Running into controversy and fearing prolonged legal hurdles, PNB Housing Finance has scrapped the Rs 4,000-crore proposed deal with US-based Carlyle Group.

Minority shareholders had red-flagged the deal while questions of conflict of interest were raised with allegations flying that many board members of Punjab Housing Finance had links with Carlyle.

Pending legal proceedings, protracted litigation, no clarity on the shareholders’ approval for the preferential issue and the continuing interim order of the Securities Appellate Tribunal (SAT) are among the reasons cited by PNB Housing Finance to terminate the share subscription agreements with Pluto Investments. 

PNB Housing said the company board decided against proceeding with the preferential allotment, following which Carlyle Group affiliate Pluto Investments initiated the process to withdraw the open offer. Pluto was to make the open offer at Rs 403.22 per share.

The deal would have made the US-based private equity giant a majority shareholder while state-run Punjab National Bank’s holding in its housing finance subsidiary would have dropped from 32.6% to 20.3%. Carlyle Group’s stake in Punjab Housing Finance, on the other hand, would have climbed to 50.1% from 32%.  

“There continues to be no visibility or certainty as to the timeline for judicial determination of the legal issues, in particular as a third member of the SAT (Securities Appellate Tribunal) is yet to be appointed. In addition, regulatory approvals required for the preferential issue are pending, and it is unclear whether such approvals will be forthcoming while the legal proceedings are ongoing," Punjab Housing said.

On May 31, investors led by Carlyle agreed to invest Rs 4,000 crore in PNB Housing. This would be in the form of preferential allotment of Rs 3,200 crore and Rs 800 crore of warrants. The deal was subsequently halted by the Securities and Exchange Board of India (Sebi) after proxy adviser Stakeholders Empowerment Services (SES) termed the deal “unfair and abusive" to PNB Housing’s minority shareholders.

On June 18, Sebi directed the company to conduct the valuation of shares by an independent registered valuer before pricing any capital-raising deal.

PNB Housing Finance then moved the SAT to challenge the market regulator’s directive. While SAT allowed the company to seek shareholders’ approval through an extraordinary general meeting, it ordered the results of the vote to be kept in a sealed cover until further orders. 

Sebi moved the Supreme Court against SAT’s split verdict.

Funding needed for PNB Housing’s growth

PNB Housing needs to raise capital to fund its lending growth as there is a rise in demand for home loans in a low interest rate regime. The mortgage lender’s liquidity was hit after the failure of Infrastructure Leasing & Financial Services Ltd (IL&FS) in September 2018 and then the outbreak of  Covid-19.

“The company’s capital raising plans will be further delayed and such uncertainty will continue. The board’s primary objective is to raise capital to support the growth of the company, and the board believes that the current situation is not in the best interests of the company and its stakeholders,” PNB Housing said.

PNB Housing will now have to explore other funding sources. The company has already received shareholders’ nod to raise Rs 35,000 crore by selling non-convertible debentures.

The task of fundraising has not been easy for PNB Housing for the past few years. The Reserve Bank of India (RBI) has also barred parent Punjab National Bank from infusing capital into its housing finance subsidiary. The mortgage lender had earlier planned a qualified institutional placement, with possible participation of Punjab National Bank through a rights issue.