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Investment companies and investment holding companies (ICs/IHCs) serve as crucial structures for establishing ownership and control within larger conglomerates. They typically hold investments in a mix of listed and unlisted entities but do not engage in any operating business themselves. This unique position makes the valuation of ICs/IHCs particularly complex and challenging.
Valuing ICs/IHCs involves assessing them as a sum of their parts, which includes both controlling and non-controlling interests across various sectors and companies with differing risk-return profiles. Some of these companies may perform exceptionally well, while others struggle to stay afloat.
The challenge lies in quantifying the value of exerting common control or significant influence over these diverse businesses—a task that is inherently difficult due to the subjective nature of such evaluations.
For public investors, the appeal of listed ICs/IHCs can vary. Those holding investments exclusively in unlisted companies might be attractive as they provide market access to otherwise unavailable assets.
Conversely, when ICs/IHCs have holdings in other listed entities, it might be more beneficial for investors to directly purchase shares in those operating companies, where evaluating financial performance, governance, and peer benchmarks is more straightforward and intuitive.
As a result, in the stock market, operating companies typically exhibit higher liquidity compared to investment companies and holding companies (ICs/IHCs). The latter offer an experience akin to investing in equity or hybrid mutual funds but without a publicly defined investment strategy or daily publication of net asset values (NAVs).
If mutual funds are comparable to a well-defined mini-tiffin platter or a thali curated based on popular choices, then owning ICs/IHC stocks is more like opting for a chef’s choice platter, where the dishes may not necessarily match the general palate.
Due to these factors, ICs/IHCs often attract fewer investors, which can impede efficient price discovery. At times, the market price of these entities might even fall below the book value, despite the underlying investments holding significant market value.
In response to challenges in valuing investment companies and holding companies (ICs/IHCs), the Securities and Exchange Board of India (Sebi) had floated a consultation paper on 19 April proposing a special call auction without price bands to enhance price discovery.
Price bands typically help control volatility and prevent market manipulation by limiting how much prices can fluctuate. Unlike continuous trading, a call auction accumulates orders over a specific period before executing them at an equilibrium price, rather than matching orders in real-time.
This special call auction would be conducted annually by stock exchanges, given a seven-day notice. It targets ICs/IHCs that have been listed for at least a year, are fully compliant with listing regulations, hold at least 50% of their total assets in shares of listed entities, and whose six-month volume-weighted average market price (VWAP) falls below 50% of their book value.
Exchanges are required to publicly disclose the book value and investment details of these companies. The newly discovered price will be accepted only if at least five different buyers and sellers participate in the auction, which will continue on subsequent days until a price is established. The conditions regarding the auction's duration, risk management, and the determination of the equilibrium price are expected to align with those used in the pre-open call auction for IPOs and relisted shares.
The paper notes that of the 70 listed ICs/IHCs, 28 have investments in other listed companies, and 16 of these have a six-month VWAP that is below their book value.
While this initiative is praised for potentially benefiting public investors by providing a more accurate reflection of ICs/IHCs’ market value, concerns arise about whether having only five unique participants and eliminating price bands could lead to market manipulation and collusion.
Moreover, the adequacy of conducting such an auction only once a year in ensuring price continuity also remains a question for further analysis.
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