Home / Markets / Stock Markets /  Sebi says valuation mandatory for all preferential allotments

The markets regulator, in arguments presented to the Securities Appellate Tribunal, said that a valuation report is mandatory before a company raises capital via preferred allotment of shares to ensure all shareholders are treated equally, especially if such a preferential allotment entails an open offer due to change in control and ownership.

The tribunal is hearing PNB Housing Finance Ltd’s challenge to a Securities and Exchange Board of India (Sebi) order that barred the home financier from raising 4,000 crore through a sale of shares at 390 apiece to the Carlyle Group and a group of other investors. SAT reserved its order on Monday after both parties completed arguments.

“The basis of the subsequent open offer price is the price at which the preferential allotment is being done. An open offer cannot happen without an independent valuation report. Hence, it is absolutely critical that the pricing of the preferential allotment, too, is based on an independent valuation," said a person close to Sebi.

During the hearing, Sebi submitted that a valuation report is required to determine the pricing of shares proposed to be sold, irrespective of the presence of Articles of Association (AoA), and the pricing should be above the formula stated under Sebi rules. This will ensure smaller shareholders are not discriminated against, and one set of shareholders do not get shares either too cheap or too expensive, Sebi argued.

Sebi’s counsel was responding to PNB Housing’s counsel submission that under the current regulations a listed firm that has an AoA would require an independent valuation report for pricing a preferential allotment, but a company that doesn’t have an AoA wouldn’t require an independent valuation report for a private placement.

SAT judge Tarun Agarwala then asked Sebi if the regulator indeed has a different pricing methodology for private placements by listed firms with an AoA. The Sebi counsel said all listed firms require a valuation report by an independent valuer to ensure the pricing of the issue is above the floor price stipulated by Sebi.

The PNB Housing saga has shifted focus to other listed firms planning to raise capital via preferential allotments.

On Saturday, BSE and NSE asked LIC Housing Finance why the company’s preferential allotment should not be halted since it does not have an independent valuation report by a registered valuer and, hence, it is not in compliance with the norms.

Sebi argued that it is insisting PNB Housing go by its AoA only because it is in conformity with the Companies Act with regards to capital raising and, therefore, it should be the first thing to be followed apart from the basic Issue of Capital and Disclosure Requirements (ICDR) norms, said a lawyer directly aware of the ongoing hearing at SAT.

“Fundamentally, the Companies Act has to be adhered to, whether the company has any AoA or not," said the lawyer.

Section 62 of the Companies Act states that when a company proposes to increase its subscribed share capital by a fresh issue of shares following a special resolution, the price of shares issued must be mandatorily determined by “the valuation report of a registered valuer".

The Act says that if convertible instruments are issued on a preferential basis, the price of the shares pursuant to conversion shall be determined upfront at the time of offer of convertible securities based on a valuation report by a registered valuer.

Last June, Sebi relaxed pricing norms for preferential allotment to ensure companies do not face difficulties in raising capital if the stock price fluctuates due to extreme volatility. The new pricing formula for allotment of shares under preferential issue is the volume-weighted average price of weekly highs and lows for 12 weeks or two weeks — whichever is higher.

Earlier, the pricing formula in a preferential allotment used to be the average of the last two weeks or the last 26 weeks, whichever was higher.

On Friday, too, SAT questioned Sebi’s logic behind asking a listed entity such as PNB Housing to get an independent valuation report before carrying out a preferential allotment.

Sebi, on 18 June, halted the deal just before the mortgage lender was about to conduct an extraordinary general meeting to secure shareholders’ approval. Sebi’s move followed a report by proxy advisory firm Stakeholder Empowerment Services questioning the pricing of the deal and fairness of PNB Housing’s proposal to let an open offer happen based on allegedly unjust pricing that was way below the prevailing market price of PNB Housing’s stock.

PNB Housing challenged Sebi’s order at SAT subsequently.

Sebi argued that the independent valuation report will also present the correct picture on pricing to the general body in the EGM, which will help shareholders vote on the deal proposal accordingly.

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