Sebi proposal to have separate delisting framework puts shine on holdcos

Typically, holdocs trade at a discount of 40-70% to their intrinsic value due to multiple factors such as dividend taxation, complex structures and lack of control

The Securities and Exchange Board of India’s (Sebi’s) proposal to have a separate delisting framework for investment holding companies (holdcos) could help narrow the discount that these companies trade at to their intrinsic value, said experts.

However, the proposed framework could prove to be tedious and would involve multiple approvals, they added.

In a consultation paper floated on Monday, Sebi has for the first time proposed an altogether new approach for delisting of holdcos.

Typically, holdocs trade at a discount of 40-70 per cent to their intrinsic value due to multiple factors such as dividend taxation, complex structures and lack of control.

 

“The shares of an investment holdcos (IHC) tend to trade at a discount compared to the underlying value of the investments of the IHC. One of the primary reasons is that investments of the promoters and members of the promoter group in IHCs are long term investments. The market does not expect the sale of such shares,” said a paper by Sebi. 

Under the proposed new delisting framework, a holdco can transfer underlying shares in other listed companies to its public shareholders or make cash payments to public shareholders of the exchange for the underlying shares or other assets.

Further, it can extinguish public shareholding by selective reduction of capital under Section 66 of the Companies Act, 2013, upon transfer of underlying shares.

“The holdco discount in India is very wide due to the regulatory and taxation environment. Globally, holdcos trade at 10-25 per cent discount. If the delisting framework is eased, some promoters would like to liquidate the investments in order to unlock value. Once there is more clarity on the framework, we could see the holdco discounts narrow,” said an analyst.

Shares of leading holdcos outperformed during Wednesday’s trade.

At present, the biggest holdco, in terms of market value, is Bajaj Holdings & Investment, which holds shares in other listed firms such as Bajaj Auto and Bajaj Finserv. Tata group holdco Tata Investment Corp holds shares of Trent, Tata Chemicals and Tata Consumer. Bajaj Holdings and Tata Investment trade at a discount of around 55 per cent and 70 per cent, respectively.

Experts said while the proposed framework is much more lenient compared to the existing reverse book-building method, it has its own checks and balances.

A Sebi expert panel has proposed that the new mechanism will only be available to listed companies having at least 75 per cent of their holdings in listed companies.

Also, the delisting resolution would require two ‘for’ votes from public shareholders for every one against’ votes.

The capital reduction scheme would be subject to the approval of the National Company Law Tribunal (NCLT) and the minority shareholders will have the right to raise any objections.

“The new delisting proposal aims to provide better price protection to retail investors by avoiding the holding company discount. However, the process of reduction of share capital could throw more spanners in the wheel and make the retail investors lose on time value of money,” said Nishant Singh, partner, Luthra and Luthra Law Offices India.

The paper floated by Sebi will be open to public comments until September 4. Based on the market feedback, the regulator may take up the final proposal to its board.

“This is probably the biggest change ever in the delisting framework,” said Manshoor Nazki, partner, IndusLaw.
 

He added, “However, the norms do not cover investment holding companies, which would have less than 75 per cent exposure in listed companies. The threshold seems to be on the higher side.”