Holdcos rally ahead of easing of delisting norms, investors lap up shares

Sebi board meeting on Saturday may introduce a separate framework for delisting norms for holdcos

Investors are eagerly acquiring shares of investment holding companies (holdcos) in anticipation of a potential relaxation of delisting norms. The Securities and Exchange Board of India (Sebi), in its board meeting scheduled for Saturday, is expected to streamline the delisting framework and introduce a distinct mechanism for the delisting of holdcos.

Shares of Tata Investment Corporation, Kalyani Investment Company, Summit Securities, and Pilani Investment and Industries Corporation have rallied between 15 per cent and 29 per cent in the past five trading sessions.

The shares of holdcos, which maintain stakes in various other group firms, have already been thriving this year amid a sharp rally in the broader markets, showcasing gains ranging between 60 per cent and 100 per cent for the calendar year.

However, the recent upturn in some counters closely follows comments made by Sebi Chairperson Madhabi Puri Buch last week.

“There was a popular belief that we would never review the delisting regulations and that we would stick with the reverse book-building process. A consultation paper has already been circulated, and Sebi has received a lot of feedback. In the next board meeting, we will present that proposal to our board,” she said.

According to the consultation paper floated in August, the market regulator has proposed the transfer of underlying shares held by holdcos in other listed companies to the public shareholders in proportion to their shareholding.

For unlisted companies where the holdco has investments and for other assets held by it, Sebi has proposed cash payments to the public shareholders.

“Delisting is a complex and lengthy process. Sebi’s proposal does permit promoters to delist and hold shares directly in companies they would otherwise control through holdcos,” said Ketan Dalal, managing director, Katalyst Advisors.

However, experts note that taking holdcos private may not be as straightforward and would necessitate changes to other regulations as well.

“While, in principle, this would be beneficial to the minority shareholders and would also enable the investment holding company to get delisted, it will require regulatory changes, both under the Companies Act and the Income-Tax Act to make it workable,” said Dalal.

“The Companies Act does not permit the distribution of dividends in kind, which the distribution of shares might amount to unless an amendment or clarification is permitting this. Also, the distribution could have deemed dividend and capital gains implications for the shareholders, which will also need to be addressed holistically to make this proposal workable,” he added.

Furthermore, Sebi has indicated that the alternative mechanism to reverse book building will be available only to those listed holdcos that have at least 75 per cent of their total value comprising investments in other listed companies.

Due to factors such as dividend taxation, complex structures, and lack of control, these holdcos usually trade at a discount of 40-70 per cent to their intrinsic value. This discount in the domestic markets is higher compared to some global markets.

Also, the delisting resolution would require two times ‘for’ votes from the public shareholders than ‘against’ votes. Additionally, the capital reduction scheme would be subject to the approval of the National Company Law Tribunal, and minority shareholders will have the right to raise any objections.

Moreover, the holdco would be required to make disclosures regarding the calculation of the entitlement ratio, per-share consideration, valuation report, and confirmation of the entitlement ratio from a chartered accountant or merchant banker.

The biggest holdcos in terms of market value belong to the Bajaj, Tata, and Wadia groups.

Bajaj Holdings & Investment, with a market capitalisation of Rs 82,000 crore, holds shares in Bajaj Auto and Bajaj Finserv. Meanwhile, Tata Group holdco Tata Investment Corporation, valued at over Rs 21,000 crore, holds shares of Trent, Tata Chemicals, and Tata Motors.