Barbeque Nation, LIC Housing Finance face heat on independent valuation

More companies are in a tricky situation for not appointing an independent valuer while going in for preferential allotment of shares. Mortgage lender LIC Housing Finance and restaurant chain Barbeque-Nation Hospitality are the latest companies to face the heat over the issue. 

Stock exchanges last week asked them to explain why they did not obtain a valuation report from a registered independent valuer while pricing their preferential allotment. This came at the heels of a legal dispute between PNB Housing Finance and markets regulator Securities and Exchange Board of India (Sebi) over the issue.

Both LIC Housing and Barbeque Nation got a letter from the BSE and the NSE seeking clarifications on compliance with the provisions of articles of association (AoA).

Last month, LIC Housing said it would allot 45.4 million shares to parent Life Insurance Corporation (LIC) at Rs 514.25 apiece to raise Rs 2,334 crore by preferential allotment of shares on a private placement basis. Barbeque Nation is looking to raise Rs 100 crore by issuing 1.18 million shares at Rs 849 apiece to the Massachusetts Institute of Technology, 238 Plan Associates, and Motilal Oswal Equity Opportunities Fund.

Exchanges have said both LIC Housing and Barbeque Nation can carry on with their shareholder meeting, where this resolution will be put to vote. But the two also have been directed not to make public the voting results until the issue is examined further. 

In a public disclosure made over the weekend, both companies said they are in compliance with the regulations. “…the price for the preferential allotment has been arrived at in compliance with the provisions of AoA, the Companies Act, 2013, and the Sebi (Issue of Capital and Disclosure Requirements) Regulations, 2018, as the company being a listed company is not required to obtain a registered valuer certificate as provided under Rule 13 of the Companies (Share Capital and Debentures) Rules, 2014,” stated LIC Housing in an exchange filing on Saturday.

Barbeque Nation in its filing stated: “Since the Companies (Registered Valuers and Valuation) Rules, 2017, do not apply to a listed company, Article 3.3.1(c) does not apply in relation to the proposed issue of preference shares by the company. Therefore, there is no requirement to obtain a valuation report from a registered valuer and the price for the proposed preferential allotment has been computed in accordance with the Sebi ICDR Regulations, 2018, as certified by a chartered accountant report previously submitted to you.”.

Legal experts say the bone of contention in all the three cases is that while the Companies Act and the Sebi ICDR Regulations don’t mandate the firms to get their shares valued by an independent valuer, their AoA -- which are internal rulebooks -- say otherwise. Sebi rules prescribe a formula which acts as a floor price for preferential allotments.

Interestingly, while the companies are saying they are following Sebi guidelines, the regulator is asking them to follow their own guidelines. Experts say companies may be confusing between prohibition and requirement.

“Sebi guidelines say an independent valuation report is not required. That doesn’t mean it is prohibited. If a company’s AoA say an independent valuation report is required while doing a preferential allotment, it is quite straightforward that the company should follow what’s there in its AoA. There is also a Supreme Court judgment in the Tata-Mistry case which says AoA form the bedrock for any company’s management,” said J N Gupta, founder of Stakeholders Empowerment Services (SES), a voting advisory firm. In its report on Barbeque Nation and LIC Housing, SES had highlighted that both companies were not following their AoA and recommended shareholders to cast ‘against’ votes on the resolution pertaining to the preferential allotment.

Shares of PNB Housing and Barbeque Nation currently trade above their proposed preferential allotment price, while those of LIC Housing trade at a discount.

Experts say the price discovery by an independent valuer doesn't have so much to do with the secondary market price; it is more related to other quantitative aspects.

“An aspect that needs to be considered from a corporate governance perspective is when a listed undertaking makes a preferential allotment, fairness in pricing is of critical importance, to avoid the possibility of the transaction being unfair to public shareholders,” said Prashaant Vikram Rajput, partner, White & Brief Advocates and Solicitors.

The Securities Appellate Tribunal (SAT) on Monday will resume hearing in the appeal filed by PNB Housing against Sebi’s directive to appoint an independent valuer before it allots Rs 4,000 crore worth of shares to private equity major Carlyle Group, former HDFC Bank chief executive officer Aditya Puri’s family investment vehicle Salisbury Investments, and others.

Experts say the SAT judgment may set a precedent.