The Securities and Exchange Board of India (SEBI) has put forth a proposal aimed at improving the price discovery process for shares of listed Investment Companies (ICs) and Investment Holding Companies (IHCs) that are trading at a considerable discount to their book value. This move comes in response to concerns raised by market observers regarding the liquidity and fair valuation of such companies.
Under the proposed framework, SEBI suggests the implementation of a special call-auction mechanism, specifically designed for listed ICs and IHCs experiencing a significant disparity between their market price and book value. Here are some key points outlined in SEBI’s proposal:
- Special Call-Auction Mechanism: SEBI recommends the introduction of a special call-auction mechanism without price bands for eligible ICs and IHCs. This mechanism aims to facilitate better liquidity and fair price discovery for the shares of these companies.
- Coordination among Stock Exchanges: The regulator proposes that stock exchanges collaborate to offer this special call-auction mechanism once a year for eligible companies. This coordination among exchanges would ensure uniformity and efficiency in the implementation of the mechanism.
- Criteria for Eligibility: To be eligible for participation in the special call-auction, ICs and IHCs must meet certain criteria. These include having over 50% of their assets invested in other listed firms and a six-month Volume Weighted Average Price (VWAP) that is less than 50% of their book value.
- Success Criteria for Auction: SEBI suggests that an auction would be considered successful if there are at least five unique buyers or sellers participating in the process.
- Potential Impact: Out of the 70 ICs and IHCs analyzed, SEBI identifies 28 companies that could potentially benefit from the proposed framework based on the eligibility criteria.
The rationale behind SEBI’s proposal stems from the observation that the significant difference between the market price and book value of these companies can adversely affect liquidity, fair price discovery, and investor interest. Market participants have voiced concerns that existing circuit filters may hinder true price discovery, leading to wide variances from book value and low liquidity for these shares.
Currently, shares of listed ICs and IHCs are often traded infrequently at prices substantially lower than their disclosed book value. These companies typically do not engage in day-to-day operations but primarily hold investments, including shares of other listed companies. Despite holding valuable investments, the market value of these companies can deviate significantly from their book value, potentially due to changes in the value of their investments over time.
SEBI’s proposal aims to address liquidity challenges and enhance fair price discovery for ICs and IHCs trading at a significant discount to their book value. By introducing a special call-auction mechanism and establishing clear eligibility criteria, SEBI seeks to foster a more transparent and efficient trading environment for these companies, ultimately benefiting investors and the broader market ecosystem.