Analyzing the SEBI’s Order in the PNBHF-Carlyle Deal

Analyzing SEBI’s intervention into the Rs. 4000 crore Carlyle-PNBHF deal and its corresponding legal implications

Sanath Rajesh*



This blog seeks to analyze the Securities Exchange Board of India’s (SEBI) intervention into a 4000 crore rupees deal between Punjab National Housing Finance (PNBHF) and the U.S. private equity giant, Carlyle, which involved a preferential allotment of shares. The deal sought to alleviate PNBHF’s distressed balance sheets and the respective preferential allotment was performed in due accordance with SEBI’s ICDR Regulations. However, contrary to PNBHF’s interests, the market regulator brought the PNBHF-Carlyle deal to a standstill by alleging that the preferential allotment of PNBHF’s securities was in contravention of its Articles of Association. Apart from analyzing the factual specifics of the case, this post, more importantly, seeks to shed light on the legal ramifications of SEBI’s emphasis on PNBHF’s Articles of Association over statutory legislations.


Regulation 164, ICDR Regulations, PNBHF, SAT, Articles of Association, independent valuation, Companies Act.


Recently, Punjab National Bank Housing Finance (“PNBHF” or “the Company”), a registered housing finance lender engaged in the business of providing retail and corporate loans, sought to raise capital from certain private equity investors, owing to its financial difficulties. Accordingly, PNBHF, vide a resolution issued on May 31 2021, contemplated and subsequently approved the issuance of equity shares and warrants to a group of proposed allottees which included the U.S. based private-equity giant, Carlyle Group, inter alia certain pre-existing shareholders. The issuance of such securities was performed by way of a preferential allotment on a private placement basis for cash consideration, which was in accordance with the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (“ICDR Regulations”). In accordance with Section 62(1)(c) of the Companies Act, 2013 (“Section 62 (1)(c)”) the aforesaid resolution sought to convene an Extra-Ordinary General Meeting (“EGM”) on June 2021, in order to seek respective approval from the shareholders of PNBHF.

However, contrary to the interests of the Company, the Securities Exchange Board of India (SEBI), via an order issued by its General Manager to the Companydirected the appellant to not consider Item No. 1 on the agenda of the EGM, wherein the Company sought to make a preferential allotment of equity shares to the Carlyle Group. The present dispute, titled PNB Housing Finance Ltd. v. SEBI (“PNBHF-Carlyle case”), culminated upon an appeal being filed by PNBHF against SEBI’s order.

Price Valuation of PNBHF's Securities

To fully appreciate the SAT’s observation on the issue, it is pertinent to understand the two different valuation approaches adopted by PNBHF and SEBI, in determining the floor price of the PNBHF’s securities. Pricing Formula under Regulation 164 of SEBI (ICDR) Regulations, 2018 PNBHF, in the EGM, stated that the method for determining the floor price for the preferential allotment of the Company’s securities was in accordance with the pricing formula prescribed under Regulation 164 of the ICDR Regulations (“Regulation 164”). Regulation 164 deals with the pricing of equity shares pursuant to the preferential issue and the pricing formula state that the price of the shares will be higher than the average market price of the respective issuer's shares for 26 weeks, and 2 weeks prior to the EGM.

1. Price Determination under Section 62 (1)(c) of the Companies Act, 2013

Section 62 (1)(c) simply states that a price determination of preferentially allotted shares by a company must be made through a valuation report curated by an independent registered valuer, who is further registered under the Insolvency and Bankruptcy Board of India. SEBI vide its order, stated that an independent valuation of the Company’s equity shares and share warrants must be performed by a registered independent valuer, and the preferential issue of PNBHF’s equity shares and share warrants must be allotted in accordance with the valuation price derived by the independent valuer, and not by the pricing formula arrived at through Regulation 164. The rationale behind SEBI’s order is premised upon the fact that PNBHF’s Articles of Association (“AoA”) prescribes for an independent valuation of the company’s shares to be performed by a registered valuer.

Dissecting the SAT's Split Verdict

Within the case, PNBHF – contesting SEBI’s order - argued that as per Rule 13 of the Companies (Shares Capital and Debentures) Rules 2014 (“Rule 13”), a listed company is exempted from conducting the independent valuation stipulation by a registered valuer. In the present dispute, PNBHF was a listed entity, trading on the registered National Stock Exchange and Bombay Stock Exchange and would thereby be exempt from performing a valuation of its shares by an independent registered valuer under Section 62 (1)(c) read along with its AoA.

Hearing the arguments presented by PNBHF, The Mumbai Bench of the Securities Appellate Tribunal (“SAT”) – comprising of Presiding Officer Justice Tarun Agarwalla (“PO”) and Judicial Member Justice M.T. Joshi (“JM”) observed that the crux of the issue primarily revolves around whether a valuation report from a registered valuer is required to be generated in accordance with the AoA of PNBHF read with Section 62 (1)(c), or whether the valuation of PNBHF’s shares must be done according to the pricing formula mentioned under Regulation 164 of the ICDR Regulations. On August 9th 2021, the same two-member Bench of the SAT delivered a split verdict on the issue. While the PO has rejected the need for a valuation report, the JM of the SAT has directed PNBHF to obtain a valuation report by a registered valuer since the same requirement has been decreed for in the Company’s AoA.

