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The recent surge in Elcid Investments' share price, reaching a staggering 6.7 million percent, has captivated the Indian financial market. This dramatic increase followed a special call auction conducted for the stock, which had previously been languishing at a low price, trading at a significant discount to its book value. The auction, conducted without any price bands, allowed the share price to rise to Rs 2,36,250 apiece, surpassing MRF as the highest-priced stock in India in absolute terms.
The explanation behind Elcid Investments' historical undervaluation lies in its status as a holding company, whose main source of revenue stems from interest and dividends earned on its substantial investment portfolio. Holding companies often trade at significant discounts to their fair value, and Elcid was no exception. This undervaluation, coupled with price-band restrictions, led to limited market liquidity and a gap between the share price and its true value, as explained by Raj Gaikar, Research Analyst at SAMCO Securities.
The catalyst for the recent surge was a new framework introduced by SEBI in 2024 aimed at improving the price discovery process for investment companies (ICs) and investment holding companies (IHCs). Recognizing that many of these companies were trading significantly below their book value, SEBI implemented a mechanism for “special call auctions with no price bands.” These auctions, designed to enhance liquidity and fair price discovery, have spurred interest in stocks of such companies, leading to a noticeable shift in the market.
Despite the significant increase, Elcid Investments still trades at a price-to-book multiple of just 0.38. While other holding companies typically trade at discounts to their book values, their valuations have been relatively less undervalued due to improved liquidity. The limited free float of Elcid Investments presents a challenge for accurate price discovery, highlighting the crucial role of trading volume in achieving a fair valuation.
The special call auction was also implemented for several other holding companies, including Pilani Investments, Kalyani Investments, TVS Holdings, and Maharashtra Scooters. While the share price of most of these companies did not experience significant movements, Mask Investment witnessed a 47 percent surge after previously trading at a discount to its book value. This suggests that the new framework has the potential to impact the valuations of various holding companies.
The special call auction mechanism, designed to facilitate price discovery for investment companies and holding companies, offers a glimpse into SEBI's ongoing efforts to enhance market transparency and liquidity. The success of this initiative remains to be seen, but the recent surge in Elcid Investments' share price underscores the potential impact of SEBI's efforts on the broader market.