Two days ago, on Friday, India’s market regulator SEBI posted on its official site a document ‘Framework for Price Discovery of Shares of listed Investment Companies (ICs) & listed Investment Holding Companies(IHCs).’ This framework is specifically designed for ICs and IHCs whose market price is at a significant discount due to book value.
Earlier a concept of differential price bands of 5%, 10%, 20% was introduced as a measure of risk management and surveillance for ensuring orderly trading, appropriate price discovery, promote market integrity etc.
The current draft proposal has been designed in consultation with Stock Exchanges and certain ICs and IHCs to find a ground reality of the situation and ascertain ways to facilitate effective price discovery.
What is SEBI’s Proposal ?
Securities and Exchange Board of India has proposed a special call action mechanism without price band for listed ICs and IHCs, whose shares are trading beyond a certain discount to their book value. There are certain criteria laid down for eligibility of ICs and IHCs :
- The ICs and IHCs may be identification based on their existing industry classification.
- The scrip should have been listed and available for trading at least for a period of 1 year and the company should have been compliant with all the LODR Regulations including submission of audited financial results;
- Total assets of the company invested in shares of other listed companies
- may at least be 50%;
- The 6-month VWAP of the security may be less than 50% of the book value of such companies; or The 6-month VWAP of the security may be less than 50% of the book value of such company based on pro-rata of their investments in shares of other listed companies;
This mechanism may be provided only once a year.
Reason for this Proposal
The substantial difference in the market price and book value of these listed ICs and IHCs is adversely affecting liquidity, fair price discovery and the overall interest of investors.
In fact, the presence of circuit filters specified by SEBI make it difficult to determine the market price of the shares closer to the investment value represented resulting in huge variance from the book value with near zero liquidity. This flaw was pointed out by one of the market participants.
Present Scenario
The draft proposal recorded, “Currently, shares of a few listed ICs or IHCs are getting traded infrequently but at a price which is significantly lower than the book value disclosed by the listed entities in their last audited financial statements. Moreover, these companies generally have no day-to-day operations and hold only investments in different asset classes including in other listed companies.”
“In certain cases, it is observed that where the investments are mainly in shares of other listed companies, the market value of the IC or IHC is at significant variance from its book value, even though the market value of the investments held is very high. The valuation of such ICs or IHCs could be fairly high on account of growth in their investments in shares of other listed companies.”, it further added.
SEBI has sought comments from the public till 10th May, 2024. Head to its official site to share your thoughts.