Lessons From PNBHFL-Carlyle Saga: SEBI moves to revamp pref allotment pricing regime

#Carlyle Group, #PNB Housing Finance, PNBHFL, #SAT, SEBI

SEBI is in no mood for a repeat of the controversial PNB HF-Carlyle deal which was ultimately called off. Reuters)

A month after the controversial Punjab National Bank Housing Finance (PNBHFL)-Carlyle deal was scrapped due to regulatory objections and consequent litigation, the Securities and Exchange Board of India (SEBI) has taken a vital step towards clearing the air by recasting the preferential issue allotment regime and monitoring pricing in related M&A transactions.

In a consultation paper released on November 26, SEBI has proposed that any preferential issue allotment resulting in change in control or allotment of more than 5 percent of the issuer company shall require a valuation report from a registered valuer for the purposes of pricing.

For cases involving change in control, the valuation report should also cover guidance on control premium, SEBI said, adding that if the issuer company’s Articles of Association provide stricter provisions, the same should be considered for pricing in addition to the regulator’s norms.

The discussion paper also included other proposals concerning preferential allotment of shares on pricing calculation methodology, lock in provisions for promoters and pledge of securities. The regulator has sought public comments by December 11.

To be sure, these proposals will become the law of the land only if they are cleared at a later stage by the SEBI board followed by a notification through an official gazette.

Highlighting the rationale for the discussion paper SEBI said,” In order to facilitate fund raising by the issuers through preferential allotment of shares while at the same time ensuring that such issuance is not detrimental to the interest of shareholders, a need is felt to carry out a comprehensive review of the entire guidelines for preferential issue so that the same may adequately reflect the present day requirements of the market.”


PNB Housing Finance locked horns with the regulator over the pricing methodology of its Rs 4,000-crore deal with key shareholder Carlyle, as part of which former HDFC Bank MD and CEO Aditya Puri would be a co-investor and join the PSU firm’s board. The transaction opted for the route of preferential allotment of shares, via which the private equity firm sought to acquire control.

Soon after, proxy advisory firm Stakeholders Empowerment Services raised several red flags alleging that the deal was not compliant with the articles of association ( AoA) of PNB Housing Finance and was detrimental to the interests of minority shareholders. It questioned the pricing and PNB’s decision to willingly lose control to Carlyle without extracting “fair compensation”.

SEBI passed an order barring the PSU firm from going ahead with the preferential allotment to Carlyle until an independent registered valuer determined the allotment price. PNB Housing Finance stuck to its guns, saying that it had followed the pricing mechanism for preferential allotments under SEBI’s ICDR (issue of capital and disclosure requirements) norms and that the deal was in the best interest of all relevant stakeholders.

The spat landed at the Securities Appellate Tribunal (SAT) wherein the housing financier argued that SEBI had no jurisdiction to pass such an order, had not provided an opportunity of hearing to the firm and had not pulled up listed firms in similar scenarios earlier. A split verdict followed and the case reached the Supreme Court. However, in a bid to avoid further litigation, PNB HF called off the deal and withdrew its appeal against the SEBI order.


Vikram Raghani, Partner at law firm J Sagar Associates, said it was a direct fallout of the PNB Housing issue.

“According to the discussion paper, any allotment which results in a change in control will now need to be backed up by a valuation which takes into account control premium. The change pre-supposes therefore that historical market price may not be an accurate benchmark for a commercial deal,” he said.

At present, the pricing formula in a preferential allotment is the VWAP (volume weighted average price) of the last two weeks or the last 26 weeks, whichever is higher. Incidentally, the SEBI discussion paper has proposed that the pricing formula should be the VWAP of weekly highs and lows for 60 trading days or 10 trading days, whichever is higher.

Raghani said the valuation requirement for any allotment above 5 percent might be an overkill and should be re-considered.

“The objective is to ensure that change in control transactions are priced appropriately. In that sense it’s a big shift and not just a procedural change. While this is an additional safeguard for minority shareholders, it may not necessarily avoid the type of controversy one saw in PNB. If there was a controversy around lack of valuation, there could be one around the valuation too,” he added.

Sanjay Asher, Partner at Crawford Bayley & Co, concurred with Raghani when it came to the regulator’s intentions behind the move.

“In normal circumstances, as per an earlier judgement of the Supreme Court, the ruling price best represents the value of the firm. However, in circumstances where there is a change in control, the valuer may opine on the implications and perhaps the idea behind this move by SEBI is to seek an expert’s view who can accordingly tweak the ruling price, higher or lower,” said Asher.

To be sure, ruling price is the price at which the last trade on a security took place, unless there was a higher bid or a lower offer.

According to securities market experts, post the PNBHF-SEBI standoff , several advisors started scrutinising the AoA of listed firms in the case of preferential allotment of shares to avoid any similar regulatory hurdles.

“These proposals are the need of the hour. If read constructively, they mean that the higher of the two prices discovered ( AoA route vs SEBI ICDR route) will prevail in such scenarios involving preferential allotment of shares. It should not be read as one pricing mechanism supersedes the other. The regulator does not want a repeat of the PNBHFL issue,” one of them told Moneycontrol on the condition of anonymity.

A second expert added, “As long as the regulator makes the pricing regime clear, it’s better for all stakeholders. However, the concept of control premium is strange as it doesn’t apply in most cases and depends on various factors including the nature of business, number of suitors keen on the asset etc.”

Additionally, SEBI has also put the onus on independent directors when it comes to whetting such transactions envisaging the sale of a majority stake.

“Any preferential issue allotment resulting in change in control may be done only pursuant to a reasoned recommendation from a committee of independent directors. The recommendatory report shall consider all aspects of preferential allotment including pricing. The committee shall also disclose the voting pattern of its meeting,” the discussion paper said.

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