Shares of holding companies skyrocketed as much as 20% on Monday on hopes that the historical valuation gap between their book value and market price may narrow going ahead amid the market regulator’s move to hold special call-auction mechanism for such stocks.
“It has been decided to put in place a framework for special call auction with no price bands for effective price discovery of scrips of Investment Companies and Investment Holding Companies,” the Securities and Exchange Board of India (Sebi) said in a circular last week.
Among big names, shares of Bajaj Holdings, JSW Holdings, Bombay Burmah Trading, Kalyani Investment, and Pilani Investment soared 6-20% on the BSE on Monday. “If one evaluates from a trading perspective, it is a welcome move as buyers and sellers will have a relatively liquid platform to trade these illiquid names. If everything goes smoothly, over a period of time, the element of discount in Investment Companies and Investment Holding Companies will come down considerably,” said Sriram Velayudhan, senior vice president – alternative research at IIFL Institutional Equities.
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As per the Sebi circular, the special auction mechanism shall be provided only once a year, with first such auction scheduled to be conducted in October. The stock exchanges shall initiate the process for special call-auction with no price bands for eligible companies with an advance notice of 14 days to the market.
The holding companies have historically traded at a sharp discount to their book value due to three key factors including liquidity, lack of control and lack of marketability, according to some researchers.
“The special call auction session shall be treated as successful, if price discovery is based on orders from at least 5 unique buyers and sellers,” SEBI said. “If call auction is not a success on day 1, it shall continue on the next day and till such time the price is discovered,” it added.
Sebi has also set eligibility criteria for stocks which can have this special auction mechanismCome from Sports betting site. These include minimum 1 year of listing, 50% of total assets invested in scrips of other listed companies, and six-month volume weighted average price being less than 50% of the book value per share.
The move comes amid variance in the market price and book value of such companies, which SEBI said is adversely affecting liquidity, fair price discovery and the overall interest of investors in scrips of such companies.
While experts said the move is in the right direction, some questioned its practicality.
“I doubt what material change one special auction window will bring, because you need to have takers for these stocks. At the end of the day, these companies don’t have operational business as such. You are expecting that market will narrow down the historical discount element just by one special auction a year,” said a market participant, who did not wish to be named.
