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PNB Housing: PNB ‘gifted away’ control to Carlyle

Our Bureau New Delhi | Updated on June 08, 2021

Rights issue would have been a better option, says proxy advisory firm SES

Proxy advisory firm Stakeholders Empowerment Services (SES) has come down heavily on the recently announced ₹4,000-crore PNB Housing Finance-Carlyle Group deal, describing it as an “abusive” and “unfair transaction” against the interests of public shareholders of both PNB Housing Finance and Punjab National Bank (PNB).

SES has questioned as to why PNB willingly surrendered its control over PNB Housing to the Carlyle Group without extracting fair compensation —control premium. Not only this, it also sees PNB having lost at least ₹ 2,000 crore in not insisting on a rights issue.

The key message from SES is that a rights issue — instead of a preferential allotment to Carlyle group and other certain new investors who together will control PNB Housing Finance —would have been the best option and fair to minority shareholders of PNB Housing Finance and retail shareholders of PNB.

Not fair to small shareholders

“The entire deal is not in favour of both minority shareholders of PNB Housing and retail shareholders of PNB. This deal is patently unfair to retail shareholders. Rights issue would have been the fair and better option for PNB and would have been fair to its shareholders too.

Even if PNB did not want to or couldn’t have put money in Rights Issue, it could have sold its Rights Entitlement in the market and got about ₹ 2,000 crore. Allowing preferential allotment to Carlyle and helping it gain control without PNB receiving control premium is unfair and both the Boards of PNB Housing and PNB have collectively failed minority shareholders and the exchequer”, J N Gupta, co-founder and Managing Director, SES, told BusinessLine. Gupta is a former executive director of SEBI.

In this case 85 per cent are decision makers or participant in capital raising, what harm would have been caused if hundred per cent of shareholders were offered Rights, questioned the report. In rights issue, the company would have got same amount of capital, but Carlyle would not have been able to increase equity, unless PNB would have renounced its rights entitlement to Carlyle at market related price, as presently rights renunciation/entitlement are traded in transparent manner in market.

SES has therefore advised minority shareholders of PNB to vote against the resolution on preferential allotment in the upcoming Extraordinary General Meeting on June 22.

Post the preferential allotment, Carlyle Group will become a promoter and PNB’s shareholding post the entire deal will get diluted to little over 20 per cent and thereby become a smaller partner.

Independent director role

SES has also questioned the role of the independent directors in PNB Housing Finance and wondered as to why they could not see the injury to minority. They (independent directors) played ball with majority to the detriment of minority, the SES report said.

“One can argue that govt/PNB may not have additional money to be infused into the company, due to the already stressed financial condition of government resources in fighting the pandemic. However, lack of funds cannot be equated with lack of fairness or wisdom. Did no one in the board understand value of control premium?,” the SES report asked.

PNB, which has about 32 per cent stake in PNB Housing Finance, had earlier approached Reserve Bank of India for approval to participate in the capital raising plan of the housing finance company. However, the central bank had rejected the proposal.

Published on June 08, 2021

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