Sebi and PNB Housing Finance Ltd. The mortgage lender’s proposal to increase Rs. 4000 Crore through a preferential allotment from an investor group led by Carlyle Group to Rs. 390 per share is currently arguing before SAT.
On Monday, after hearing both parties, the court chose to reserve its order. Sebi stated during the hearing that regardless of the presence of articles of association in a listed company, a valuation report is required to arrive at an appropriate price level for the shares proposed to be issued and such a price should be greater than the formula set out in the ICDR. regulations. This will ensure that small shareholders will not be discriminated against and that a group of shareholders will not get shares that are neither too cheap nor too expensive.
Sebi’s lawyer was responding to an allegation against the market regulator by the lawyer for PNB Housing, who said Sebi’s rules on preferential issuance of shares are ambiguous.
The attorney for PNB Housing pointed out certain sections of the Companies Act and ICDR standards and argued before the SAT that according to the regulations in force, if a listed company has an AoA, it would need an AoA. independent valuation report to set the price of a preferential grant, but, if a listed company does not have AoA, it would not require an independent valuation report for such a private placement.
According to Janak Dwarkadas, adviser to PNB Housing, on the basis of these standards, Sebi could rely on two different pricing standards for preferential issues of listed companies.
Following the arguments of the PNB Housing council, SAT judge Tarun Agarwala also asked Sebi if the regulator was indeed applying a different pricing methodology for private placements by listed companies that have an AoA.
Sebi’s board said that for all listed companies, a valuation report by an independent appraiser is required only to ensure that the issue price is above the floor price stipulated by Sebi.
The PNB Housing saga has shifted the market’s attention to all the other listed companies which also plan to raise capital through preferential allocations.
On Saturday, BSE and NSE asked LIC Housing Finance why the company’s preferential allocation should not be halted because it does not have an independent appraisal report by a registered appraiser and therefore is not up to standards.
Sebi insists that PNB Housing comply with its AoA only because it complies with company law when it comes to raising capital and therefore should be the first thing to follow outside of basic standards. of the ICDR, said a lawyer with direct knowledge of the ongoing SAT hearing.
“Fundamentally, corporate law has to be followed whether or not the company has an AoA,” said the lawyer.
Article 62 of the Companies Act provides that when a company with share capital proposes to increase its subscribed capital by a new issue of shares following a special resolution (issue by preferential allocation) , the price of the shares issued must be determined by “the valuation report of an approved expert”.
The law stipulates that if convertible instruments are issued on a preferential basis, the price of the shares following the conversion will be determined in advance at the time of the offer of convertible securities on the basis of a valuation report by a registered appraiser.
Last June, Sebi relaxed the pricing standards for the preferential allocation to ensure that companies do not have difficulty raising capital if the stock price fluctuates due to extreme market volatility. . The new pricing formula for the grant of preferred stock is the volume weighted average price of weekly highs and lows for 12 weeks or two weeks, whichever is greater.
Previously, the pricing formula in a preferred allocation was the average of the past two weeks or the past 26 weeks, whichever is greater.
Also on Friday, the SAT questioned Sebi’s logic of asking a listed entity like PNB Housing to obtain an independent appraisal report before proceeding with a preferential allocation.
Sebi on June 18 halted the deal just before the mortgage lender was set to conduct an EGM to get shareholder approval for the deal. Sebi’s move follows a report by proxy consultancy firm SES questioning the price of the deal and the fairness of PNB Housing’s proposal to let an open bid occur on the basis of a allegedly unfair price which was well below the prevailing market price of PNB Housing’s stock.
PNB Housing subsequently contested Sebi’s order with the SAT.
Sebi had argued that the independent valuation report would also present a correct picture of pricing to the general body of the EGM, which will help shareholders vote on the proposed agreement accordingly.
Sebi justified his action before the SAT by declaring that the allocation project without an independent valuation report would have impacted the minority shareholders of the company, who hold just over 15%.
The market surveillance body also argued before the SAT that the preferential allocation would have resulted in a change of ownership and an open offer, the pricing of which would have been based on the preferential issue price that was decided by PNB Housing. without evaluation report.
PNB Housing, on the other hand, chose not to cancel the deal despite the deal being terminated by Sebi and the mortgage lender’s promoter himself – the Punjab National Bank asked the company on July 4 to reconsider the deal and think about other ways to raise capital. .
Either way, PNB Housing needs the approval of 75% of the shareholders for the deal to go through. The parties to the deal are PNB and private equity firms Carlyle, General Atlantic and Ares SSG, which have a combined 85% stake in PNB Housing.
Controlling over 32% as a promoter group, the Punjab National Bank can block the special resolution by voting against the preferential allocation.
The vote has already taken place on June 22 but the results of the vote have been kept under seal, pending the final order from the SAT.
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