SEBI vs PNB Housing Finance tussle relating to valuation of shares & Corporate Governance Issues

SEBI ORDER ON PREFERENTIAL ISSUE OF SHARES BY PNB HOUSING FINANCE TO CARLYLE GROUP

The PNB Housing Finance in its Board Meeting held on 31st May, 2021 has approved the preferential issue of equity shares to Carlyle Group, Ares SSG, General Atlantic and Salisbury Investments Private Limited (of which Mr. Aditya Puri, the former Managing Director of HDFC Bank, is a senior advisor and also controls it).

The PNB Housing Board has scheduled the Extra-Ordinary General Meeting (EGM) to be held on 22nd June, 2021 for the proposed approval of the Preferential issue of shares and warrants to the abovesaid entities. The proposed investment was about Rs. 4000 Crore, of which Rs. 3200 Crore would come through the issue of Equity Shares and Rs. 800 Crore through warrants.

After approval of the offer the Carlyle Group would become the majority shareholder and also the management control will be in there hands thereon. Also, the PNB Bank Limited, the original Promoter control will also be reduced from its current holding of approx. 32%.

Now the share price of the proposed allotment of the shares was Rs. 390/shares and warrant as well. However, the market price of the shares of the PNB housing was Rs. 525 per share. Now this proposed allotment is taking place at a price which is well below the current market price of the shares. So how should the valuation be determined in such cases?

But before the above said scheme of things can be approved at the EGM, SEBI issued a letter on June 18, 2021 to PNB Housing Finance stating that the proposed allotment of equity shares through preferential issue is ultra vires of its Articles of Association (AOA).

The AOA of PNB housing contains an Article which provides for the valuation to be done in case of Preferential Offer by Registered Valuer.

So, what are norms for valuation of the Listed Company shares under SEBI (Issue of Capital and Disclosure Requirements), 2018 regulations or what provision of Companies Act, 2013 or applicability of AOA provisions.

These are the questions that need to be answered or is the Objection raised by SEBI is correct considering PNB Housing is a listed company.

Contention of the SEBI

SEBI has contented that PNB Housing should have done an independent valuation of its shares as stated under its AOA.

But PNB housing being a listed entity has complied with the provisions as specified under the SEBI (ICDR), 2018 by carrying out the valuation of the shares as provided under the above said regulations and the value of shares Rs. 384 per share and they agreed to allot for Rs. 390 per shares.

SEBI (ICDR) requirements for valuation

As per Regulation 164 of SEBI (ICDR) Regulations, 2018, the price of equity shares issued on a preferential basis should be made in the following manner:

In case the company is listed on a stock exchange for more than 26 (twenty-six) weeks:

1. The average of the weekly high and low of the volume weighted average price of the related equity shares quoted on the recognised stock exchange during the twenty-six weeks preceding the relevant date; or

2. The average of the weekly high and low of the volume weighted average prices of the related equity shares quoted on a recognised stock exchange during the two weeks preceding the relevant date.

In case the company is listed on a stock exchange for less than 26 (twenty-six) weeks:

1. The price at which equity shares were issued by the issuer in its initial public offer or the value per share arrived at in a scheme of compromise, arrangement and amalgamation under Sections 230 to 234 the Companies Act, 2013, as applicable, pursuant to which the equity shares of the issuer were listed, as the case may be; or

2. The average of the weekly high and low of the volume weighted average prices of the related equity shares quoted on the recognised stock exchange during the period the equity shares have been listed preceding the relevant date; or

3. The average of the weekly high and low of the volume weighted average prices of the related equity shares quoted on a recognised stock exchange during the two weeks preceding the relevant date.

In the present case, the pricing of equity shares as of relevant date was Rs. 384.60/share and the proposed price of the equity shares is Rs. 390/shares which complies with the SEBI (ICDR) Regulations, 2018. Hence there is no question of the violation of the SEBI (ICDR) regulations, 2018. Then why SEBI is putting its nose into this very much fair deal.

Provision of Preferential Issue and Valuation under Companies Act, 2013:

Section 62(1)(c) of the Companies Act, 2013 talks about preferential issue of shares wherein the price of such issue should be determined by a valuation report of a Registered Valuer. However, the Companies (Share Capital and Debenture) Rules, 2014 also state that in case of listed companies, the price of shares to be issued by preference need not be determined by a valuation report of a registered valuer.

The valuation report under Section 62(1)(c) is not applicable to the listed companies by the Companies (Share Capital and Debenture) Rules, 2014 but the AOA of the PNB housing requires a valuation report for issue of such equity shares. A dispute may arise from this provision which is that Article 19 (2) should not be read in such a way that it varies from Companies Act, 2013.

As per the provision of Section 6 of the Companies Act, 2013, all the sections in it will have effect despite anything contrary mentioned in the Articles of Association of a company. Anything mentioned in the Articles of Association which is ultra vires to the provisions of the Companies Act, 2013 will be void.

Nonetheless, the Articles of Association has the power to impose any additional requirements which can go above and beyond the Companies Act, 2013. It is left to be decided whether the valuation report provided by the statutory auditor of PNB satisfies Article 19 (2) of the Articles of Association.

There is another issue wherein SEBI in its letter stated that valuation report has to be provided by an independent registered valuer. It is not mentioned anywhere in the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 or in Companies Act, 2013 and its rules that the registered valuer has to be independent. In this case, the law needs to be amended if an independent registered valuer has to be introduced to produce a valuation report for issue of equity shares on a preferential basis.

APPEAL TO SEBI APPELLATE TRIBUNAL (SAT)

The PNB aggrieved by SEBI’s attempts to stall the proposed allotment appealed to SAT. The SAT in its interim hearing approved the EGM to be held on June 22, 2021 but directed the Company to not publish the results of voting until further orders.

CONCLUSION

In case of issue of equity shares, it can be argued that preferential issue is a fast process. In case of pricing, the Board of Directors are not likely at fault because they comply with the SEBI regulations and the valuation report of the registered valuer is not applicable to preferential issue by listed companies.

Further the role of Board of Directors in their fiduciary capacity also needs to be questioned as they are required to protect the interest of the shareholders even there is compliance but only in the letter not the original spirit. The issue of Corporate Governance will also unfold as the case progresses further.

It remains to be seen whether public shareholders will vote for or against the proposed allotment after the interference of SEBI.

What you think is the action of SEBI is unjustified as claimed by PNB housing.

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Disclaimer: The contents of this article are for information purposes only and do not constitute an advice or a legal opinion and are personal views of the author. It is based upon relevant law and/or facts available at that point of time and prepared with due accuracy & reliability. Readers are requested to check and refer relevant provisions of statute, latest judicial pronouncements, circulars, clarifications etc before acting on the basis of the above write up.  The possibility of other views on the subject matter cannot be ruled out. By the use of the said information, you agree that Author / TaxGuru is not responsible or liable in any manner for the authenticity, accuracy, completeness, errors or any kind of omissions in this piece of information for any action taken thereof. This is not any kind of advertisement or solicitation of work by a professional.

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