PNB Housing Finance-Carlyle Deal: SAT Questions Regulator's Intervention

PNB Housing case: Is it fair for the regulator to intervene even before the shareholders got a chance to vote?, SAT asks SEBI.

The logo of the Securities and Exchange Board of India (SEBI), India’s market regulator, is seen on the facade of its head office building in Mumbai. 
The logo of the Securities and Exchange Board of India (SEBI), India’s market regulator, is seen on the facade of its head office building in Mumbai. 

The Securities Appellate Tribunal raised concerns on the market regulator’s directions to PNB Housing Finance Ltd. that came even before the company’s shareholders could vote on the preferential allotment resolution.

In the hearing on Tuesday, the appellate tribunal "raised an objection" on Securities and Exchange Board of India’s stance that the preferential allotment resolution is ultra vires the company's articles and should not be acted upon until the company undertakes a valuation of shares from an independent registered valuer. SEBI could’ve passed an order after the extraordinary general meeting giving the company’s shareholders, including parent Punjab National Bank, an opportunity to express concerns, if any, SAT said.

At what stage can SEBI step into the affairs of a company? The company has its own shareholders. They will decide the future course of action—no one can interfere. If the company's action is in violation of any laws, then the concerned authority can step in but prior to that, is it fair on the part of the authority to step in and say you can’t do this, you can do only this.
Observations by Securities Appellate Tribunal

To SEBI’s argument that the preferential allotment pricing decision by PNB Housing Finance’s board will have a direct impact on the market, the appellate tribunal observed the regulator has pre-empted the EGM outcome.

“If the proposal is turned down by the shareholders in the EGM, then what happens? The impact on the market has nothing to do in so far as this controversy is involved," the SAT said. "You’ve prevented the shareholders from exercising their franchise under the Companies Act. Why do you assume that shareholders are dummies?”

The cases emanates from objections the SEBI has raised to the pricing of the preferential allotment issue proposed by PNB Housing Finance. The housing financier had announced capital raising via a preferential issue on May 31 to certain entities belonging to the Carlyle Group, General Atlantic, Ares SSG and Salisbury Investments.

Currently, government-owned Punjab National Bank owns 32.6% stake in it. The preferential issue would result in PNB's stake declining to 20% and Carlyle Group, with a current 32%, would become the company’s controlling shareholder with an over 50% holding.

For this preferential issue, PNB Housing Finance's board arrived at a price of Rs 390 per share. The pricing was determined as per SEBI’s Issue of Capital and Disclosure Requirements Regulations.

But the market regulator directed PNB Housing Finance to undertake the valuation of shares as per the provision in its articles of association that require a registered valuer's report on valuation. This prompted PNB Housing Finance to approach SAT for relief, which allowed the company to go ahead with the shareholder meeting but not disclose the results.

On July 7, PNB Housing Finance's board said it had decided to await the decision of the appellate tribunal even though parent PNB asked it to consider restructuring the Rs 4,000-crore fundraising plan.

On Monday, arguing for PNB Housing, senior advocate Janak Dwarkadas had questioned SEBI’s jurisdiction to direct a listed company to adhere to its articles of association. Senior Advocate Fredun Devitre argued before SAT on behalf of the market regulator on Tuesday.

Small Shareholders Are Being Shortchanged, SEBI Says

SEBI’s counsel argued that it’s incorrect to say that the regulator is directing the company to disobey its own regulations. Devitre was responding to PNB Housing Finance’s submission that the company is being asked to adhere to its articles when the law says something else.

The regulator is only saying that the ICDR prescribes a floor price for a preferential issue. But if in its AoA, which is a contract with shareholders, a company has promised a formula that could result in a higher pricing, that exercise must be undertaken, Devitre submitted.

He argued that:

  • There’s no conflict between PNB Housing Finance’s articles of association, SEBI’s ICDR regulations and company law provisions. And even if there is one, any court’s first endeavor must be to reconcile it so that there’s compliance with both.

  • ICDR was brought in to ensure shareholders do not get a price below a benchmark. It does not prohibit a price that is higher than the price determined under the regulations. So there’s no conflict between ICDR and the company’s AoA.

In reconciling the two—ICDR and AoA—rule of harmonious construction will apply.

Forget the theory, common sense tells us if there’s conflict, can you reconcile? Can you obey one without the disobeying the other? Yes, you can abide by ICDR and your AoA. SEBI is not saying disobey the ICDR. You have to do the exercise under AoA and ICDR. If you arrive at a price under your AoA which is higher than the ICDR-pricing, then common sense will tell you what you should go by.
Fredun Devitre arguing for SEBI
  • This is not a run-of-the-mill preferential issue. It will result in change in control and consequently an open offer. The preferential issue pricing will have a direct impact on the open offer price. Small shareholders are being short-changed because the company has chosen not to abide by its articles.

  • Section 24 of the Companies Act gives SEBI jurisdiction in the matter to act in the interest of investors. If a proposed action is likely to adversely impact the market, SEBI has the right to step in. If a company proposes something that will impact the small shareholders, SEBI can step in at that stage.

  • The single largest shareholder (PNB) has written to the company telling it to abide by the AoA.

The market regulator will resume its arguments on Friday.