Indian two thousand and five hundred rupee banknotes are arranged for a photograph in Mumbai, India. (Photographer: Dhiraj Singh/Bloomberg)

PNB’s Plan To Sell Stake In Housing Finance Arm Falls Through

Punjab National Bank, on Thursday, informed stock exchanges that it is calling off a deal to sell equity stake in its housing finance arm to Varde Holdings Pte. Ltd. and General Atlantic. The deal has been called off after the two sides failed to get Reserve Bank of India approval for certain conditions linked to the transaction.

In March 2019, PNB had agreed to sell 1.08 crore shares of PNB Housing to Varde Holdings and a similar number to General Atlantic at a price of Rs 850 per share. The deal value stood at Rs 1850 crore and was intended to help the lender raise capital.

However, the transaction failed to get all requisite approvals.

“The transacting parties to the Share Purchase Agreement have not been accorded approval by the Reserve Bank of India for exemption from application of pricing guidelines under the Foreign Exchange Management (Transfer or Issue of Security to a Person Resident Outside India) Regulations, 2017 ("FEMA 20-R"),” said PNB in an exchange notification. While it is not clear what specific conditions were not approved by the regulator, the stated regulations deal with pricing of capital instruments.

With RBI approval not forthcoming, PNB said that all parties have mutually agreed to terminate the share purchase agreement.

PNB further stated that it strongly believes in the growth story of PNB Housing Finance and will continue providing support to the business.

Implications For PNB, PNB Housing

Through this deal, PNB was trying to sell 13 percent stake in PNB Housing Finance. Post the deal, the bank’s stake in the housing finance company would have fallen to 19.78 percent from 32.79 percent as of March 2019.

One of the reasons behind the stake sale was the need to release capital. PNB, hit by a Rs 14,000 crore fraud by diamantaire Nirav Mod and Mehul Choksi, has been trying to shore up its capital position by exiting subsidiary and non-core businesses.

With the PNB Housing deal off the table, PNB may need to look at other avenues to raise capital or go back to the government for increased funding. As of December 2018, PNB had a total capital adequacy ratio of 10.52 percent and common equity tier-1 ratio of 6.93 percent.

The inability to close the stake sale will increase the overhang on the PNB stock, said Digant Haria, assistant vice president at Antique Stock Broking. PNB will need to attempt a stake sale again at some stage, he added.

PNB Housing, too, may find it difficult to get adequate capital. With PNB strapped for funds, its ability to support the growth of the housing finance division would be limited.

Recently, CARE Ratings placed debt facilities of PNB Housing on ‘credit watch’. It cited the need to raise capital and the increased share of corporate loans as the reason behind its rating view.