SAT questions Sebi's intervention in PNB Housing-Carlyle Group deal

Says regulator could've waited before passing order in PNB HF matter

The Securities Appellate Tribunal (SAT) in a hearing on Tuesday said market watchdog Securities and Exchange Board of India (Sebi) tried to pre-empt the outcome of PNB Housing Finance’s extraordinary general meeting (EGM) that was called to decide on the allotment of preferential shares to the Carlyle Group and other investors.

“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?” SAT asked Sebi, adding that the regulator could have waited till the completion of the EGM before passing an order. The tribunal adjourned the hearing to Friday.

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.

Sebi justified its action by saying the proposed allotment would have impacted the market and minority shareholders, who hold a little over 15 per cent in the company. It said the preferential allotment would result in a 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).

There’s 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, Sebi told SAT. 

“There’s no conflict when the company abides by its own AoA. 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 AoA and arriving at a price higher than the ICDR floor price, it said.

According to section 19 (2) of PNB Housing Finance’s AoA, further shares may be offered to any persons if authorised by special resolution either for cash or for consideration other than cash — if the price of such shares is determined by the valuation of a registered valuer.

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 law does not require engaging the services of registered valuers when a listed company makes a preferential issue, PNB Housing Finance told the tribunal.

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.