The Securities Exchange Board of India (SEBI) has directed PNB Housing Finance (PNBHF) to halt its Rs 4,000-crore deal with Carlyle Group. The securities watchdog has said the allotment of preference shares goes against the lender's articles of association. PNB said it will move the Securities Appellate Tribunal (SAT) against the SEBI directive.

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What is the Deal?

Punjab National Bank’s subsidiary PNB Housing Finance had agreed to a sale of shares to a consortium of investors led by Carlyle Group, an American private equity firm. The board of the housing lender had approved the raising of Rs 4,000 crore by way of issuing preference shares and convertible warrants. A total of 8.20 crore equity shares and 2.05 crore warrants exchangeable into equity shares were being sold for Rs 390 per share and warrant.

Pluto Investments S.a r.l, Salisbury Investments Pvt Ltd, General Atlantic Singapore Fund FII Pte Ltd and Alpha Investments V Pte Ltd, along with existing investors Ares SSG and General Atlantic were involved in the deal. Pluto Investments is an affiliated entity of Carlyle Asia Partners IV, and Carlyle Asia Partners V, and Salisbury Investments is the family investment vehicle of Aditya Puri. Puri is the senior adviser for Carlyle in Asia and the former MD of HDFC Bank.

Why SEBI Stepped in?

The first sign of trouble for the deal came when Stakeholders Empowerment Servies (SES), an institutional investor advisory firm, raised red flags about the deal. SES had stated in its proxy advisory report that the state-run bank was set to lose over Rs 2,000 crore by the allotment of preferential shares.

Moreover, the SES report said the deal was unfair to minority shareholders and was against the law. The advisory firm also highlighted how the deal went against PNBHF’s articles of association.

The SEBI and RBI, and some sources suggested the Centre too, began to investigate the deal.

Soon after, SEBI directed the bank to halt the deal on the grounds raised by SES.

Points of Conflict of Interest

One of the major points that stood out in the deal is the issuance of warrants and shares at the floor price. The issue of conflict of interest between the board of directors and the lender was also raised. Two of the board members in PNB Housing Finance are Carlyle employees as well as nominee directors since the firm has a 32 per cent stake in the company. There are other Carlyle connections as well.

Hardayal Prasad, MD & CEO of PNBHF, Neeraj Madan Vyas, non-independent director, Chandrasekaran Ramakrishan, independent director, Nilesh S Vikamsey, independent director and T.M. Bhasin, independent director, all have recorded connections with Carlyle Group. Five directors out of 10 have a link with the American firm. The connections of most of the directors to Carlyle is through SBI Card’s public issue that raised Rs 7,000 crore out of Rs 9,500 through Carlyle Group.

(Edited by : Shoma Bhattacharjee)