Special call auctions to aid holding companies price discovery, narrow discounts

The significant discounts between the current market value and the book value of holding companies are expected to narrow soon. The change is expected after the Securities and Exchange Board of India (Sebi) introduced special call auctions with no price bands for price discovery of investment holding companies.

Currently, stocks like Kalyani Investment, Bombay Burmah, Pilani Investment, Kama Holding, Vardhman Holdings, Summit Securities, and Maharashtra Scooters are trading at 60 -85% discount to their book values.

On Thursday, the market regulator issued a framework for the price discovery of holding companies. It announced that the first special call auction will be conducted in October by stock exchanges, based on the latest available audited financial statements of these companies. Subsequent special call auctions will be held as and when the companies publish their annual audited financial statements.

"Currently, retail investors are often unaware that certain companies hold substantial investments in listed entities, making them hidden gems. This initiative will facilitate price discovery for these companies," said Sunil Damania, chief investment officer, MojoPMS. "Although the special call auction is set to occur annually, we advocate for quarterly auctions, aligned with the quarterly disclosure of company holdings, to enhance their effectiveness."

Kalyani Investment Co, part of the Pune-based Kalyani Group, is currently trading at a discount of 84% to the book value. It holds a 31.36% stake in Hikal, 13.6% in Bharat Forge and 16.45% in BF Utilities. The current market value of these three holdings is over ₹13,103 crore whereas the market capitalisation of the company is just ₹2,155 crore.

Similarly, The Bombay Burmah Trading Corp has a 17% stake in Bombay Dyeing and a 50.55% stake in Britannia Industries worth over ₹65,175 crore. The current market capitalisation of the company is just ₹11,749 crore.

"The frontline holding companies have adequate participation and traders' interest on the exchange, enabling price discovery, but for those holding companies in which liquidity is an issue, the call auction method could help," said Anand James, chief market strategist at Geojit Financial Services.

Pilani Investment, an investment arm for the Birla group companies, holds stake in companies like Grasim, Hindalco, UltraTech Cement, and Century Textiles worth ₹22,580 crore while its market cap is ₹4,433 crore.

As per Sebi's framework, holding companies will be identified based on uniform industry classifications provided by stock exchanges. Criteria include that the stock should have been listed for at least one year, the stock should not be under suspension for trading, and the total assets of the company invested in stocks of other listed companies should be less than 50%, among other requirements. The stock exchanges will initiate the process with a 14-day advance notice to the market.

According to Damania of MojoPMS, most investment companies face liquidity challenges due to low float, which could raise concerns about the effectiveness of price discovery when the system launches in October 2024.