SAT questions SEBI's intervention in PNB Housing Finance-Carlyle deal
Premium- Sebi says the proposed allotment would have impacted the market as well as minority shareholders that hold a little over 15% in the company
The Securities Appellate Tribunal (SAT) on Tuesday questioned market regulator Securities and Exchange Board of India’s (Sebi) decision to order stay on the proposed preferential allotment on mortgage lender PNB Housing Finance Company Limited ( PNBHFL) before company’s shareholders could vote on the equity infusion. In June PNB Housing had announced its capital-raising plan that involved preferential allotment of shares worth ₹3,200 crore and warrants worth ₹800 crore to a select group of investors led by the global private equity giant Carlyle Group.
However, soon after the announcement Stakeholders Empowerment Services (SES)—a proxy advisory firm--had called the deal “unfair" to public shareholders and were in violation of the company’s articles of association ( AoA) in matters pertaining to valuation. Subsequently, Sebi had in its June order asked PNB Housing Finance to put on hold the deal saying it was ultra-vires of the articles of association (AoA) of the housing finance firm. PNB Housing later challenged the Sebi order in the Securities Appellate Tribunal ( SAT) on June 21.
"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. Responding to the SAT observation, Sebi’s counsel argued that the proposed allotment would have impacted the market as well as minority shareholders that hold a little over 15 per cent in the company. It said the preferential allotment would result in change in 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," it told SAT, adding that it did not find that the price arrived at for the preferential allotment was in accordance with the applicable provision in the company's Articles of Association (AoA). Shareholders of PNB Housing on 22 June voted on a special resolution for a preferential allotment of shares to Carlyle and other investors. The fundraiser needs approval from 75% of those present and voting. The parties to the deal are PNB and private equity firms Carlyle, General Atlantic and Ares SSG, which own a combined 85% stake in PNB Housing.
Sebi further argued that there is no conflict between following a company's AoA and Sebi's ICDR (Issue of Capital and Disclosure Requirements) 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 articles of association and arriving at a price higher than the ICDR floor price, it said.
On Monday PNB Housing Finance had told SAT that the market regulator cannot compel it to follow the Articles of Association (AoA) as it is just a contract.It argued that AoA cannot override the Securities and Exchange Board of India's ICDR (Issue of Capital and Disclosure Requirements) regulations, which listed firms have to follow for issuing preferential allotments. The company law does not require engaging the services of registered valuers when a listed company is making a preferential issue, the housing finance company told the tribunal.
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