Red flags as PNB stake in housing finance subsidiary may dip below 26%

QUESTIONS are likely to be raised at the shareholders’ meeting of Punjab National Bank Housing Finance (PNBHF) later this month over the possibility of Punjab National Bank (PNB) losing its dominant shareholder status in the company. And into the circumstances of last week’s Rs 4000-crore investment in PNBHF announced by a consortium of investors, led by US private equity giant The Carlyle Group and former HDFC Bank Ltd chief executive Aditya Puri.

The capital infusion will make Carlyle the largest shareholder in PNB Housing. This despite the fact that both the government and PNBHF publicly committed to ensuring that PNB maintains a 26% stake.

Shares of PNBHF have doubled over the last six days even as a report prepared by Stakeholders’ Empowerment Services, a leading “proxy advisory firm” to protect minority shareholder interests, has called the PNBHF board resolution on preferential issue of equity shares and warrants to the consortium as “unfair transaction, against public shareholders and PNB”.

It has also called the transaction “ultra vires” of the Articles of Association.

The preference share allotment by PNB Housing Finance to Pluto Investments, a Carlyle affiliate (it will subscribe to 80% of the shares issued) and Puri’s Salisbury Investments, along with two other existing foreign investors, will leave PNB with just 20.3% stake in the housing finance major.

This means it will not only lose its dominant shareholder status but also its veto power on the board of the company. The Carlyle Group will see its stake rising to above 50 per cent.

On the pricing of the preference share at Rs 390, PNBHF, the report said, ignored its Articles of Association which calls for the price to be “determined by the valuation of a registered valuer”. Given that the book value of PNBHF share is Rs 540, that would have pegged it at a more realistic level, experts said, as it gives indication of intrinsic value.

Instead, the company went by SEBI rules on pricing under which it’s based on either 12-week or two-week highs.

As of now, PNB’s shareholding in PNBHF stands at 32.64% and that of the Quality Investment Holdings (a Carlyle entity) stands at 32.21%.

However, post the allotment of shares, PNB’s holding is set to go down to 20.3% and that of QIH to 20%. Together with Pluto’s holding of 30.1%, both Carlyle entities will, together, hold over 50% in the company.

A dip in holding below 26 per cent will not only weaken PNBs stature on board but will also take away its Veto Power, which sources say would be of concern to the government.

In 2019-20, when PNBHF was looking to raise capital, the government had maintained that PNB’s shareholding should not go below 26%.The promoter, PNB, also seems to have gone back on its commitment of holding at least 26% stake in PNBHF.

In a statement on January 23, 2020, PNBHF said, “PNB will maintain a minimum shareholding in PNB Housing at 26%. Further, PNB has confirmed that its stated objective is to continue to hold a minimum 26% shareholding in the Company and continue to be the promoter of the Company.”

Asked about dilution of PNB’s stake and pricing of the share, PNBHF said: “As a responsible company, PNB HFC has consistently striven for sound business practices along with excellent corporate governance…..This deal for capital raising has been arrived at with appropriate due diligence keeping best interests of all stakeholders in mind. We are confident this will take the company forward to its deserving success and growth and expected to unlock value for all the stakeholders including minority and retail investors.”

Emails sent to Punjab National Bank and The Carlyle Group went unanswered.

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