Sebi mulls framework for price discovery of investment companies trading below book value

Markets regulator Sebi on Friday came out with a proposal to lay down a framework for price discovery of shares of Investment Companies (ICs) and Investment Holding Companies (IHCs) whose market price is at significant discount to book value.

Under the proposal, Sebi has proposed a special call-auction mechanism without price band for listed ICs and IHCs, whose shares are trading at a big discount to their book value, according to the consultation paper.

Some market observers believe that the significant difference between market price and book value of these companies is hurting liquidity, fair price discovery, and investor interest.

The regulator said it received presentation from market participants suggesting unrestricted price discovery in these shares because circuit filters set by Sebi prevent market prices from reflecting the true investment value, resulting in wide variances from book value and very low liquidity.

Currently, shares of some listed ICs or IHCs are traded infrequently at prices significantly lower than their disclosed book value. These companies typically lack day-to-day operations and primarily hold investments, including shares of other listed companies.

Despite holding high-value investments, the market value of the IC or IHC can significantly differ from its book value. This difference may be due to the growth in investments in shares of other listed companies, resulting in potentially high valuations.

In its consultation paper, Sebi proposed that the stock exchanges should co-ordinate amongst themselves and provide the special call-auction mechanism for such companies. Further, such mechanism should be provided for the ICs or IHCs only once in a year.

The Securities and Exchange Board of India (Sebi) has sought comments from public till May 10 on the proposal.

With regards to criteria for identification of ICs or IHCs eligible for special call-auction, Sebi said that such entities should be identified based on their existing industry classification.

The entities should be listed for at least a year, at least 50 per cent of their assets in shares of other listed companies, and the 6-month average volume weighted average price (VWAP) should be less than 50 percent of the book value or the pro-rata book value based on their investments.

Once identified, stock exchanges will initiate a special call-auction process for eligible companies with a 7-day notice. This is subject to certain conditions such as detailed information should be disclosed, including overall book value, book value based on investments, and last traded price.

The auction will be considered successful if at least five unique buyers and sellers participate. If not successful on day 1, it continues until a price is found. The session's duration and risk management will follow pre-open call auction rules for IPOs and relisted shares, Sebi suggested.

Out of approximately 70 listed ICs or IHCs, 28 companies have 25 percent or more of their assets invested in shares of other listed companies.

Among these 28 companies, 16 have had their six-month average VWAP (from October 1, 2023, to March 31, 2024) trading at a discount to their book value, based on the latest available information as of September 30, 2023.