Sebi to Enhance Price Discovery for Firms Trading Below Book Value

In a significant move aimed at enhancing the price discovery process for shares of Investment Companies (ICs) and Investment Holding Companies (IHCs), the Securities and Exchange Board of India (Sebi) introduced a new proposal on Friday. This initiative seeks to address the issue of shares of certain ICs and IHCs trading at a substantial discount to their book value, which has been a concern for market liquidity, fair price discovery, and investor interest.

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According to Sebi's consultation paper, the proposed framework includes a special call-auction mechanism without a price band for listed ICs and IHCs experiencing a notable disparity between their market price and book value. This discrepancy is believed to affect the liquidity of these shares adversely, as circuit filters currently in place can prevent market prices from accurately reflecting the true investment value of these entities.

ICs and IHCs, which often lack day-to-day operations and primarily hold investments in other listed companies, can see their market value significantly diverge from their book value. This divergence is attributed to the growth in investments in shares of other listed entities, potentially leading to high valuations. Sebi's proposal aims to facilitate unrestricted price discovery for such companies by allowing them to undergo a special call-auction process once annually.

The regulator has called for public comments on this proposal until May 10. The criteria for identifying ICs or IHCs eligible for this special auction include being listed for at least a year, having at least 50 percent of their assets in shares of other listed companies, and having a 6-month average volume weighted average price (VWAP) less than 50 percent of the book value or the pro-rata book value based on their investments.

Once identified, stock exchanges will initiate the special call-auction process for eligible companies with a 7-day notice period. The auction will be deemed successful if it attracts participation from at least five unique buyers and sellers. If the initial session does not meet this criterion, the auction will continue until a successful price discovery is achieved. The sessions' duration and risk management protocols will align with those used for IPOs and relisted shares.

Out of approximately 70 listed ICs or IHCs, 28 companies have more than 25 percent of their assets invested in shares of other listed companies. Among these, 16 have seen their six-month average VWAP from October 1, 2023, to March 31, 2024, trade at a discount to their book value, as per the latest information available as of September 30, 2023. This proposal by Sebi could potentially rectify the pricing discrepancies faced by these entities and improve investor confidence in their market valuation.