Explained: Why shares of Holding companies like Bombay Burmah, Bajaj Holdings rose up to 20%

Shares of holding company stocks like Bombay Burmah, Bajaj Holdings, Pilani Investments and others are trading with gains of up to 20% on Monday.

The move comes after market regulator SEBI, announced a framework for special call auctions with no price bands for price discovery of such companies.

SEBI noted in its circular that most of these companies are traded infrequently and at a price significantly lower than the book value, which is generally a measure of the company's equity. Holding companies generally do not have operations of their own but they own investments in other listed entities, particularly within the same group.

"The variance in market price and book value of such Holding Companies is adversely affecting liquidity, fair price discovery and the overall interest of investors in scrips of such companies," the SEBI circular said.

How will these holding companies be classified?

• These stocks should be listed and available for trading for at least one year and not suspended for trading.
• Assets invested in scrips of other listed companies should be at least 50%.
• Six-month Volume Weighted Average Price (VWAP) of such stocks shall be less than 50% of the book value per share based on the present value of their investments in shares of other listed companies.
• In case such stocks are not traded in the last six months, the six-month VWAP will be considered zero.

For example, a company has a book value based on investments in other listed companies as ₹10 crore and total outstanding shares are 1 crore. Therefore, the book value per share is ₹10. The six-month VWAP is ₹3, which is less than 50% of the book value based on investments in other companies. Therefore, the said company will meet the eligibility criteria for the special call auction.

If the eligibility criteria is not fulfilled, the company will not be eligible for the Special Call Auction.

The Procedure

• Stock exchanges will initiate the process of the call-auction with no price band for holding companies with a 14-day advance notice.
• Notice will be disclosed by the exchanges on their website to bring it to the knowledge of the investors.
• The call auction will be treated successful, if the price discovery is based on orders from at least five PAN numbers, is based on orders from at least five PAN.
• If the Call auction is not successful on the first day it will continue on the next day till a price is discovered.
• The Special Call Auction mechanism will be conducted only once a year.

The first such Special Call Auction will take place in October 2024 based on the latest available audited financial information of such companies. Subsequent Call auctions will be done as and when the annual audited financial statements are published.

Shares of Vardhman Holdings, Kalyani Investments are locked in a 20% upper circuit, while the others are trading with gains between 5% to 20%.