Articles of association are the internal rules that guide the company in important matters. The breach of articles of association will affect the binding of members. The majority members and minority members would file a suit if there is a breach of the articles. This suit is to protect the legal system and relationships inside the company. Articles of association should not violate the memorandum of association. Articles of association should abide by the provisions of company law. Here is a case about articles of association violation. This detailed information on the Punjab National Bank housing finance case explains to the readers the importance of articles of association.
What do you understand about “articles of association”?
The articles of association define the objectives of the company and the operational regulations. The capital structure, organisational goals, corporate governance and form of business are the four elements of articles of association. The incorporation of the Punjab national bank housing finance was in 1988. It is registered as a national housing bank. Articles of the association of PNB housing finance state the way of price calculation. Recently, the shares are allocated on a preferential basis to four businesses. Carlyle Group, Salisbury investments, general Atlantic, and alpha investments are the parties about to enter into the contract. The stakeholder’s empowerment services argue that the share allocation and price calculation are unjust. As per the contract, the price is 390 INR per share. The market price of the same share is INR 540 per share. The registered valuer calculates the preferential allocation. The laws that govern the share allocation are as follows: Companies act 2013, section 62(1)(c), Rule 13(1) of the companies act, rules 2014, SEBI regulation 164, ICDR regulation 164 and section 62(1)(c) of the act.
Preferential share allotment:
As per the companies act, the allotment and valuation must be done by the registered valuers. The preferential share allotment calculation is as per rule 13 of the share capital rules. This guideline states that the valuation report from a registered valuer is not required to decide the price of a share. The other method of calculating the price of a share is the average method. The AOA is the contract between the company members and the company. It guides the members, and the final decision is as per the statutory criteria. The members used the statutory criteria to calculate the share price for the preferential allotment. They neglect the AOA calculation. They did not submit the valuation report for the preferential allotment. The argument of PNB housing finance is said as unjust by SEBI.
Settlement:
PNB housing finance planned to enter into a contract with Carlyle group. This company is a dominant owner and shows immense interest in Punjab national bank. The US-based company, Carlyle Group, paid 72.76 lakh as a settlement for the deal. The reasons listed by SEBI for AOA violation are as follows: no valuation report, the collective interest of stakeholders is missing, and there is a lack of material information.
Cases about violation of AOA:
The case handled by V.B. Rangaraj V. V.B. Gopal Krishnan ended with a declaration that the transfer of shares is as per the AOA, shareholders and company law. The recent cases from Tata Consultancy Services Limited and Cyrus investment private limited emphasised that AOA is the bedrock for internal operations. The issue of preferential shares should not change the position of the shareholders. In the case of PNB housing finance, the issue would lead to losing control and transfer of control to Carlyle. The price of a share is thirty per cent below market price. The duty of the board towards compliance and articles of association is to complete the statutory obligation with bylaws governing the allotment.
Reasons for preferential allotment:
Preferential share allotment is an option to raise money for the operations. Preferential share allotment of shares is in bulk numbers to venture capitalists, individuals and businesses. In preferential allotment, the existing shareholder or predetermined investor gets the opportunity. The preferential owners enjoy the profits on a priority basis. The preferential shareholders get reimbursement during the closure on a priority basis. Companies fill out PAS-3 and MGT-14 forms during preferential allotment. Form PAS-3 consist of the Board resolution and list of allotted members. It has to be submitted within 15 days. Form MGT-14 is for passing a special resolution. The explanation for the resolution will be submitted within 30 days of the preferential allotment.
The preferential share issue is for the following reasons. In brief, the company’s fund flow, capital flow and cash flow decide the preferential allotment of shares.
• Preferential allotment secures equity participation.
• To raise funds with fewer expenses. There is no brokerage in the preferential issue. Funding from the public through equity share is time-consuming and expensive.
• It increases the flow of capital. If the company has poor performance, the retail investors will not show interest in buying the shares. The predetermined investors buy preferential shares to increase the flow of capital.
• The venture capitalists, financial institutions, promoters, suppliers, and buyers get to increase their stake through the preferential share allotment.
• The following documents were prepared before the preferential issue: valuation report, several allotted names, resolution, and offer letter draft, notification for EGM, explanatory statement, and approval of offer letter.
Who is a registered valuer?
A chartered accountant with three years of experience in auditing or consultation is eligible to apply for the job of a registered valuer. A registered valuer is a person or entity registered under the registered valuers and valuation rules, 2017. The job profile of a registered valuer came into existence in 2017. The valuation of assets, liabilities and securities in the arbitration system raises the question of authenticity.
Conclusion:
The violation of articles of association educates the business owners about the standards of SEBI. The board members should understand the importance of compliance and the points mentioned in the articles of association.
