Sebi holds PNB Housing board accountable for preferential pricing nod

The Securities and Exchange Board of India (Sebi) told the Securities Appellate Tribunal (SAT) on Friday that the board of directors of PNB Housing Finance had erred in approving the pricing for the preferential allotment of shares as it did not conform to the company's articles of association (AoA).

"The approval of the board of directors has consequences in law and Sebi is entitled to step in at this stage. If you place a particular pricing before shareholders during the extraordinary general meeting (EGM) please do it by your own articles of association. There is no repugnancy between the ICDR and AoA provisions and section 19 (2) of the AoA is operative, which makes the board resolution deficient," a legal counsel representing Sebi argued before the tribunal. He added that the article 19(2) of the AoA, which requires valuation by an independent registered valuer, was specifically brought in at the time of the company's listing.

The EGM, conducted on June 22, was called to decide on a special resolution on the preferential allotment of shares to the Carlyle Group and other investors. It required the approval of 75 per cent of those present and voting to pass. The parties to the deal were Punjab National Bank, the largest shareholder, and private equity firms Carlyle, General Atlantic, and Ares SSG, which together own 85 per cent in PNB Housing Finance.

SAT admitted that there was no repugnancy between section 19 (2) of the company's AoA and Sebi's ICDR (Issue of Capital and Disclosure Requirements) regulations, which prescribes a minimum floor price for the preferential allotment but does not prohibit higher pricing.

Sebi alleged that the valuation report furnished by the company merely certified the floor price arrived at under the ICDR regulations, and did not spell out the valuation methodologies used to arrive at the price, which typically is the case when such an exercise is conducted by independent registered valuers.

It further said that rule 13(1) of the Companies (Share Capital and Debentures) Rules, 2014 was only an enabling provision and should not be availed of if the company's AoA said otherwise.

The regulator also refuted the company's allegations that its second letter dated June 25 was a breach of natural justice. It said the report of the stock exchanges and the issues raised by Sebi were placed before the company and it was given ample time to respond. An absence of personal hearing did not invalidate the regulator's actions, Sebi said.

SAT will hear the matter on Monday for arguments and rejoinder.

PNB Housing Finance had told SAT on Monday that the market regulator cannot compel it to follow the AoA as it is just a contract.

It argued that AoA cannot override the ICDR regulations, which listed firms have to follow for issuing preferential allotments.

The preferential allotment was announced by PNB Housing in May and was deemed “unfair” to public shareholders of the company a week later by proxy advisory firm SES. On June 18, Sebi directed the company to halt the allotment unless the valuation is done by an independent valuer.

The mortgage lender then moved SAT, challenging the regulator’s directive, and the appellate tribunal allowed the company to conduct its scheduled EGM, but with the caveat that the outcome of the vote would not be disclosed.