PNB Housing Finance-Carlyle Deal: No Valuation Exercise Was Done, SEBI Says
Reports submitted by PNB Housing Finance Ltd. in apparent "compliance" with its articles of association can at best be called a price certificate, senior advocate Fredun Devitre told the Securities Appellate Tribunal on Friday.
Arguing for the second day on behalf of the market regulator, Devitre emphasised on a harmonious reading of the housing financier's AoA, company law provisions and SEBI regulations. Read together, there’s no "repugnancy", he argued, and PNB Housing Finance must undertake an independent valuation to determine the price for its preferential issue.
On May 31, the housing financier had announced capital raising via a preferential issue to certain entities belonging to the Carlyle Group, General Atlantic, Ares SSG and Salisbury Investments.
The controversy arose when the Securities and Exchange Board of India wrote to the company raising objections to pricing of the preferential allotment issue. The company’s board had arrived at a price of Rs 390 per share determined as per SEBI’s Issue of Capital and Disclosure Requirements Regulations.
In his arguments earlier in the week, Devitre had argued that this is not a run-of-the-mill preferential issue and will have a direct impact on the open offer price. Small shareholders are being short-changed because the company has chosen not to abide by its articles, he had submitted.
Articles Require A Valuation Report; Not A Price Certificate
PNB Housing Finance had told the appellate tribunal that it carried out a valuation exercise which was certified by two accounting firms.
SEBI’s counsel refuted this claim saying what the company has submitted is a pricing certificate. No valuation exercise was carried out as per the various methodologies prescribed by the accounting regulator.
It must be noted that all three valuation reports hold that the valuer is required to determine as to what is the fair value of share. But all that they do is give the pricing certificate which is not the same thing.Fredun Devitre, Senior Counsel
Devitre said that in all the reports submitted by the company, the only task undertaken by the valuers was the mathematical calculation of floor price without going into any discussion as to what valuation methodologies have been adopted and what have been rejected, and if they have been rejected on what basis. This, Devitre emphasised, is the basis of valuation. Any exercise falling short of it is only a price certification, he argued.
The Securities Appellate Tribunal, in its observation, agreed that the two are different. First is based on the assets and financials of a company and the second is a function of the market.
But SEBI provisions for preferential issues which are applicable to listed companies talk about "pricing" and not "valuation", the appellate tribunal observed. The company law provisions which are applicable to unlisted companies, it further observed, however, talk about valuation.
Pointing to Rule 13(2) of the share capital rules, the appellate tribunal observed that on a plain reading, it appears that listed companies have to abide by SEBI’s ICDR pricing.
No Legal Bar On Independent Valuation, SEBI Says
The share capital Rule 13(1) that says a listed company shall not be required to determine price via an independent valuation is only an enabling provision.
It's permissible and legal for a company to voluntarily agree not to avail the relaxation under the provision, especially as it has promised a potentially higher price as per its AoA, Devitre argued.
He explained his point with an illustration: Assuming that an high court exempts advocates from wearing the black coats. However, a bar association passes a resolution that our advocates will continue to don the coats. Doing that will not be in violation of High Court's direction in any manner, he explained. The situation would have been different if the high court had prohibited wearing of the black coats.
Similarly, the company law provision does not bar listed entities from obtaining a valuation report voluntarily if a private agreement between the parties necessitates such an agreement. The AoA is one such agreement.
What it (the provision) provides it that such a valuation by a registered valuer is not obligatory or mandatory for a listed company. It does not prevent or render illegal a listed company from voluntarily determining the price of a preferential issue on the basis of a valuation report of a registered valuer, so long as that price is not less than the ICDR floor price.Fredun Devitre, Senior Counsel
Article 19(2) Predates PNB Housing’s Listing
Devitre said the company’s board resolution authorising the preferential allotment is itself not in accordance with the requirements under the AoA and therefore deficient. SEBI’s preventive intervention to such deficiency is perfectly warranted, he said.
PNB Housing Finance had earlier said the article requiring a report of a registered valuer for a preferential issue was put in much prior to its listing. And that once the company got listed, the effect of the article was ceased by virtue of Rule 13(1) of the share capital rules.
Devitre countered this by pointing out that the Article 19(2) was consciously brought in at the time when the company was being listed. No corresponding Article existed in PNB Housing Finance’s AoA prior to its listing. He also argued that post-listing, the articles of the company have been amended twice but significantly this particular article was left untouched.
So the company also accepts that the articles continue. It is retained consciously. There would be good and valid commercial reasons for the conscious and well-thought out inclusion.Fredun Devitre, Senior Counsel
SEBI's counsel concluded his arguments today. PNB Housing Finance will now respond to the regulator’s arguments on Monday.