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About 20 years ago, Maruti Suzuki India Ltd’s plan to raise capital through a rights issue had to be stalled, because the government of India wasn’t willing to budge on its demand for a ‘control premium’. The government had planned to renounce its rights and sell them instead to some financial institutions. This, in turn, would reduce its stake and give control of the firm to the joint venture partner, Suzuki Motor Corp.

The deal eventually went through in May 2002 after the Japanese firm shelled out 1,000 crore as control premium.

In sharp contrast, Punjab National Bank (PNB) is letting go of control at PNB Housing Finance Ltd with no talk whatsoever of any control premium.

Cost of control
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Cost of control

Stakeholders Empowerment Services (SES), a proxy advisory firm, has advised shareholders of the housing finance firm to vote against a proposal to issue preferential shares to a handful of investment firms, which will give control to Carlyle Group.

The main quibble is that while the allotment price is in keeping with Securities and Exchange Board of India (Sebi) rules, it does not factor in any premium for the control being gained.

SES’s suggestion is for the firm to opt for a rights issue instead. This will enable both minority shareholders and PNB to acquire shares at the same price, or sell their rights at a market-determined price.

It’s impossible for minority shareholders to stall the preferential issue and demand a rights issue. Even if Carlyle and other investors participating in the issue were barred from the vote, just PNB’s vote would see the resolution through. The state lender is not being allotted shares in the issue, which will bring its stake in PNB Housing down from around 33% to a little over 20%. It has also agreed to tweak an agreement that allows the use of the PNB brand by the housing finance firm as long as its stake is above 20%—this threshold was earlier at 26%.

All of this is odd. PNB stands to lose the most by not demanding a control premium, although this doesn’t seem to bother it at all.

The bank hasn’t put the transaction to a shareholder vote, and a perusal of its stock exchange announcements shows it hasn’t formally communicated to its shareholders why it is letting Carlyle get into the driver’s seat at PNB Housing at just the prevailing share price.

Incwert Advisory Pvt. Ltd, an independent valuation services firm, points out in a report that acquirers paid on average a 28% premium to acquire control over banking and financial services firms between November 2011 and June 2020.

While averages can mean anything, the control premium was nil only in two out of the 53 instances where open offers were made in the sector. In three cases, the control premium paid was over 100%.

The huge jump in PNB Housing’s share price this month shows that the market has prescribed high value to the aspect of PNB ceding control to Carlyle. It’s only fair that PNB shows it has taken the best efforts to ensure that its shareholders have got the best terms in the deal. Sebi has now added weight to the warnings of SES by asking the housing finance firm to commission an independent valuation report.

Shareholders of PNB and its overseer, the government of India, need to ensure that the lender also commissions an independent valuation exercise that determines a fair control premium. If Suzuki could budge, so can Carlyle.

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