Share price surge after SEBI's special auction plan on valuation methodology of holding companies such as NCL Holdings.

03 July 2024

Holding companies typically don’t do much; they are like landlords from back in the day. They don’t run a business or produce anything themselves. Instead, their main job is to own parts of other companies. They can own entire companies or just parts (partial ownership), but typically they don’t engage in other business activities. Their main task is to manage these investments. For the longest time, investors didn’t care much for these companies; they were outcasts. However, last week, suddenly everybody was taking an interest in these stocks.

For Example, Bajaj Holdings, as a holding company, primarily earns its income through dividends received from its subsidiaries. When the subsidiaries distribute dividends to Bajaj Holdings, they are required to withhold a certain percentage of the dividends as a withholding tax before distribution. The withholding tax rate for domestic shareholders is typically 10%. The dividend income received by Bajaj Holdings is then included in its total income for the financial year and is subject to corporate tax unless it is distributed to its shareholders.

Given this structure, investors may wonder why they would choose to buy the holding company with its complex and opaque system instead of purchasing the stocks of the individual subsidiaries. This lack of investor interest results in low valuations and poor liquidity for holding company stocks. Even existing investors struggle to sell their holdings when needed.

Recognizing this issue, the Securities and Exchange Board of India (SEBI) intervened. SEBI observed that holding companies were trading at very low prices on the stock market, which it deemed unfair. To address this, SEBI proposed special call auctions for holding company stocks. These call auctions, set to take place once a year starting in October, aim to establish new prices for these stocks and improve their liquidity. During a call auction, investors can place buy or sell orders for these stocks within specific time intervals on a designated day. SEBI has set specific criteria for holding companies to qualify for inclusion in these special call auctions, intending to gradually improve the trading prices for these stocks.