In today’s Finshots, we tell you how a new scheme by the SEBI could benefit stock prices of holding companies.

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The Story

Holding companies!

Typically they don’t do much. They are like landlords (Zamindars) from back in the day. They don’t run a business. And they don’t 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.

And some of these companies are actually listed. Meaning you can buy them yourself.

But for the longest time, investors didn’t care much for these companies. They were outcasts.

Until something changes. Last week, suddenly everybody was taking an interest in these stocks. And that's what we are going to discuss today.

But before that, you need to understand these companies a little bit better.

Consider Bajaj Holdings. It has a market capitalisation of ₹96,000 crores. This makes it the largest listed holding company in India. But here’s the catch. According to the latest annual report, Bajaj Holdings owns 36% of Bajaj Auto, 41% of Bajaj Finserv, and 51% of Maharashtra Scooters — their top 3 subsidiaries. And since all these companies are listed, you can calculate what the actual stake is worth considering their market capitalisation. We won’t bore you with the math, but it adds up to well over ₹2 lakh crores.

So technically speaking, Bajaj Holdings trades at a 50% discount to what it’s actually worth.

Why does this happen?

Well, despite what they own (and no doubt, it’s worth a lot), Bajaj Holdings doesn’t have a real business of its own. It makes money through its subsidiaries. It’s only when the subsidiary does well that a holding company can do well. And it gets paid when the subsidiaries pay out a share of their profits in the form of dividends.

Now, this translates into two things.

One, investors value the stock based on its future earnings. Simply put, they see what the stock is worth today, based on projections of how much money the holding company will generate in the future. And since holding companies have very few revenue sources, they end up being valued at much lower than what they could be actually worth if you considered the assets or the subsidiaries they’ve invested in.

And two, investors also look at how much money they could earn off these stocks themselves.

Now a holding company makes most of its money from dividends. So when Bajaj Holdings receives dividends from its subsidiaries, the subsidiaries would deduct a withholding tax at the prescribed rate before distributing the dividends. The withholding tax rate for domestic shareholders is typically 10%. The dividend income received by Bajaj Holdings then would be included in its total income for the financial year. This will be further taxed at the applicable corporate tax rates unless they distribute it to their shareholders.

So if you are an investor who has the option of buying the subsidiaries directly, why would you buy the holding company with this opaque, inefficient structure? You’d just buy the individual stocks.

This is another reason why there is such poor investor interest in these companies. Nobody wants to hold “holding” company stocks, and it strips them of the real valuations they deserve. And even the few investors who own these stocks have very little chance of exiting their investments when they need to because nobody wants to buy them off of them.

To put it simply, there’s a liquidity issue—very few buyers and sellers.

And that’s exactly what caught SEBI’s (Securities and Exchange Board of India’s) attention. It noticed that holding companies were trading at very low prices on the stock market, which seemed unfair.

So, SEBI had an idea. They proposed special call auctions for these holding company stocks. This would help investors find new prices for these stocks and make it easier to buy and sell them.

What does this mean?

About ten years ago, SEBI introduced a system to help improve trading for stocks that don’t get traded much, while keeping their prices stable. During a call auction, the stock exchange opens a special time window on a specific day for investors to trade these stocks. Investors can place their buy or sell orders only during short intervals within this window.

It’s like a controlled trading environment where investors can discover new prices and also sell their investments if they want to. This helps improve liquidity, which means investors will feel more confident about investing in these stocks on regular trading days too.

Starting in October, this special call auction for holding company stocks will happen once a year. Stocks have to meet certain criteria set by SEBI to be included, but the goal is to help these holding companies gradually trade at better prices.

This they hope will concentrate most trading activity in a short interval and thereby help improve liquidity.

Will this finally give investors confidence to hold more holding stocks?

Well, we will have to wait and see. Until then…

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