M&A Critique

Pricing of shares in the case of preferential allotment: – Whether should be as per ICDR regulations?

In 2021, the Reserve Bank of India refused to give regulatory approval to Punjab National Bank to fund the PNB Housing Finance Limited (PNB Housing) on concerns of the lender’s financial health. Due to prohibition imposed by the RBI, PNB Housing Finance proposed to raise up to INR 4,000 Crore from US-based private equity firm Carlyle and other entities.

PNB Housing Finance proposed to issue the shares to the above-mentioned entities in complying with section 62 (1)(c) of the Companies Act, 2013 and Chapter-V of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 on “Preferential Basis”.

Facts of the Case: –

After making an announcement to BSE and NSE regarding a board meeting held for the issue of shares on preferential basis, both the stock exchanges asked for information & documents from PNB Housing and submitted Joint Report to SEBI. After review of the joint report and further documents from PNB Housing, SEBI passed an order that PNB housing shall not act upon on issue of shares until the PNB Housing obtains report from the registered valuer in terms of Article 19(2) of the Articles of Association (AOA). Against the order of the SEBI PNB housing filed an appeal with the Securities Appellate Tribunal (SAT).

Objection raised by SEBI –

  1. Proposal regarding the issue of shares on the preferential basis is ultra vires of AOA since valuation by the registered valuer had not been factored while determining the price of the preferential issue and that the AOA as it stands as on date requires the Board of Directors to consider the valuation report of a registered valuer. The report submitted by the statutory auditor was merely a certificate of calculation of price and the same is not in accordance with the SEBI ICDR Regulations
  2. Since valuation report is given by statutory auditor, it is not permissible under Section 144 of the Companies Act, 2013 that deals with the services that cannot be rendered by the auditor.
  3. Valuation under the AOA determines the value and ICDR regulations determine the minimum price for issuance of the shares.

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Sanket Joshi