Preferential valuation

PNB Housing should have engaged an independent valuer

The uncertainty over the future of minority shareholders and infusion of capital into PNB Housing Finance (PNB Housing) will continue for some time. The Securities Appellate Tribunal (SAT) on Monday allowed the company to conduct the scheduled extraordinary general meeting on Tuesday, with the caveat that the company would not be able to disclose, till further orders, the outcome of the vote on the resolution related to the Rs 4,000-crore deal with investors led by private equity firm Carlyle. PNB Housing had approached the tribunal after the securities market regulator, Securities and Exchange Board of India (Sebi), asked it to stop the preferential allotment of shares unless the valuation was done by an independent entity. The market regulator also termed the company’s decision “ultra vires” of its Articles of Association.

The company has, of course, defended its decision and argued that it is in line with the prescribed rules. While the technicalities of the decision will now be settled by the appellate tribunal, the PNB Housing board needs to do some serious soul-searching. The issue attracted public attention after Stakeholders Empowerment Services, a proxy advisory firm, raised quite a few red flags. It argued that the deal was unfair for public shareholders of PNB Housing and shareholders of Punjab National Bank (PNB). PNB Housing is a public sector undertaking (PSU) because it is promoted by PNB, a public sector bank. PSUs command considerably low valuation in the stock market compared to their private sector peers because of a variety of reasons, such as the style of functioning and government interference. Since the control will change after the deal, an independent valuation of the firm was critical. The PNB Housing board kept the allotment price in tune with the Sebi rules, but rather strangely did not factor in any premium for the control it was ceding. In fact, the share price nearly doubled after the deal announcement, though it has corrected recently because of the uncertainty over the deal. The stock market has re-rated the stock to account for a change in control.

It is highly unlikely that the PNB Housing board was unaware of such a possibility, and should thus explain its failure to charge a control premium as Carlyle Group will have over 50 per cent ownership in the firm. Even if the board was convinced that there was no case for such a premium, it should have followed good governance practices and got the deal vetted by an independent valuer instead of its own auditor. This would have not only made the deal more transparent and acceptable but would have also absolved some of the directors of the accusation that it was influenced by their links with Carlyle Group in the past. On its part, Sebi should have been far more proactive. No one knows why the regulator waited for the proxy advisory firm’s report to halt the deal. If it had found the deal violating the Articles of Association, it should have acted earlier. The SAT ruling will now show if the board acted in the best interests of all stakeholders. How the issue is finally settled can have broader implications as the government intends to privatise most of the firms it owns and they might have to be sold to a group of large investors and private equity players.