SEBI’s Proposed Framework for Undervalued Companies

April 20, 2024

The Securities and Exchange Board of India (SEBI) has proposed a framework for price discovery of shares of listed Investment Companies (ICs) and Investment Holding Companies (IHCs) whose market price is trading at a significant discount to their book value.

Proposed Special Call-Auction Mechanism

SEBI has suggested a special call-auction mechanism without price bands for listed ICs and IHCs whose shares are trading at a substantial discount to their book value.

The regulator has proposed that stock exchanges coordinate among themselves to provide this mechanism once a year for eligible companies.

SEBI proposed a special call-auction for listed investment companies (ICs) and investment holding companies (IHCs) whose shares trade at a significant discount to book value.

Key points

Special annual call-auction without price bands
Aims to improve liquidity and fair price discovery
Eligibility: Over 50% assets in other listed firms, 6-month VWAP <50% of book value
Auction considered successful if 5+ unique buyers/sellers participate
28 out of 70 ICs/IHCs potentially eligible under proposed criteria

Rationale Behind the Proposal

Some market observers believe that the significant difference between the market price and book value of these companies negatively impacts liquidity, fair price discovery, and investor interest. SEBI received presentations from market participants suggesting unrestricted price discovery for these shares, as the existing circuit filters prevent market prices from reflecting the true investment value, resulting in wide variances from book value and low liquidity.

Current Situation

Presently, shares of some listed ICs and 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 an IC or IHC can differ significantly from its book value, possibly due to growth in investments in other listed companies. The proposal aims to address liquidity issues and improve fair price discovery for these companies.

« Previous Post Next Post »