The tribunal asks if regulator can intervene before investors vote on a plan
PNBHF announced a preferential share sale to investors led by Carlyle
PNB Housing Finance Ltd’s contested share sale to Carlyle Group and others took a new turn on Tuesday, with an appeals court questioning how the markets regulator could stay the process before the company’s shareholders could vote on the proposal.
Approving the proposal would have led to a change of ownership of the mortgage lender, with the private equity giant taking the driving seat. The matter reached the Securities Appellate Tribunal (SAT) after the Securities and Exchange Board of India (Sebi) stayed the process.
“At what stage can Sebi step in and decide the affairs of a company? Is it fair for the regulatory authorities to step in prior to the shareholders taking a decision? How can you say the decision is fait accompli? Do you think the shareholders are dummies?" the tribunal asked Sebi.
The story began in June when PNB Housing announced a preferential sale of shares worth ₹3,200 crore and warrants worth ₹800 crore to a set of investors led by Carlyle, which is already a shareholder in the mortgage lender. Soon after the announcement, proxy adviser Stakeholders Empowerment Services (SES) criticized the deal as “unfair" to public shareholders and a violation of the company’s Articles of Association (AoA) pertaining to valuation. Sebi then asked PNB Housing Finance to put the deal on hold on the ground that it was ultra-vires of AoA, prompting it to move SAT.
In response to SAT’s objection, Sebi’s counsel on Tuesday argued that the proposed allotment would have impacted the market as well as minority shareholders holding a little over 15% in PNB Housing. It said the preferential allotment would result in a change of ownership and an open offer and that the preferential issue price would have a direct bearing on the open offer price.
“Sebi will have to intervene if it finds that the action proposed to be taken by a company will impact the securities market," its counsel told the tribunal, adding it did not find that the preferential allotment price was in accordance with the applicable provision in its AoA.
PNB Housing shareholders on 22 June voted on a special resolution on the preferential allotment. The fundraising needs approval from 75% of those present and voting. The parties to the deal are Punjab National Bank and private equity firms Carlyle, General Atlantic and Ares SSG, which own a combined 85% stake in PNB Housing.
On Monday, PNB Housing told SAT that Sebi cannot compel it to follow its AoA as it is just a contract and that AoA cannot override Sebi’s Issue of Capital and Disclosure Requirements (ICDR), which listed firms must follow for preferential allotments. Company Law does not require engaging the services of registered valuers when a listed company is making a preferential issue, the housing finance company had said.
On this, the Sebi counsel on Tuesday argued that there is no conflict between following a company’s AoA and Sebi’s ICDR regulations, and in reconciling the two, the rule of harmonious construction would apply.
“There’s no conflict when the company abides by its own articles of association. The fundamental task is to determine whether the two provisions have been repugnant to each other and can be reconciled," Sebi said. Arriving at a floor price under the ICDR regulations doesn’t bar the company from conducting the pricing exercise under its AoA and arriving at a price higher than the ICDR floor price, it said.
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