Minority stakeholders flay PNB HF-Carlyle deal | Economic Times

Mumbai: With Punjab National Bank (PNB) and minority shareholders losing Rs 2,400 crore in just 6 trading days, the Rs 4000 crore transfer of control deal in PNB Housing Finance to a private equity (PE) consortium led by Carlyle has evoked strong reactions from sections of the minority shareholders and a proxy advisory firm who are calling the whole transaction non-transparent and against their interests. However, a senior finance ministry official told ET that has been no “regulatory issue” with the transaction. Questions are being raised if any value discovery was undertaken and how the investors – Carlyle, GA and Ares/SSG – were selected for ceding control by PNB, a state-run bank. Additionally, the method adopted for the transaction through a preferential allotment at a depressed market price of 0.7x book value (which was trading 45% lower than IPO price in 2016 and 75% lower than lifetime high in 2017) and devoid of any control premium in a well-capitalized mortgage firm with is under scrutiny. In a note to institutional investors, the proxy firm, Stakeholders Empowerment Services (SES), helmed by former Sebi ED JN Gupta, has argued that for a capital raise, a rights issue would have been a fairer and better option. “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 renounce its right entitlement to Carlyle at market related price.”On May 31ST, PNB’s associate company PNBHF announced that is raising Rs.4000 crores through a preferential allotment to the private equity consortium mentioned above. It also said that Carlyle Group would become a promoter of PNBHF and acquire control as part of this preferential allotment. Carlyle has been an existing shareholder with 32% while GA and SSG owned 10% each. Carlyle also had two representatives on the board ever since it invested in the company in 2014.“The entire transaction is unfair to public shareholders and shareholders of PNB (read the Government of India). The Board of both PNB and the company have collectively, failed minority shareholders and the exchequer,” Gupta told ET. “Government’s family jewels are being sold at the price of coal. Whoever sells a finance company, where NPAs have been provided for and with a secured book, below its book value, is not prudent.”Control DiscountThe brewing storm over the deal may cast unnecessary shadow on the ambitious privatization program of NDA government, according to several market participants ET spoke to since the deal was announced last month. Most spoke anonymously since they are not authorized to speak with media. “The company has been starved of capital since H1 of 2020 and made some attempts in vain but the capital has to come in through a transparent,” said an aggrieved retail investor of the company on condition of anonymity. “As a minority investor, I would have liked a rights issue or a premium on the buyback. Most importantly, if the preferential route was considered, then a proper auction process to discover the right value should have been undertaken. The spurt in share price reflects how the market sees the intrinsic value of the franchise.”At the stock price of PNBHF on June 7, PNB would have made Rs 1600 crores by selling these rights. Similarly, rights entitlement of minority shareholders of PNBHF would have been in the money to the tune of Rs.800 crores. On the other hand, Carlyle led consortium has got windfall gains of Rs 2400 crore without investing a single rupee yet. The PNB HF stock has appreciated 125% over the preferential issue price. Circumventing AoA of PMBHF?Article 19 of AOA PNB HF states, if capital is raised in a manner other than the rights offering, the company needs to obtain the valuation of a registered valuer. However, there is no mention of the registered valuer’s report and the valuation in the EGM notice sent to the shareholders. SES concludes that the transaction could be “ultra vires” (against the law).Between Wednesday and Friday, ET sent detailed questionnaires to PNB, PNBHF and Carlyle seeking granular on valuation, competing bids if any, the value discovery process and whether Carlyle’s representative – Kaul and Kapil Modi—recused themselves during the entire exercise. 83327562A PNB HF responded to ET’s email query saying the capital raise is being executed in compliance with all regulatory and legal requirements, and in consultation with legal advisors. “The objective of the funding is to enable the Company to strengthen its balance sheet and support future growth objectives, which market analysts believe will unlock shareholder value,” its spokesperson said. While PNB did not respond, during its post earnings press conference on Saturday, S. S. Mallikarjuna Rao, the bank’s MD & chief executive, said, “There was a requirement of capital which we wanted to contribute via a rights issue but because of regulatory guidelines we could not.” Carlyle declined to answer.Counter ViewsAmit Tandon, founder, Managing Director of the Institutional Investor Advisory Services argued that “the share price appreciation is predominantly on account of Aditya Puri buying into the company and joining the board as a director. That has led to the over 100% appreciation in share price in one week, benefiting all equity holders.”But having said so, Carlyle as a large shareholder is increasing its shareholding and is benefiting disproportionately from how the transaction has been structured, Tandon argues, adding most arguments regarding the price are contra-factual. “With Carlyle as a significant shareholder, expecting a higher price through inviting bids is not a given. A rights offering is no guarantee of being value accretive. It would have happened at a discount to the market price if not the market price, and the stock could just as easily have come down, rather than move up.”However, a senior institutional investor argued that auction processes are conducted to discover a fair price and a stock price rally after announcement of a deal cannot justify the absence of a due process in this situation.Several equity analysts also feel the large equity infusion would improve investor confidence and bring the company back on its growth path while reducing its borrowing costs through a potential ratings upgrade.“The capital was much needed for confidence building among its lenders,” said Nidhesh Jain, analyst with Investec. “We expect this could lead to a credit rating upgrade leading to an improvement in cost of funds. This should improve its competitive positioning and loan growth. Its balance sheet is well provided with overall provisions at 4.1% of loans (highest among HFCs).” But Praveen Agarwal, a former banker turned investor took to social media right after the announcement criticizing the transaction, saying as per the management’s own commentary, there was no extraordinary stress in the company. “Then what was the need to raise Rs 4000 crore at a 25% discount to book value versus the original plan of Rs 1800 crore. Carlyle is getting majority control through the back door without paying control premium. Peers like Mahindra had opted for rights issue.”With additional reporting by Dheeraj Tiwari from New Delhi