Preferential treatment

PNB Housing Finance-Carlyle deal raises questions of minority rights, conflict of interest, that lie at heart of corporate governance

In the PNB Housing Finance saga, matters appear to have come to a head, with PNB Housing, on Monday, filing an appeal before the Securities Appellate Tribunal (SAT) against a letter issued to it by the Securities and Exchange Board of India (SEBI). In its letter, SEBI had asked PNB Housing to keep its resolution for the preferential issue of equity shares and warrants to the Carlyle group and others on hold until valuation of the shares is carried out by an independent registered valuer. SEBI’s letter came after Stakeholders’ Empowerment Services (SES), a proxy advisory firm, raised questions over the proposed transaction, terming it “unfair” to the interests of minority shareholders. While SAT has allowed for a vote on the issue, and the matter will be taken up on July 5, the manner in which this entire issue has played out raises troubling questions.

The transaction in question involves the issue of Rs 4,000 crore preference shares to a group of investors led by the Carlyle group. With this transaction, the group’s shareholding in PNB Housing would rise to over 50 per cent, giving it the controlling stake. The concerns voiced are basically two: One, the decision to opt for a preferential issue, and two, the pricing of the preferential shares. In a rights issue, as opposed to a preferential issue, all shareholders are entitled to participate. This, as SES has argued, allows for equal treatment of shareholders. On the issue of pricing, SES has argued that the valuation exercise was carried out without accounting for the “control premium”, implying that the shares should have been priced higher. The argument is straightforward: The transaction changes the nature of the company — effectively transforming it to a privately controlled entity. This event needs to be priced in. The fact that the share price of PNB Housing Finance has soared signals how the market valuation of the company went up due to this event. On its part, though, PNB Housing Finance has refuted the allegations, and has clarified that the process followed to determine the pricing of shares was in line with the “market practice” by listed companies.

Several red flags have been raised. More so, when, as reported in this paper, of the 12 PNB Housing Finance board members who approved the transaction, seven, including the independent directors, had dealings with the Carlyle group. This raises questions about conflict of interest, and protection of minority rights, which lie at the heart of corporate governance structures.

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