PNB Housing Finance Case: SAT Verdict Split Over Shareholders' Rights Versus Investor Interest
The Securities Appellate Tribunal gave a split verdict in the case of PNB Housing Finance Ltd. The matter was heard by a two-judge bench of Presiding Officer Justice Tarun Agarwala and Judicial Member Justice MT Joshi.
As a result of this difference in opinion, PNB Housing Finance has been directed to not declare the voting results on the preferential allotment resolution as yet.
Justice Agarwala ruled in favour of the housing financier saying SEBI's direction to the company 'was patently illegal and cannot be sustained'.
Such unilateral decision taken by the authority is patently erroneous and smacks of arbitrariness quite apart from the fact that the same was also violative of the principles of natural justice as embodied in Article 14 of the Constitution of India.Justice Tarun Agarwala, SAT
But Justice Joshi found merit in the Securities and Exchange Board of India's arguments on grounds of investor interest.
There is no bar in SEBI Act to pass such orders, though extraordinary in nature. SEBI is mandated to take such decisions as it may find necessary to protect the interest of the investors.Justice MT Joshi, SAT
On May 31, PNB Housing Finance announced its board had approved raising Rs 4,000 crore via a preferential allotment of shares to select shareholders led by Carlyle Group.
The controversy arose when the securities regulator halted the deal on objection to the preferential allotment pricing.
The company’s board had approved a price of Rs 390 per share determined as per SEBI’s Issue of Capital and Disclosure Requirements Regulations.
But the market regulator directed the company to undertake a valuation of the shares as per its Articles of Association - that mandate a registered valuer's report for such fund raising.
PNB Housing Finance approached SAT for relief. The tribunal allowed the company to proceed with the shareholder vote on the preferential allotment but to keep the voting results confidential.
Shareholders' Right Is Supreme, Says Justice Agarwala
As per SAT's presiding officer, the market regulator had no jurisdiction to issue directions to PNB Housing Finance even before any decision could be taken by the shareholders at the extraordinary general meeting.
"The right of the shareholders to accept or reject an agenda is supreme and paramount which cannot be whittled by any executive action of the respondent [SEBI]".
It would've been open to SEBI to step in and question the preferential allotment resolution after it was approved by requisite number of shareholders. It was not open to SEBI to pre-empt the shareholders from passing the resolution, Justice Agarwala noted.
On the specific issue of pricing formula, he pointed out that
◾ The Companies Act provision of pricing shares on the basis of valuation report of a registered valuer has been dispensed with under the 2014 Rules for listed companies.
◾ SEBI's ICDR regulations 'is a complete code by itself and no external aid is required.
◾ ICDR regulations make no reference to price determined by the registered valuer.
◾ There cannot be two mechanisms for valuation of shares - one where the company's AoA requires valuation by a registered valuer and another where the AoA has no such stipulation.
The pricing of shares of a listed company is required to be determined in accordance with SEBI regulations, Justice Agarwala concluded.
...in a case of a listed Company like that of the present appellant the stipulation contained in Article 19(2) of the Articles of Association requiring valuation of the shares through a registered valuer is dispensed with in view of Rule 13 of the Rules of 2014.SAT Order By Justice Agarwala
SEBI Is Mandated To Protect Investor Interest, Says Justice Joshi
Judicial member Justice Joshi pointed out that PNB Housing Finance incorporated the requirement of an independent valuation for preferential issues in its AoA at the time of listing in 2016.
◾ The company entered into this contract with its shareholders through the AoA. And unless the agreement is unlawful or unenforceable, it would have to be performed.
◾ While the 2014 Rules said a registered valuer's report when pricing preferential shares was no longer necessary, they did not prohibit such a requirement.
◾ SEBI's ICDR provisions also mandate a minimum price but they don't prohibit a higher price.
Hence, there is no repugnancy or contradiction between the three, he found.
Justice Joshi pointed out that the valuation is SEBI's concern since the preferential allotment will result in change of control - from Punjab National Bank to Carlyle Group. That would trigger an open offer and the exit price would be impacted by the preferential issue pricing.
He concluded that if the AoA provides for an additional method to determine preferential issue pricing, there can be two methods to value the shares. The higher price will prevail for the preferential allotment which ultimately would be the price for an open offer to the general shareholders giving them an opportunity to exit.
if the Articles of Association additionally provides for additional method of valuation of the shares then in those cases, in my view there can be two methods of valuation of the shares and the higher of the valuation would be the valuation of the shares for the purpose of preferential allotment of the shares...