SEBI proposes call auction for investment and holding companies

In response to concerns raised by industry representatives regarding fair-price discovery for certain listed investment companies (ICs) and investment holding companies (IHCs), the Securities and Exchange Board of India (SEBI) has put forth a proposal for implementing a call auction system.

The proposal aims to address issues arising from the current circuit filters which are seen as hindering fair-price discovery for these shares. According to SEBI's consultation paper dated April 18, the call auction could be implemented for ICs and IHCs meeting certain criteria, including industry classification, at least one year of listing, compliance with listing regulations, and having at least 50 percent of total assets invested in shares of other listed companies.

SEBI also suggests that companies eligible for the call auction must have a six-month volume-weighted average price (VWAP) less than 50 percent of their book value, among other conditions.

The consultation paper highlights that shares of ICs and IHCs are trading at a significant discount to their book value, which is affecting liquidity, fair price discovery, and overall investor interest. SEBI proposes a framework to correct this disparity.

Currently, shares of some listed ICs or IHCs are traded infrequently at prices significantly lower than their disclosed book value. These companies typically have no day-to-day operations and primarily hold investments in various asset classes, including shares of other listed companies.

The paper notes a significant variance between the market value and book value of ICs or IHCs, despite holding high-value investments in shares of other listed companies. This variance is negatively impacting liquidity and fair price discovery.

Regarding the impact of circuit breakers on fair-price discovery, SEBI stated that price bands were introduced as risk-management and surveillance measures to ensure orderly trading and appropriate price discovery.

Once ICs and IHCs are identified for the call auction, stock exchanges will initiate the process with a seven-day prior notice, subject to conditions outlined in the consultation paper.

The proposed call auction system is intended to enhance fair-price discovery for shares of investment and holding companies, addressing concerns raised by market participants regarding liquidity and pricing disparities.