PNB Housing controversy puts spotlight on independent valuer rule

Inconsistencies between the Companies Act and the Issue of Capital Regulations to be debated before SAT

PNB Housing Finance fund infusion controversy has put a spotlight on the rule around appointing an independent valuer while making a preferential allotment of shares.

Market regulator Securities and Exchange Board of India (Sebi) has put a spanner in the works on private equity major Carlyle-led capital infusion of Rs 4,000 crore in the mortgage lender for not getting the company valued from an independent registered valuer before arriving at the allotment price.

PNB Housing, which needs these funds to tide over financial difficulties, believes that its board has compiled with all the regulations while clearing the deal on May 31.

The bone of contention is whether a valuation report from an independent valuer is required for this deal.

Sebi in its communication to the company has said that the preferential allotment is “ultra-vires of articles of association (AOA)”. The regulator is of the view that under the section 19(2) of AOA valuation of shares need to be done by an independent registered valuer.

Legal experts say if one reads the AOA along with the provisions of the Companies Act an independent valuer’s report would be required.

However, there is an interpretation that the valuation report isn't required from a registered valuer isn’t required under Sebi’s Issue of Capital and Disclosure Requirements (ICDR) Regulations.

PNB Housing and Sebi will slug it out over this issue before the Securities Appellate Tribunal (SAT) during their next hearing scheduled for July 5.

“The issue that Sebi has highlighted on the PNB Housing preferential allotment stems from the articles of association of PNB Housing, which states that an offer of equity shares may be made "if authorized by a special resolution either for cash or consideration other than cash, if the price of such shares is determined by the valuation of a registered valuer,” said Murtaza Zoomkawala, Managing Associate, L&L Partners.

Legal experts say if there are any inconsistencies between the Companies Act and the Issue of Capital Regulations, the former should prevail.

“As per Section 62 of the Companies Act, which starts with ‘where at any time, a company having a share capital’, there is no difference between listed or unlisted company and the price of a preferential allotment is to be determined on the basis of a valuation report of a registered valuer.  But the second proviso of Rule 13 of the Companies (Share Capital and Debentures) Rules, 2014, provides an exemption for listed companies from valuation report of a registered valuer while issuing shares on a preferential basis.  However, according to legislative jurisprudence, wherever there is an inconsistency between the Act and rules, the Act shall prevail over the rules,” said Raj Bhalla, Partner at law firm MV Kini.

Besides interpretation of the law, experts said as best-practice listed firms should choose to appoint independent valuers to ensure fair pricing.

“Another aspect that needs to be considered from a corporate governance perspective is that when a listed public sector undertaking makes a preferential allotment, the fairness in pricing is of critical importance as to avoid a possibility of the transaction being unfair to the public shareholders, more so when a potential transaction shall change the control from a state-owned entity to a non-government entity. PSUs are national wealth and therefore a regulatory concern around a fair price discovery backed by an independent valuation seems fair,” added Prashaant Vikram Rajput, Partner, White & Brief Advocates and Solicitors.

The shareholders of PNB Housing on Tuesday voted on the resolution to issue securities worth Rs 4,000 crore to Carlyle Group, former HDFC Bank chief executive officer Aditya Puri’s family investment vehicle Salisbury Investments, General Atlantic, and Alpha Investments at Rs 390 per share. As per SAT, directions the voting results will not be made public till the tribunal passes a final order in the matter.

Shares of PNB Housing on Tuesday ended at Rs 737.

Analysts said HFC assets have shrunk in the last two years. Its profile has undergone change. One, leverage has come down and it retained profits instead of declaring dividend, improving net worth (capital adequacy) at FY21-end. This provides room to carry business with present capital and leverage in FY22.

The capital adequacy ratio rose to 18.7 per cent in FY21 from 18 per cent for FY20 (14 per cent FY19). The decline in scale of operations, internal accrual generation and the relatively lower risk weights required for smaller ticket loans helped to enhance capital adequacy.

Even before the preferential allotment blew up, rating agencies had flagged some concerns iabout PNB HFC. ICRA had said there was improvement in leverage profile in FY21. Yet the same remains relatively high, given the macro environment and the high asset quality stress faced by the industry including PNBHFL. 

India ratings said PNBHF had seen heightened delinquencies and a decline in asset under management in the last two years due to a challenging operating environment amid the COVID-19 pandemic.