PNB Housing Questions SEBI’s Power To Direct Valuation By Independent Valuer
Signage for Punjab National Bank (PNB) is displayed outside a branch in Mumbai. (Photographer: Dhiraj Singh/Bloomberg)

PNB Housing Questions SEBI’s Power To Direct Valuation By Independent Valuer

The market regulator has no jurisdiction to direct a listed company to adhere to its articles of association, senior counsel Janak Dwarkadas told the Securities Appellate Tribunal on Monday.

Arguing for PNB Housing Finance Ltd., Dwarkadas said appointing a registered valuer to determine the price for its proposed preferential allotment will be in violation of company law provisions.

The housing financier had announced capital raising via a preferential issue on May 31 to certain entities belonging to the Carlyle Group, General Atlantic, Ares SSG, and Salisbury Investments. Currently, government-owned Punjab National Bank owns 32.6% stake in it. The preferential issue would've brought PNB's stake down to 20% and Carlyle Group would've become the company’s controlling shareholder with an over 50% majority stake.

For this preferential issue, PNB Housing Finance's board had arrived at a price of Rs 390 per share. The pricing was determined as per Securities and Exchange Board of India's ICDR Regulations. But SEBI directed PNB Housing Finance to undertake the valuation of shares as per its articles of association. This had prompted PNB Housing Finance to approach SAT for relief, which had allowed the company to go ahead with the e-voting but not disclose the results.

On July 7, PNB Housing Finance's board had decided to await the decision of the appellate tribunal even though PNB had asked it to consider restructuring the Rs 4,000-crore fundraising plan.

Also read: PNB Housing Finance: The (Missing?) Registered Valuer Report

Condition Mandating Valuation By A Registered Valuer Won’t Apply: PNB Housing Finance

PNB Housing Finance relied on company law provisions to say that listed companies are mandated to follow SEBI guidelines on pricing for preferential issue. And that if the company's AoA is in conflict with the law, the latter will prevail.

Dwarkadas pointed to section 62(1)(c) of the Companies Act and Rule 13(1) of the Companies (Share Capital and Debentures) Rules to make his point.

The section requires the price for a preferential issue to be determined by a valuation report of a registered valuer. But the share capital rules say that a preferential issue by a listed company need not appoint a registered valuer.

And so, Dwarkadas argued, listed companies have to abide by the pricing formula laid down under SEBI's ICDR Regulations.

The fact that the company's AoA requires a valuation report from a registered valuer cannot override the requirement under the law, Dwarkadas said.

The articles are a contract between private parties and the statutory rules will get a priority over the articles. It has been repeatedly held by the courts that if any provision in the articles of association is contrary to the provisions of the law, it will be held void ab-initio.
Janak Dwarkadas arguing for PNB Housing Finance at SAT

In support of his arguments Dwarkadas also cited Section 6 of the Companies Act which gives primacy to company law in the event of contrary provisions under the memorandum or articles of a company.

Finally, Dwarkadas argued that Article 19(2) was part of PNB Housing Finance's AoA before the company was publicly listed. This would mean the AoA mandating valuation by a registered valuer would not survive, he told the tribunal.

Provisions of the articles of association that the price of further issue of shares have to be determined by a registered valuer not only predates the listing of the company but is also repugnant to the Companies Act.
Janak Dwarkadas arguing for PNB Housing Finance at SAT

Also read: Corporate Governance And The Case Of PNB Housing Finance

PNB Housing Questions SEBI’s Powers To Direct Valuation

During the course of the arguments, PNB Housing Finance also questioned the powers of SEBI to direct the company to follow its AoA.

This is a case where the regulator is telling a listed company to obey its articles even though that would mean disobeying SEBI’s own regulations and other provisions of the law. "Can you even think of a logic in this argument?" Dwarkadas argued.

A statutory authority, he said, cannot act beyond its powers and called SEBI’s direction asking for a valuation from an independent registered valuer bad and erroneous in law. In a preferential allotment, SEBI has to only ensure that pricing is as per ICDR.

Don’t understand where the regulator is getting the jurisdiction to tell us to follow AoA. We do not know where the respondent (SEBI) gets the authority to tell a listed company that you will not follow our own regulations but follow another method which is neither in the regulations nor in any other rules.
Janak Dwarkadas arguing for PNB Housing Finance at SAT

Finally, Dwarkadas also pointed to other cases where companies, with similar AoA provisions, have announced preferential issues as per ICDR-prescribed pricing formula. But the regulator has not raised concerns in those cases.

Other listed companies with AoAs similar to ours have raised capital via preferential allotment as per ICDR guidelines. SEBI’s response to that is those didn’t come to our notice. LIC Housing Finance has only recently announced a preferential allotment. No objection has been raised by SEBI.
Janak Dwarkadas arguing for PNB Housing Finance at SAT

BloombergQuint has sought a comment from LIC Housing Finance. The tribunal will hear arguments from market regulator SEBI on Tuesday.

Also read: PNB Housing-Carlyle Deal: Delayed Or Dead?

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