The Framework SEBI Is Proposing for Undervalued Companies

Published : 22 April 2024
Updated : 24 May 2024
The Framework SEBI Is Proposing for Undervalued Companies

The Securities and Exchange Board (SEBI) of India proposed a structure for price discovery of listed Investment Companies and Investment Holding Companies whose market price is currently trading at an unacceptable discount to their book value. 

Special Call-Auction Mechanism Suggested 

1. A unique call-auction procedure without price bands has been proposed by SEBI for listed ICs and IHCs whose shares are selling at a significant discount to book value.

2. The regulator has suggested that stock exchanges work together to offer qualifying companies this tool once a year.

3. For investment holding companies (IHCs) and listed investment companies (ICs) whose shares are trading at an important discount to book value, SEBI has proposed a special call-auction.

Important Points 

1. Unique yearly call auction with no price bands 

2. To increase fair price discovery and liquidity 

3. Eligibility: Assets held in other listed companies exceeding 50%, and a 6-month VWAP less than 50% of book value 

4. 28 of the 70 ICs and IHCs that meet the suggested eligibility requirements 

Justification For The Proposal 

The large mismatch between these companies' market and book values, according to some market viewers, has an adverse impact on investor interest, fair price discovery, and liquidity. Since the current circuit filters prevent market prices from reflecting the genuine investment value, leading to large deviations from book value and limited liquidity, market participants have presented to SEBI with suggestions for open price discovery for these shares.

Current Situation

At the moment, shares of a few listed ICs and IHCs are sometimes traded for considerably less than their reported book value. These businesses usually don't have regular business operations; instead, their main focus is on investments, such as stocks in other publicly traded companies.

Even with high-value holdings, an IC or IHC's market worth may be much less than its book value, maybe as a result of increasing investments in other publicly traded firms. Enhancing fair price discovery for such companies and addressing liquidity concerns are the goals of the plan.