BackCarlyle’s long shadow over its buyout target
PNB Housing Finance has got a SAT go-ahead for a shareholder vote on an equity allotment that would grant Carlyle control of it, but the deal has aroused suspicions of a cheap sell-out
PremiumOn Monday, PNB Housing Finance got a go-ahead from the Securities Appellate Tribunal (SAT) for a conclave of shareholders scheduled on Tuesday for a vote on its controversial proposal to allot shares worth some ₹4,000 crore to a clutch of investors led by The Carlyle Group, a US-based private equity major. But India’s fourth biggest mortgage lender must not declare results till the Tribunal has its final say. The lender had appealed against an 18 June directive from the Securities and Exchange Board of India (Sebi), which demanded an independent valuation of its equity before it sought a wide shareholder nod for the preferential allotment. As Sebi saw it, the lender’s board resolution on the deal was an overstretch of the authority granted by its own Articles of Association, but the company denied any violation of norms, arguing that it had got its shares valued and the offer was in the best interest of all stakeholders. This last assertion, however, has been contested. As the deal in question would give its allottees management control of PNB Housing Finance, its offer price of ₹390 per share attracted allegations of a cheap sell-out, and this is reason enough for the case to merit a closer look.
That price was fixed on 31 May, when the lender’s board okayed a preferential allotment of 82 million equity shares and 20.5 million convertible warrants to Carlyle unit Pluto Investments and Aditya Puri’s Salisbury Investments, among others, and called an extraordinary general meeting on 22 June for a shareholder seal. If the proposed expansion of PNB Housing Finance’s equity base goes through, Carlyle, which has an extant stake of over 32% in the business via another investment unit, would control 50.2% of its voting stock while Punjab National Bank would see its holding shrink from a bit above 32.6% to just over 20%. Word of a significant ownership shift appeared to play a role in the subsequent run-up of its market price, which doubled to about ₹880 in the span of a week. It has fallen to around ₹700 since, but the escalation was taken as an indication of the control premium its board could have got had it bargained harder. As critics pointed out, an alternative would have been to make a rights offer that would let minority owners sell their equity entitlement to control-seeking investors at a premium determined by the market. This way, they would have gained from the deal’s price pop and not had reason to complain.
What fanned suspicions of PNB Housing Finance’s neglect of shareholder value maximization, a fiduciary duty, were reports of a board riddled with conflicts of interest. Of its 12 members, two are Carlyle employees nominated by it as representatives, while five others are reported to have indirect links with the group through a chain of past associations. Carlyle is well known for its international heft as much as its global sprawl of investments. There are likely to be many professionals in India who have worked for a firm Carlyle has invested in, but the composition of its target’s board is an outlier that casts the acquisition deal in unflattering light. It could turn out that PNB Housing Finance has technically adhered to all the relevant rules for a share allotment of this nature. This needs investigation. But it would be a shame if its small shareholders are left wondering who watches out for them when it comes to big money and high stakes.
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