Shares of several holding companies soared by up to 20% on Monday, propelled by a significant regulatory announcement aimed at improving price discovery and liquidity. The Securities and Exchange Board of India (SEBI) has proposed the introduction of special call auctions for certain investment and holding companies, a move that has excited market participants.

Holding companies like Pilani Investment and Industries Corp., Kalyani Investment Co., and Nalwa Sons Investments, among others, saw their shares reach all-time highs following SEBI's announcement. These companies, which primarily hold investments in other listed entities and do not have day-to-day operational activities, often trade at a significant discount to their book values due to low trading volumes and limited liquidity.

On Thursday, SEBI announced a new initiative to address these issues by proposing special call auctions without price bands. This mechanism is designed to better align the market value of these companies' shares with their book value.

Nirav Karkera, head of research at Fisdom, commented on the development, stating that the new price discovery mechanism will help narrow the gap between the market value and the book value of holding companies. This, in turn, is expected to enhance the value of their listed shares. Karkera noted that the introduction of special call auctions is likely to increase participation in these shares, which have historically struggled with low float and liquidity issues.

"Previously, low float was a challenge for these companies, but it has now become a driving force for price increases. Investors are eagerly purchasing these shares ahead of the first special call auction, leading many to hit their upper circuit limit today," Karkera added.

SEBI's circular, issued on June 20, highlighted that certain investment companies (ICs) and investment holding companies (IHCs) often trade infrequently and at prices significantly below their disclosed book values. This disparity negatively affects liquidity, fair price discovery, and investor interest. To remedy this, SEBI has decided to implement a framework for special call auctions with no price bands, aimed at effective price discovery.

Kranthi Bathini, director of equity strategy at WealthMills Securities, indicated that investors are buying shares of holding companies in anticipation of the first special call auction set for October. Bathini views the new framework as a positive step but stressed the importance of clear criteria for auction eligibility.

The circular specifies that to qualify for the special call auction, ICs and IHCs must meet certain criteria: they must be classified under a uniform industry classification, have their shares listed and traded for at least a year without suspension, allocate at least 50% of their assets to shares of other listed companies, and have a six-month volume-weighted average price (VWAP) of their shares below 50% of their book value per share based on investments in listed companies.

This move by SEBI is expected to significantly boost the visibility and valuation of holding companies, benefiting investors and enhancing market efficiency.