Question of value

The last word has not yet been said in PNB Housing Finance’s attempt to raise ₹4,000 crore through stake sale to a group of investors, led by the Carlyle Group. But the issue raises questions over the manner in which such deals involving stressed companies are priced. SEBI’s diktat to the company to halt the stake sale on grounds that the deal pricing is ‘ultra vires’ of its Articles of Association and that the Board should decide the pricing based on an evaluation by an independent registered valuer, has set a precedent for the future. While the stressed nature of the business, its urgent requirement of funds and inability of the parent, Punjab National Bank, to invest further funds into the company may have prompted the Board to accept the deal, the fact is that the pricing of the preferential issue appeared more favourable to Carlyle than to the minority shareholders.

While being compliant with the law and the minimum floor price calculated as per Regulation 164(1) of ICDR regulations, the deal fails to take cognisance of the control premium that needs to be built into the price as Carlyle will end up owning 50 per cent stake in the company post-deal. With the stake of PNB declining to 20.3 per cent the company would cease to be a public sector entity and may therefore witness re-rating in the market. The doubling of stock price after the deal was announced corroborates this. Interestingly, SEBI has halted the deal on grounds that an independent valuer was not used to price the issue, as specified in the Articles of Association of the company. But the fact is that the SEBI rules require a valuation certificate by an independent valuer, based on book value and other financial metrics only when the shares of the company are not frequently traded. In case of frequently traded companies, average trading price in recent past is used for pricing the issue, as was done by PNB Housing Finance. It may be good to review these rules, mandating companies to also consider the intrinsic value of the business while pricing issues of highly traded stocks as well. The stock price before the deal may not always reflect the altered prospects of the company on completion of the deal. Also, control premium needs to be added to the price when the buyer gains controlling stake.

The PNB Housing issue also raises questions about the state of governance in Indian companies, for the company’s Board seems to have overlooked the interest of the smaller shareholders while ratifying the deal. With the Securities Appellate Tribunal ruling that the result of the e-voting on the deal in the extraordinary general meeting is to be revealed only next month when the SAT will give its final verdict, the fate of the preferential issue hangs in the balance. SEBI would do well to take a deep look at the issues thrown up in the case and plug the lacunae in regulations governing preferential offers.

COMMENT NOW