PNB Housing Finance-Carlyle Rs 4000 cr deal: EXPLAIN! SEBI asks why action must not be taken against lender

Securities and Exchange Board of India (SEBI) has sought a response from PNB Housing Finance Limited regarding its proposed Rs 4000 cr deal with American private equity player Carlyle. The market regulator has sent a letter to PNB Housing Finance finding it in an “apparent transgression of law” asking the mortgage lender to explain why action must not be taken against the company.   

"On the basis of material available on record, it is evident that the company has failed to comply with the principles governing disclosures and obligations of a listed entity as enshrined in the LODR Regulations and the Company Act, 2013," SEBI said in its letter.

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"Keeping in view the aforesaid apparent transgression of law, the company and the Board of Directors are called upon to explain as to why it should not be construed that the Directors have failed to discharge responsibility cast upon them in law and consequently why appropriate actions in terms of law be not considered for such failure," the letter further reads.  

Zee Business has reported that SEBI has sent another letter to PNB Housing Finance Company in the case related to its proposed deal with Carlyle. In this letter, the market regulator has inquired why all shareholders were not given equal opportunities and why the common shareholders have been ignored.   

In its examination letter, SEBI has raised issues related to the corporate governance of the company. 
The Sebi has sought explanation on these aspects:   

Why has there been an attempt to overlook the interests of common shareholders?  
On 25 June 2021, Sebi sent a letter to the Independent Directors and the company. SEBI has questioned the PNB Housing Finance Company and the Directors over allegedly not following the Article of Association of the company and appointing an independent valuer. The market regulator has written first letter on June 18on the same issue. 

PNB Housing Finance challenged the directive in Securities Appellate Tribunal (SAT), which on June 21 gave partial relief to PNB Housing by allowing it to conduct its scheduled Extraordinary General Meeting (EGM) but with a directive not to disclose the voting outcome of the proposal related to preferential allotment and change in AoA of the company. PNB Housing Finance board had approved fund raising plan of Rs 4000 Cr with Rs 3200 Cr as equity and Rs 800 Cr as warrants, the EGM was called on June 22 to get shareholders nod on issues including the fund raising plan by issuing preference shares to Carlyle.  

PNB HFC has put its arguments before the SAT 
-The SEBI has no jurisdiction to direct a listed company to stick to its articles of association
-Article of Association of company is mere a contract and can not be above Companies Act 
-Listed companies are mandated to follow SEBI guidelines on pricing for preferential issue. 
-The role of SEBI under ICDR regulations is limited to determine the pricing of the issue  
-SEBI issued 2 letters without giving the HFC any chance of explaining the position and hence against principles of natural justice

-The lender argued that there were other companies who are not following their AoA but ICDR regulations, So why only PNB Housing Finance is being singled out
SAT will be hearing the arguments of SEBI on Tuesday.   

Which other companies may face difficulties?  
-PNB Housing Finance argued that LIC Housing Finance is also not following its AoA but ICDR Regulations   
-LIC HFC’s 2335 Cr worth of preferential shares are not as per the AoA. 
- On 19 July, there is an EGM where voting will likely take place on the proposal.   
-As per sources Barbeque Nation may also face issues with respect to its preferential shares as the situation is similar here as well.  
- Barbeque Nation is planning to raise Rs 100 cr with the issue of preferential shares.

As per sources SEBI may direct exchanges to seek explanation from the 2 companies i.e. LIC Housing Finance and Barbeque Nation on the issue raised by PNB Housing Finance. Zee Business sent an email to Barbeque Nation on the issue but reply is awaited, on the LIC Housing Finance, people aware of the matter said the company has complied with all the requirements. 

Interestingly PNB Housing Finance’s promoter PNB sought legal opinion on the issue and asked the company to follow what was suggested by the regulator and restructure its deal with Carlyle, but PNB HFC is in favor of waiting till the final outcome from SAT. 

Proxy Advisory Firm SES has questioned the deal on many issues specially choosing the preferential route for fund raising when the option of Rights Issue was available, Which will give equal opportunity to all shareholders and is more democratic. SES also pointed out that the PNB can earn around Rs 2000 Cr by selling its Right Entitlements to Carlyle, proxy advisory firm also questioned that why no premium was being charged when PNB is going to relinquish its control, which is a kind of norm in such deals.

Which gives equal opportunity to all shareholders and is more democratic. SES also pointed out that the PNB can earn around Rs 2000 Cr by selling its Right Entitlements to Carlyle, proxy advisory firm also questioned that why no premium was being charged when PNB is going to relinquish its control, which is a kind of norm in such deals.