PNB Housing-Carlyle Deal: Were Minority Shareholders Short-Changed?
Labourers work at a real estate construction site in Mumbai (Photographer: Dhiraj Singh/Bloomberg)

PNB Housing-Carlyle Deal: Were Minority Shareholders Short-Changed?

Private equity firm Carlyle Group’s investment in PNB Housing Finance Ltd. will help the home financier get the capital it needs to clean up and grow. But is that capital coming on terms unfavourable to its minority investors?

The deal, announced on May 31, involves an investment of Rs 4,000 crore led by the Carlyle Group, which already held about 32% in PNB Housing Finance before the transaction.

The preferential allotment of equity shares and warrants is taking place at a price of Rs 390 per share—a slight premium to the floor price of Rs 384.60 that was arrived at through the Securities and Exchange Board of India’s pricing formula.

Following the investment, a mandatory open offer will be launched for 7.08 crore equity shares at a price of Rs 403.22 apiece.

This price is significantly lower than where the PNB Housing stock is trading on the exchanges, leading to questions over the likely success of the open offer. The stock, which was trading at Rs 525.65 on May 31 has risen 60% to Rs 839.45 on June 4, within four days of the deal announcement.

“Even though pricing (of the preferential issue and open offer) has been set as per regulatory norms, it does not reflect the market value of the company and makes no sense to minority shareholders, who are being forced to dilute to make room for Carlyle,” said JN Gupta, managing director at non-profit proxy advisory services firm, Stakeholders Empowerment Services.

Abhijit Tibrewal, a senior research analyst at Reliance Securities, agreed.

“They (PNB Housing Finance promoters) could have been fairer to the minority shareholders. This could have easily also been done via a rights issue that would have allowed participation from all shareholders,” he said. “Instead, they went for a preferential issue that led to a major change in the company’s ownership, without any participation of minority shareholders.”

We estimate individual investors’ shareholding in the stock would decline to 3.5-4%, which begs the question—will PNB Housing Finance be as good as a privately held company, the brokerage Nirmal Bang said in a May 31 research note. “Nonetheless, we think this capital raise will provide the much-needed balance sheet strength and growth ammunition.”

PNB Housing Finance, in reply to BloombergQuint's emailed query on its open offer pricing, said that the capital raise is being executed in compliance with all regulatory and legal requirements, and in consultation with legal advisors.

"The objective of the funding is to enable the company to strengthen its balance sheet and support future growth objectives, which market analysts believe will unlock shareholder value," it said.

When contacted, Carlyle declined to comment, while Punjab National Bank Ltd. said that fundraise was driven by PNB Housing's capital requirement.

"There was a requirement of capital which we wanted to contribute via a rights issue but because of regulatory guidelines we could not," said S. S. Mallikarjuna Rao, managing director and chief executive at PNB during its earnings press conference on Saturday.

Limited Options

While the transaction has left some minority shareholders raising questions, PNB Housing may have had little choice.

The company has been trying to raise funds for two years now, a person familiar with the matter said on condition of anonymity. The NBFC crisis in 2018 delayed fundraising and a proposed investment by PNB into the housing finance unit was shot down by the Reserve Bank of India. Other potential options, including a stake sale by PNB to another private equity fund, also did not materialise, this person said, without sharing details.

Against that backdrop, the Carlyle-led investment has come as a relief. After having a state-run bank as its largest shareholder for three decades, PNB Housing Finance will now be majority-owned by a private equity firm. The Carlyle Group, through two different entities, will own a 50.2% stake, General Atlantic Singapore will hold 9.8% and the SSG Group will have 3.8% shareholding in the company.

This changes market perception of the company.

“The change in market perception is evident in how the stock price has run up after the deal was declared, as investors posed greater confidence in Carlyle and Aditya Puri leading the transformation journey of PNB Housing from being a public-sector bank-led company to a largely private entity,” said Gopal Agrawal, co-head of investment banking at Edelweiss Financial Services.

The Rs 4,000 crore in fresh equity capital will help the company reduce its leverage and increase provisions against corporate bad loans, said Tibrewal. But it will also help PNB Housing Finance insulate itself from the emerging risks due to the second Covid-19 wave and give it growth and confidence capital, he said.

With veteran banker Aditya Puri expected to join the company’s board, it lends considerable credence to the company’s business and strategic intentions, said Kunal Shah, senior analyst at ICICI Securities. “It also gradually improves visibility on credit rating upgrade and will help the company reduce its cost of funds, closing down the gap with its peers,” he said.

PNB Housing’s cost of funds was at about 8% in fiscal 2021. The company was rated AA by four rating agencies—CARE Ratings, India Ratings and Research, CRISIL and ICRA. Except for CARE, the remaining three maintained a negative outlook on the company, mainly because of its deteriorating asset quality and high gearing levels.

The company’s gross non-performing assets stood at Rs 2,762 crore or 4.44% of its total advances as of March 31. Retail bad loans were at 2.52%, while corporate delinquencies were much higher at 12.65%.

Not A Smooth Run

Cleaning up the books and pushing growth in a competitive home loan market will be an immediate priority from here on.

“With mounting NPAs in the corporate segment and declining balance sheet strength, PNB Housing Finance had started holding back disbursements, along with corporate portfolio sell-downs,” Nirmal Bang said in its note cited earlier. This resulted in a sharp reversal in its growth trend with loan book falling by 10.3% in fiscal 2020 and 9% in fiscal 2021, it said.

In March, PNB Housing wrote off assets worth Rs 83 crore, which mainly comprised corporate loans. It also identified five accounts with an exposure of Rs 875 crore that made up 7% of its corporate loan book, where there was a significant increase in credit risk.

As Carlyle turns promoter and acquires a controlling stake, said Tibrewal, it would want to start from a clean slate, which means over the next few quarters the company may see an increase in provisioning and write-offs in its corporate loan book. The focus of incremental lending may remain on retail, and more specifically, on affordable and mass-affluent housing loans.

“The deal sets the growth runway for the next two to three years, as Carlyle would look to turn the company around just as it did with SBI Cards and Payment Services Ltd., where it made the largest-ever partial exit by a private equity firm through a public listing after holding the investment for less than three years,” he said.

Some questions have also arisen on the ability of the housing financier to use the PNB brand.

As per the earlier arrangement signed in December 2009, PNB could pull out its trademark from the housing financier if its shareholding fell below 30%. But the terms were renewed on May 24, and the limit was changed to 20%. “In the event, PNB’s shareholding in PNB Housing falls below 20%, PNB would have the right to terminate the revised Agreement,” it said. “In case of such termination, PNB Housing shall be allowed a transition period of up to 24 months for a change of brand name.”

However, Rao of PNB said there are no plans to divest its stake in PNB Housing for now. "We are not currently looking at any divestment. We want PNB Housing finance to do well. It is a good company where good valuations have come. In 2017, we redeemed our stake at Rs 1,600 per share and got good money. So the company is required to remain afloat with good potential, and that is what our objective is," he said.

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