee has made recommendations to fix the issue that emanated from PNB Housing Finance's dispute with the Securities and Exchange Board of India.

The suggestions say:

• A preferential issue resulting in change in control or allotment of more than 5% to an investor or to investors acting in concert to require a valuation report. The valuation should then be considered for pricing the issue.

• If the Articles of Association mandate a stricter pricing formula compared to what's prescribed under ICDR, that should be adhered to.

• If a preferential allotment will result in change in control, the valuation report should suggest a control premium. Such an allotment is to be done only after a reasoned recommendation from a committee of independent directors. The committee shall also disclose the voting pattern of its meeting.

The proposals are clearly made to ensure a PNB Housing-like situation doesn't arise in the future, experts BloombergQuint spoke with said.

To recap, it all started with a letter by SEBI objecting to the preferential allotment pricing by PNB Housing's board. The company sought to raise Rs 4,000 crore via a preferential allotment of shares to select shareholders led by Carlyle Group.

SEBI told PNB Housing Finance to undertake a valuation of the shares as per its Articles of Association—that mandate a registered valuer's report for such fundraising. PNB Housing Finance objected to it saying pricing has to be done as per SEBI's Issue of Capital and Disclosure Requirements Regulations.

The matter reached the Securities Appellate Tribunal, resulting in a split verdict, which the Supreme Court refused to decide upon.

Things couldn't have been left in a regulatory vacuum after the Carlyle-PNB Housing Finance deal got called off—which is why we're seeing these proposals from the PMAC, Ravi Kumar, partner at IndusLaw, told BloombergQuint.

That said, if they're implemented, it will be hugely problematic because the minute there is a requirement for a valuation report to justify pricing (of listed securities), there will be ripe challenges in court on this aspect, Kumar said.

You do a preferential allotment for quick fund raising; not to get bogged down by a valuation fight in courts, Kumar said.

Harsh Maggon, partner at Trilegal, concurred.

Determination of valuation, and indeed control premium, isn't an exact science and is largely driven by commercial exigencies of parties, Maggon said.

"Take, for instance, a distressed company in need of funds—who will pay control premium in such a situation?" he asked.

Both the experts also opposed the proposal to get independent directors to specify whether control premium is being charged and if not, then give reasons for it.

A company's board is duty-bound to ensure that they get the best price possible, Kumar said. "I don't think we need to get so prescriptive given the fall-out of a couple of cases."

They already have this fiduciary responsibility under the company law and Listing Regulations, Maggon added. "I somehow feel this is an overkill."

Not all suggestions by the PMAC are unwelcome. To account for market volatility and make preferential allotments attractive for promoters and existing investors, the PMAC has recommended a formula change.

Currently, pricing has to be a higher of -

• Average of the weekly high and low of the volume weighted average price during the 26 weeks preceding the relevant date; or

• Average of the weekly high and low of the volume weighted average price during the two weeks preceding the relevant date.

The suggestion is reduce 26 weeks to 60 trading days and replace two weeks with 10 trading days in the existing formula.