SEBI's Initiative to Boost Price Discovery for Listed Investment Firms

SEBI's Proposed Framework for Undervalued Companies - Enhancing Price Discovery for Listed Investment Firms
SEBI's Initiative to Boost Price Discovery for Listed Investment Firms

The Securities and Exchange Board of India (SEBI) has introduced a framework aimed at enhancing the price discovery process for shares of listed Investment Companies (ICs) and Investment Holding Companies (IHCs) that are currently trading at a substantial discount to their book value.

Proposed Special Call-Auction Mechanism:

  • SEBI has put forth the suggestion of implementing a special call-auction mechanism devoid of price bands specifically tailored for listed ICs and IHCs whose shares are experiencing a significant discount to their book value.
  • This mechanism is envisioned as a yearly event for eligible companies and would be facilitated through coordination among stock exchanges.
  • Notably, the call-auction would be conducted without any price bands, thereby allowing for a more dynamic price discovery process.

Key Points of the Proposal:

  • The primary objective of this initiative is to bolster liquidity and ensure fair price discovery for the shares of these entities.
  • Eligibility for participation in the call-auction is contingent upon certain criteria, including the requirement of over 50% assets invested in other listed firms and a 6-month Volume-Weighted Average Price (VWAP) that falls below 50% of the book value.
  • A successful auction would be determined by the participation of at least five unique buyers or sellers.
  • Analysis suggests that out of the 70 ICs/IHCs under consideration, 28 could potentially meet the proposed eligibility criteria.

Rationale Behind the Proposal:

  • SEBI's proposal is underpinned by the recognition that the existing disparity between market price and book value negatively impacts liquidity, fair price discovery, and investor interest in these companies.
  • Market observations and presentations received by SEBI indicate a consensus among stakeholders that unrestricted price discovery is crucial for rectifying the existing discrepancies, as the current circuit filters hinder the market prices from accurately reflecting the true investment value.

Current Market Scenario:

  • Currently, shares of certain listed ICs and IHCs are traded sporadically at prices significantly lower than their disclosed book value.
  • These companies typically operate with minimal day-to-day activities and primarily hold investments, including shares of other listed entities.
  • Despite the substantial value of their investments, the market value of ICs or IHCs can deviate significantly from their book value, potentially attributed to fluctuations in the value of investments in other listed companies.
  • The proposal endeavors to mitigate liquidity challenges and foster fair price discovery for these entities.

By implementing this framework, SEBI aims to address the prevailing liquidity concerns and facilitate a more transparent and efficient pricing mechanism for listed Investment Companies and Investment Holding Companies.

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