The PO of the SAT Bench adopted a viewpoint wherein he opined that if one were to consider the AoA, there would exist two different mechanisms for preferential allotments – one in case of companies requiring a valuation of their shares through a registered valuer performed in accordance with the Section 62(1)(c), and another in the case of companies without such a provision (thereby resorting to the pricing formula stipulated under the ICDR Regulations). In that regard, the PO argued that the ICDR Regulations were the relevant code by which preferential allotment was to be conducted by listed companies. The PO also held that SEBI’s order restraining PNBHF from proceeding with the shareholder’s decision-making on the agenda relating to the preferential allotment was in violation of the principles of natural justice as no opportunity of prior hearing was given to PNBHF. Furthermore, the PO held that SEBI lacked the jurisdiction to interfere in matters of the preferential allotment as the public shareholders had not given their ratification yet.

On the contrary, the JM of the SAT Bench argued that a company’s AoA is essentially a contractual agreement between the members of a company and its importance cannot be downplayed in comparison to statutory and regulatory provisions. The JM placed reliance on the decision of the Punjab and Haryana High Court in the case of Amruta Kaur Puri v. Kapurthala Flour Oil and General Mills Company Pvt. Ltd., wherein a quorum pertaining to board meetings within a company’s AoA was upheld and given priority, even though the same provision was over and above the statutory requirements prescribed within the Companies Act, 1956. With respect to the question of SEBI’s jurisdiction in restraining PNBHF from proceeding with the preferential allotment as discussed in its EGM, the JM opined that SEBI was competent in doing so as there was a paucity of time.

Observations and Implications of the SAT Order

This blog argues that the SAT’s split-verdict order has multiple implications which can possibly set an unfavourable precedent for companies contemplating preferential allotments to private equity investors. Considering the JM has prima facie prioritized the need for a valuation report prescribed within PNBHF’s AoA, the order has raised an interesting question pertaining to SEBI’s statutory jurisdiction. By earmarking the importance of PNBHF’s AoA for performing the valuation of its shares, a conflict arises as to whether Regulation 164 of the ICDR Regulations – which is essentially SEBI’s pricing formula for valuation of shares in a preferential allotment - assume lesser jurisdictional and legal relevance when compared to the stipulations given in a company’s articles of association.

The split verdict of the SAT Bench also raises questions with respect to previous preferential issues effectuated by companies in accordance with regulatory compliances, which may substantially differ from the valuation procedure prescribed within their respective AoA’s. A further question that arises is whether all listed entities have to specify their preferred valuation methods within their AoA to conduct preferential issues, considering the JM has adopted a stance that binds a company to its contractual agreements within its AoA.

This blog argues that the pricing method prescribed under Regulation 164 of the ICDR Regulations provides a company with richer share valuations by utilizing favourable market price fluctuations to its advantage, and is thereby beneficial for a company contemplating a preferential allotment of its shares – especially in times of financial distress. In such a scenario, wherein the stock price of a company is rising, resorting to an unfavourable valuation method, such as the procedure under Section 62(1)(c) prescribed within the AoA during the company’s inception, would result in lower share valuations. Within the present preferential issue of equity shares and share warrants to the Carlyle Group, SEBI’s order has the potential to skew valuations considering the shares of PNBHF have witnessed a lot of volatility, with the price ranging between Rs. 700 and Rs. 800. If PNBHF is required to conduct another EGM, it would result in higher valuations which would further disincentivize the Carlyle Group from subscribing to the preferential allotment of equity shares and share warrants. Constantly amending the AoA’s would prove to be a further hassle, considering such amendments require special resolutions to be passed in a General Meeting. Ultimately, SEBI’s order would further strain PNBHF as it chose to conduct a preferential allotment of its securities under the context of pre-existing financial stress. As per an exchange notification on July 7 2021, PNBHF received a letter from its parent company, the government-owned Punjab National Bank, asking the lender company to restructure the initial Rs. 4000 crore deal with the Carlyle Group. Considering the shares of PNBHF have soared to levels of Rs. 875 – a new high from record low levels in March 2020 - it appears as if PNBHF is confronted with a no-win situation, as the Carlyle Group is faced with unattractive valuations and the stressed lender is caught within a legal tussle with the market regulator. To add to PNBHF’s woes, the Mumbai Bench of the SAT will now have to refer the dispute to the Supreme Court due to a lack of quorum.


[*] Sanath Rajesh is a third-year law student from Jindal Global Law School [constitutent of OP Jindal Global (Institute of Eminence, Deemed To Be University)], Sonepat, India. The author may be reached out through

Preferred Citation – Sanath Rajesh, “Analyzing the SEBI’s Order in the PNBHF-Carlyle Deal", Syin & Sern Law Review, Published on 7th September 2021.

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