In the recent case of PNB Housing Finance Limited vs Securities and Exchange Board of India , the Securities Appellate Tribunal (SAT) rendered a split verdict on the legal question of PNB Housing Finance Limited`s preferential allotment of shares. The bench consisted of the Presiding Officer (PO) and the Judicial Member (JM) who could not reach a consensus. As a result, the status quo order of 21 June 2021 (SAT Order) presently prevails.

Question of law for adjudication:Whether a valuation report from a registered valuer, as provided for in the Articles of Association, is required for preferential issue of shares by a Listed Company, or compliance with ICDR would suffice?

Background of the case: PNB Housing Finance Limited (PNBHFL) became a listed company in November 2016 when it floated its shares on the stock exchanges. The company was desirous of raising fresh growth capital in 2021. The parent company, Punjab National Bank Limited (PNB), holding 33% shares of PNBHFL was unable to provide further growth capital to PNBHFL as it did not obtain necessary regulatory approvals from the Reserve Bank of India for such a fund infusion. While the company was scouting for growth capital, four entities jointly evinced interest to infuse funds by way of preferential allotment of shares. To that effect, PNBHFL passed a resolution dated 31 May 2021 and approved raising of capital through preferential allotment of shares to the proposed allottees at a price of Rs. 390/- per share. The resolution also resolved to convene an Extra Ordinary General Meeting (EOGM) for approval of the resolution by the shareholders and thus a notice was issued intimating that an EOGM would be convened on 22 June 2021. Item No 1 for the meeting was the issue of preferential allotment of shares.

After several communications with PNBHFL, Securities and Exchange Board of India (SEBI), issued a notice dated 18 June 2021 (Impugned Order) holding the Item No 1 of EOGM ultra vires to the Article of Association (AOA) of PNBHFL. Article 19(2) of the AOA of PNBHFL required the company to obtain a report from a registered valuer which PNBHFL had not obtained. PNBHFL had obtained a report which was merely a valuation certificate by the statutory auditor which was not in accordance with any rules or regulations.

SAT Order: PNBHFL challenged the Impugned Order contending that SEBI had no jurisdiction to pass such an order. PNBHFL claimed that the Impugned Order violated the principle of natural justice since it was issued without prior notice. To that, the PO held that the Impugned Order was arbitrary, perverse and lacked fairness, but the JM had a different opinion. JM stated that the Impugned Order was issued in order to safeguard the interest of the investors, and was thus justified. The disagreement continued with regards to the interpretation of the statutes and the question about SEBI`s authority and jurisdiction arose. As a result, the court had to examine a few legal precedents along with the AOA of PNBHFL.

Enumeration of provisions:

Article 19(2) of the AOA of PNBHFL state as under
``Notwithstanding anything contained in sub-clause (1) hereof, the further shares aforesaid may be offered to any persons (whether or not those persons include the persons referred to in clause (a) of sub-clause (1) hereof) if authorized by special resolution either for cash or for consideration other than cash, if the price of such shares is determined by the valuation of a registered valuer.``

The AOA mandated that the price of the shares be valued by a registered valuer, whereas the other statutes had dispensed with such a requirement. The mandated compliance is specified in Section 62(1)(c) of the Companies Act, 2013 (Companies Act) . However, this section does not apply to listed companies, since the Companies (Share Capital and Debentures) Rules, 2014 (SCD Rules) do not require a listed company to determine the price of shares by valuation report of a registered valuer.

Second Proviso of the SCD Rules state as under
``Provided further that the price of shares to be issued on a preferential basis by a listed company shall not be required to be determined by valuation report of a registered valuer.``
Hence, PNBHFL was in compliance with the SCD rules.

Regulation 164 of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (ICDR) prescribes a regulatory method and stipulates a minimum price at which preference shares may be issued. The floor price as per ICDR in this case was Rs. 384.60/-. Hence, the preference issue price determined by PNBHFL was in compliance with Regulation 164 of ICDR.

The differing perspective of the members of the Tribunal: The view taken by PO was that the submissions of PNBHFL are valid as the ICDR is a complete code. The price of preferential allotment of shares by listed companies under ICDR follows a specific methodology and cannot be valuation based pricing. Thus, the contradictions between the provisions can be easily determined as ICDR overturns the Companies Act and SCD Rules in case of listed companies.

To that, the JM had a differing opinion. The JM was of the view that the AOA is a contract between the shareholders and the company and should be strictly complied with unless void. Article 19(2) of AOA which mandates price to be valued by registered valuer is not repugnant to Regulation 164 of ICDR or Regulation 13 of SCD Rules. The Regulation 13 of the SCD Rules does not prohibit determination of the price by registered valuer. Further, Regulation 164 of ICDR just sets a minimum price. To him, there is no repugnancy between any provisions and the provisions can stand together. If AOA imposes a requirement over and above what the ICDR or SCD rules / provisions require, they cannot be called repugnant. He also relied on a decision of Punjab and Haryana High Court wherein the quorum required for the board meeting in AOA was 4 directors i.e., greater than Companies Act which requires a quorum of 3 directors. He also stated that Section 6 of the Companies Act overrides the provisions of AOA but the AOA cannot erode/dilute the mandates of the Companies Act.

Way Forward: Given that the previous SAT Order shall prevail, owing to the split verdict, the only recourse the parties have is to approach the Supreme Court to resolve this conundrum.


Due to differing opinions, the stalemate continues. When looked at severally, both the opinions seem justified. Although JM`s view appears more purposive and in the interest of shareholders/investors, the PO`s view is strictly technical and cannot be argued against. The issue of interpretation of various statutory provisions, some of which may not always be in complete consonance with each other, continues to remain a vexing legal issue. While dealing with such issues, the intent of the legislature must be looked at and the provision which advances the cause of justice and defeats the mischief must be adopted. Another unresolved legal aspect is whether SEBI can intrude in the affairs of the listed company in the manner that they have sought to do in this case. We sincerely hope that the Supreme Court will resolve this conundrum and settle these vexing questions of law and interpretation in the coming days.

This update was released on 01 Sep 2021.

The views expressed in this update are personal and should not be construed as any legal advice. Please contact us directly on +91 22 40565252 or for any assistance.

Legal Update Team
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