[Opinion] Special provision in AOA vs. Pricing under SEBI (ICDR) Regulations

[2023] 146 taxmann.com 188 (Article)

The mandatory requirement of valuation of shares under different laws and regulations in India has always been a matter of interest for corporate law professionals. The requirement of valuation of shares is provided in Company Law, SEBI (ICDR) Regulations, Foreign Exchange laws, Income Tax laws. The requirement of valuation also depends upon the type of issue of shares – rights issue or preferential offer or ESOP, etc. In an interesting matter before SEBI (and then SAT), the issue was – whether mandatory requirement for valuation of shares of listed company by Registered Valuer under articles of association will prevail over the relevant provisions of Companies Act/Rules and SEBI Regulations.

Brief facts of the case: PNB Housing Finance Ltd. (‘Appellant Company’) is a registered housing finance company that is listed to stock exchange. The Appellant Company was seeking to raise its capital in the past two years but such efforts could not materialise. Punjab National Bank (largest shareholder in Appellant Company, holding 33%) informed the Appellant Company that it could not provide funding as regulatory approval from RBI was not obtained. On the other hand, some of the existing shareholders along with others jointly offered to pump in funds by way of preferential allotment of shares.

Based on the offer given by the said entities, the board of directors of Appellant Company passed a resolution on May 31, 2021 approving the raising of capital through preferential allotment of shares to the proposed allotees at Rs. 390/- per share. The board of directors resolved to call and convene an extra-ordinary general meeting on June 22, 2021 to consider the issue and allotment of shares by way of preferential allotment/private placement basis for cash consideration. The said resolution of the board of directors and subsequent issue of the notices to the shareholders were intimated to the stock exchanges, pursuant to which, the stock exchanges sought various information/responses from the Appellant Company which was duly provided/replied.

Based on the replies by the Appellant Company, the stock exchanges submitted a joint report to SEBI. SEBI (by its letter dated June 17, 2021) asked the Appellant Company to submit a para-wise comments to the joint report submitted by the stock exchanges especially on the issue whether all applicable methods of valuation were considered by the board of director while ascertaining the share price. The Appellant Company provided the requisite reply and, thereafter, the impugned communication was issued. By that communication, SEBI held that agenda no. 1 (i.e. issue and allotment of shares by way of preferential allotment) being ultra vires of Article of Association would not be acted upon until the Appellant Company obtained a report from the Registered Valuer as contemplated by Article No. 19(2) of the Articles of Association. SEBI mentioned that the resolution was ultra-vires since valuation by the Registered Valuer had not been factored while determining the price of the preferential issue and that the Articles of Association requires the board of directors to consider the valuation report of a Registered Valuer.

SEBI, by impugned communication, restrained the Appellant Company from holding the extra-ordinary general meeting with regard to the said agenda. The said communication by General Manger, SEBI was challenged in appeal before SAT.

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