Can Carlyle-Aditya Puri combine pass the Sebi hurdle on PNB Housing deal?
PNB Housing Finance has filed an appeal at the Securities Appellate Tribunal  The Rs 4,000-crore Carlyle Group-PNB Housing Finance deal received another setback with promoter Punjab National Bank (PNB), the biggest shareholder in PNBHFL writing to the home loan subsidiary asking it to reconsider the structure of the deal in the backdrop of the objections raised by market-regulator Securities and exchange board of India (Sebi). The PNB letter is critical since the proposed deal is already under the scanner of the regulator after a proxy advisory firm raised several questions on the deal structure including the valuation part. PNB asked its mortgage arm to reconsider the structure of the Rs 4000-crore investment proposal from Carlyle-Aditya Puri combine in the current form and seek an alternative plan. The PNB Letter had conveyed a decision taken by the board of directors of PNB at their meeting held on July 3, 2021 (on the basis of a legal opinion obtained from a law firm and deliberated at such board meeting) that, in their view, the board of directors of the Company should take cognizance of the directive issued by SEBI vide their letter dated June 18, 2021 and reconsider restructuring the contours of the deal/transaction of the capital raising in line with such SEBI directive, said a PNBHFL communication to exchanges on July 7. One view is that with this letter the deal that is already under regulatory scrutiny has turned even more questionable for investors. Any step that is taken to ensure that the interest of minority investors is not harmed and there is fairness to everybody is welcome. I cannot advise PNB Housing finance to cancel the deal or not," said JN Gupta, former executive director of Sebi and founder, managing director of proxy advisory firm Stakeholders Empowerment Services (SES). "But, it appears PNBs letter to PNB HFL is based on the legal advice they received and the earlier decision (Carlyle proposal) was not checking all the right boxes, Gupta said. A similar view was aired by noted chartered accountant, Jayant Thakur. It is up to the shareholders to decide whether a transaction should happen or not. Once the rules of the law are laid out, the regulators have no say in it unless there is some fraud or rule violation. However, in this case, since PNB which is a significant shareholder itself has raised an issue, I dont think this transaction can happen in the current form, Thakur said. If PNB opposes, that will be the end of Carlyle Rs 4,000 crore deal as the proposal requires a minimum 75 percent votes from shareholders present. If the deal doesnt go through, it will also be seen as the first major setback for Aditya Puri in his long career. Ever since Puri got a call from legendary banker Deepak Parekh in 1994 to lead HDFC Bank, the banker had to never look back in his career. During his 26 years as HDFC Bank CEO, Puri had a magic run, growing the bank to Indias largest private lender and also becoming the longest-serving Indian bank CEO. The veteran banker joined as an advisor at Carlyle in November 2020. When the combine later bid to take over a controlling stake in PNB Housing Finance, the housing finance arm of PNB, Puri, in a way, pitched himself against Parekh being a direct competitor to Housing Development Finance Corporation (HDFC). For Puri, it would have been the start of a second innings in banking business. But, as it appears, the game isn't smooth for Puri this time. In an announcement made on May 31, PNBHFL said Carlyle Group along with its affiliates, existing investors, and Puris family investment vehicle will together invest up to Rs 4,000 crore in the housing finance company backed by Indias second-largest PSU bank, PNB, subject to regulatory approvals. Pluto Investments, an affiliated entity of Carlyle Asia Partners IV and Carlyle Asia Partners V, has agreed to invest up to Rs 3,185 crore through a preferential allotment of equity shares and warrants, at a price of Rs 390 per share. Existing shareholders of the company, funds managed by Ares SSG and General Atlantic, will also participate in the capital raise. The statement added Puri will likely get nominated on the Board of Carlyle in due course. But, the market regulator, on May 31, directed PNBHL to halt the issue until the company undertakes a fresh valuation from an independent valuer. Later, the Securities Appellate Tribunal (SAT) allowed PNB HFL to conduct the AGM but asked the company to not announce the results of the AGM till a final order. SAT is likely to hear the case next on July 12. But, in the meantime, the bigger jolt has come from PNB. Proxy Advisory firm SES first raises an issue raising questions on questions on the deal in a report. Incidentally, Sebis objection was also related to the independent valuation of the issue. PNB HFL needs capital urgently to repair its loan book and for future growth. The HFC will benefit from the Rs 4,000 crore capital infusion in more than one way. With the fresh round of investment, PNB HFL hopes to augment its capital adequacy, reduce gearing and accelerate growth with a focus on retail housing, including self-employed and affordable housing loans. Assuming full capital infusion, including warrants, and no other change to the March 31, 2021 financials, the capital adequacy ratio of PNB Housing Finance as of March 31, 2021, would increase to over 28 percent from 18.7 percent. According to ICICI Securities, the resultant capital buffer (CAR of >28 percent) is enhanced to adequately face the potential stress due to COVID disruption, and gradually improve visibility on rating upgrade. Equity infusion of Rs 40 billion will lead to sharp uptick in CAR to 28 percent and reduce gearing to <5x (from 6.7x). This will instill confidence to debt market, thereby improving visibility on debt rating upgrade. PNB HFL will also accelerate its borrowing capabilities (at lower cost) for retail-focused growth, said ICICI Securities. The SAT ruling in this case will be crucial in the case, according to experts. If SAT upholds the Sebi ruling, PNB and Carlyle may have to go back to the drawing board to work on the deal structure and valuation.