PNB Housing to SAT: Sebi can't compel us as AoA is just a contract

It argued that AoA cannot override the Sebi's ICDR (Issue of Capital and Disclosure Requirements) regulations, which listed firms have to follow for issuing preferential allotments

PNB Housing Finance told the Securities and Appellate Tribunal (SAT) on Monday that the market regulator cannot compel it to follow the Articles of Association (AoA) as it is just a contract. 

It argued that AoA cannot override the Securities and Exchange Board of India's ICDR (Issue of Capital and Disclosure Requirements) regulations, which listed firms have to follow for issuing preferential allotments.

The company law does not require engaging the services of registered valuers when a listed company is making a preferential issue, PNB Housing Finance told the tribunal. The company added that other listed firms with AoAs similar to its own also raise capital via preferential allotment as per the ICDR guidelines.

Last month, PNB Housing had announced its capital-raising plan that involved  preferential allotment of shares worth Rs 3,200 crore and warrants worth Rs 800 crore to a clutch of investors led by the Carlyle Group. Stakeholders Empowerment Services (SES)—a proxy advisory firm--had called the deal “unfair” to public shareholders of the company and those of PNB. The mortgage lender had defended the deal stating that the process followed in determining the issue price for its securities was in line with the market practice and complied with the applicable law.

However, two days before the planned extraordinary general meeting (EGM) to vote on the fundraising plan, Sebi directed the company to halt preferential allotment of shares unless the valuation is done by an independent valuer. The mortgage lender then moved SAT, challenging the regulator’s directive. 

The tribunal allowed the company to conduct the scheduled EGM with a caveat that the outcome of the vote will not be disclosed.

A company's AoA is a primary declaration of the company's nature, purpose and ends which, along with the Memorandum of Association, forms the company's constitution. These must be submitted at the time of application for incorporation.

"The SC judgement in the Tata versus Mistry case observes that articles of association are the bedrock of any company management. PNB Housing has argued that the articles of association were introduced prior to the IPO but there have been several changes introduced post listing,’’ said JN Gupta, co-founder & managing director, SES.  Anything currently in AoA would be applicable unless it dilutes any superior law, he pointed out. ‘’However, if AOA has stronger provisions, the same will prevail."