Business

How Did PNB Housing Finance Find Itself In The Current Mess?

  • Indeterminate litigation and poor real estate loan management are two reasons for the current mess the Housing Finance Company is in today.

Sourav DattaNov 16, 2021, 11:43 AM | Updated 11:43 AM IST
PNB Housing Finance Limited

PNB Housing Finance Limited


Punjab National Bank’s housing finance arm, PNB Housing Finance, was listed on the stock markets in 2016. Within around seven months of its listing, the company’s stock rose more than 75 per cent from the listing price.

The timing couldn’t have been better — the government had announced the Pradhan Mantri Aawas Yojana to build new affordable houses. Naturally, it followed that the real estate boom would support housing finance companies like PNB.

However, in retrospect, investor optimism appears to have been misplaced. PNB’s stock has almost halved since its listing in 2016, destroying investor wealth over the last five years.

How Did The Problems Begin?

Like other housing finance companies, PNB had managed to grow its loan book quite quickly, with easily available capital. Between 2014 and 2018, its loan book grew from Rs 5,500 crore to Rs 33,195 crore.

The aggressive ramp up also increased leverage, which was classified as "above average" by India Ratings in a credit rating report dated 2019.

PNB Housing loan book delinquencies, however, appeared to be quite low and under control. But its parent — PNB — was struggling with its finances after the Nirav Modi scandal — which prompted the private-equity investor Carlyle Group’s and PNB’s efforts to sell off the housing finance arm.

The Indian economy was already slowing down, from 8.3 per cent in 2016 to 6.8 per cent in 2017 and 6.5 per cent in 2018. As a result, the demand for real estate saw a growth decline as well, causing the previously seen growth of companies like PNB Housing to falter.

Aggravation Of The Problems

During the same period, one of India’s largest financial companies, IL&FS, defaulted on its debt, putting India’s financial system under immense pressure.

As credit costs spiked, finance companies faced net interest margin pressures, and doubts over the solvency of other companies increased, such as PNB Housing.

The company had above-average leverage, and was looking to reduce leverage by raising equity to reduce the dependence on debt. However, given the investor fears, PNB Housing had no recourse to raise equity. The company’s non-performing assets (NPAs), though quite low, had begun edging up slowly.

According to CRISIL, the adjusted gearing ratio had risen to 11 times by March 2019.

As a means to ease its troubles, the company began selling healthy portions of its loan books such as the wholesale real estate loans.


Covid-19 further added to the company’s pain during this period.

Failed Fundraise Plans

However, the company’s large shareholders finally came up with a solution right in the midst of the pandemic in August 2020 — a preferential or rights issue of Rs 1,800 crore. However, the RBI did not give PNB the regulatory approval to increase its stake in PNB Housing.

Eight months later, another plan was formulated, where Carlyle and its associates would invest Rs 4,000 crore into the company at a discounted stock price.

The private equity group said that it would invest Rs 3,185 crore through shares and warrants. PNB Housing had steadily reduced its leverage from CRISIL’s adjusted peak of 11, and the Carlyle deal would pull it lower.

However, other investors and proxy advisories considered the deal to be unfair towards minority shareholders, causing the Securities and Exchange Board of India (SEBI) to look into the issue.

SEBI then asked the company to bring in independent agencies to value the business before moving ahead with the deal.

The housing finance company then appealed at the Securities Appellate Tribunal (SAT) which ended up with a split verdict. Subsequently, the Supreme Court was approached on the issue.

The Supreme Court, in turn, decided to wait for the appointment of a third member of the SAT. As a result, PNB Housing, which should have raised capital two years ago, has remained starved of capital.

PNB Housing’s management decided that it did not wish to waste its time waiting for legal proceedings.

“There continues to be no visibility or certainty as to the timeline for judicial determination of the legal issues, particularly as a third member of the SAT is yet to be appointed. The Board further noted that due to the protracted litigation and the continuing interim order of the SAT dated June 21, 2021, there is no clarity on the shareholders' approval for undertaking the Preferential Issue. 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 on-going,” the NBFC said in a communication to the exchanges.

With the decision to scrap the preferential allotment, PNB Housing is in a similar place as it was two years ago. During a recent conference call, the management said the capitalisation situation is much better than what it was previously.

However, it is yet to announce a concrete fundraising plan.

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