Preferential Treatment

Context: PNB Housing has filed an appeal before the Securities Appellate Tribunal (SAT) against a letter issued to it by the Securities and Exchange Board of India (SEBI). 

• SEBI had asked PNB Housing to keep its resolution (for the preferential issue of equity shares and warrants to the Carlyle Group and others) on hold until valuation of the shares is carried out by an independent registered valuer. 
• SEBI’s letter came after Stakeholders’ Empowerment Services (SES), a proxy advisory firm, raised questions over the proposed transaction, terming it “unfair” to the interests of minority shareholders. 

What is exactly the matter and why its relevant to UPSC syllabus? 

Matter involves the issue of Rs 4,000 crore preference shares to a group of investors led by the Carlyle Group. With this transaction, the group’s shareholding in PNB Housing would rise to over 50%, giving it the controlling stake. This raises questions about conflict of interest, and protection of minority rights, which lie at the heart of corporate governance structures. 

• Corporate governance is an important topic in GS IV Ethics paper. 

What are the concerns being raised? 

Two concerns are being voiced:  

• The decision to opt for a preferential issue: A company can issue two types of shares, that is, equity shares and Preference shares. Consequently, there are two types of issues: Preferential issue and rights issue. 

• In a rights issue, all shareholders are entitled to participate. This allows for equal treatment of shareholders. 
• Preferential issue is not open to all shareholders. Only specified group of people can participate.  

• The pricing of the preferential shares: On the issue of pricing, argument has been made that the valuation exercise was carried out without accounting for the “control premium”, implying that the shares should have been priced higher.  

• What is Control Premium? – Control premium is an amount that a buyer is sometimes willing to pay over the current market price of a publicly traded company in order to acquire a controlling share in that company. 
• Hence, in this case the argument is straightforward: As the transaction involved changes the nature of the company — effectively transforming it to a privately controlled entity, this event needs to be priced in.  

Other concerns 

Several other concerns have also been raised, like  

• 12 PNB Housing Finance board members who approved the transaction, seven, including the independent directors, had dealings with the Carlyle Group. This raises questions of conflicts of interest. 

What is the response of PNB Housing? 

PNB Housing Finance has refuted the allegations, and has clarified that the process followed to determine the pricing of shares was in line with the “market practice” by listed companies. 

What is going to happen now? 

While SAT has allowed for a vote on the issue, and the matter will be taken up on July 5. 

Terms to know 

• Equity shares 
• Preference shares 
• Corporate governance 

Source: Indian Express