BS READS: Why is illiquid Elcid Investments stock so valuable off-market?

Elcid's stock has changed hands only 31 times on the bourses in 9 years and trades at Rs 11.03, but few want to sell, as they assume its intrinsic value in lakhs. Jyotindra Dubey explains why

Elcid Investments is a highly illiquid stock with hardly any trades -- the share has changed hands only 31 times since July 2011--on the exchange. The Mumbai-based company is currently trading at Rs 11.03 a share on the BSE, with a market capitalisation of merely Rs 20 lakh. Prima facie, it looks like a dud penny stock, with no investor willing to take a punt on.

Are there no buyers for the stock? There are, but the sellers as unwilling to give it up as the intrinsic value of the stock is estimated to be a staggering Rs 4,00,000 a share—nowhere close to its current market price.

Due to the lack of liquidity in the stock exchange trades, various investors moved to off-market transactions in pursuit of a better value. This is where Elcid commands a huge premium over its current market, trading in the range of Rs 70,000-80,000 a share.

Minority shareholders have now approached Bombay High Court and want SEBI and BSE to intervene to ensure fair value discovery and exit options.

Why are investors pegging such a high valuation for a penny stock?

Blue chip

Elcid Investments is the holding company of Arvind Vakil--one of the four founders of Asian Paints, India’s largest paints company--and his family. Elcid, along with its two wholly-owned subsidiaries, holds 4.23 per cent stake in the blue-chip stock as on June 2020—currently worth almost Rs 7,000 crore.

Adding the other stocks and mutual fund assets owned by Elcid, the total net asset value of the company comes out to around Rs 8,000 crore.

Incorporated in December 1981, Elcid was listed on BSE in the following year in July, three months ahead of Asian Paint’s IPO. The company has 200,000 outstanding shares with a net asset value of Rs 4,00,000 per share.

The promoters—the Vakil family—own a stake of about 75 per cent, and minority shareholders the rest.

The promoters held around 80 per cent stake in the company until December 2012, and were compelled reduce it by June 2013 to comply with SEBI's new norms which stated that all privately promoted companies were required to have a public shareholding of at least 25 per cent.

To avoid increasing its public shareholding, the promoters of Elcid decided to go for delisting the stock from the exchange. In February 2013, the company came up with its first delisting offer for the entire public shareholding of 40,750 shares or 20.38 per cent stake, offering Rs 11,455 per share. However, minority shareholders rejected the offer price and surrendered only 16,500 shares.

Even though the offer price was at a huge premium to the trading price of around Rs 3 per share, the net asset value of the company’s stake in Asian Paints was over Rs 2,000 crore then, or Rs 100,000 a share. Hence, the delisting didn’t go through.

After the failed delisting attempt, the promoters came up with an open offer to dilute 4.75 per cent of their holding or 9,500 shares at Rs 5,000 apiece for the public in May 2013.

Since the shares were on offer at a huge discount to the intrinsic value, the offer for sale was fully subscribed. But the investors who bought shares at Rs 5,000 seven years ago are now stuck with a trading price of around Rs 11 per share, almost a 100 per cent loss.

“Shareholders who can’t hold the investments any longer are exploring the off-market route to make an exit, where the share is commanding a price of Rs 60,000-80,000, which is still lower than the fair value. But even in the off-market, very few deals take place as it is hard to find sellers,” said Altaf Siddiqui, MD & CEO of Enrich Advisors, a Mumbai-based firm dealing in unlisted shares.

Company long-timers also bought Elcid shares at a high premium to the market price.

In February 2018, Mahesh Dalal, an independent director at Elcid, along with his wife and daughter, bought 500 shares of the company in off-market transactions for Rs 20,000-22,000 per share, according to the company’s stock exchange filings. This was when the share price on the exchange was still hovering around Rs 5 a share.

In February this year, another independent director in the company, Ketan Kapadia, bought 200 shares in an off-market deal at a rate of Rs 35,000 per share, as disclosed in the company’s filing with BSE.

Dividend in, dividend out

Elcid Investments has no operations other than holding a portion of the Vakil family’s stake in Asian Paints and other stocks. Over 98 per cent of its income is dividend income. Elcid recorded a consolidated income of Rs 40.32 crore, during 2018-19, of which Rs 39.4 crore was dividend income. The company posted a net profit of Rs 38.36 crore in the same period.

The company has been regularly paying dividends to its shareholders at least since 2002, BSE data shows. In 2018-19, the company announced a dividend of Rs. 15 a share--much higher than the market price of the stock--and, a total dividend payout of Rs. 30 crore, or 78 per cent of the company’s net profit generated during the year.

While Asian Paints is the most valued stake held by Elcid, it also holds minority stakes in over 100 listed companies, such as Berger Paints, Reliance Industries, Indian Hotels, ITC, and State Bank of India. Elcid has also invested in mutual fund schemes and venture capital funds. It holds 1,200 shares in One97 Communications, the holding company of PayTM.

Elcid has two wholly-owned subsidiaries registered as NBFCs: Murahar Investments and Trading Company, and Suptaswar Investments and Trading Company. Both companies have similar operations, i.e. holding equity investments, which are mostly Asian Paints stocks, mutual funds and investments in VC funds. Dividends from Asian Paints are the main source of income for both subsidiaries.

Elcid also has a few cross holdings in Asian Paints through some of the unlisted firms. For instance, it owns a stake in Lambodar Investments and Trading Company, which in turn holds 0.63 per cent in Asian Paints.

Is net asset value equal to fair value?

Since Elcid has no other business other than holdings stocks and its main source of income is dividend income, its fair value can only be derived from the underlying assets worth Rs 8,000 crore or Rs 4 lakh per share.

Though net asset value does not give the exact fair value of a listed share, such a vast gap between the net asset value and trading price indicates that the share is not trading at a fair value.

For instance, even if we consider the book value of the investments—Rs 295 crore—it comes to about Rs 14,700 per share, showing that the discrepancy with the current trading price still exists.

“Elcid is a holding company and there exists a ‘holding company discount’. Holding companies are often quoted at a discount to their intrinsic values. This discount in India is usually in the range of 30-50 per cent. Even if we consider a larger discount of around 90 per cent, fair value still comes out to be around Rs 40,000 per share for Elcid,” said Siddiqui.

July 1982	Elcid Investments gets listed on BSE
October 1982	Asian Paints, the investee company of Elcid Investments, gets listed
February 2013	Elcid Investments floats a de-listing offer at Rs 11,455 per share
March 2013	Minority shareholders reject de-listing offer
May 2013	Elcid Investments comes up with offer for sale at Rs 5,000 a share
November 2018	3A Capital files a writ petition with Bombay High Court to get a fair price discovery for Elcid Investment shares
March 2019	Bombay High Court admits writ petition filed by 3A Capital
August 2019	Sebi responds to Bombay High Court on 3A Capital's writ petition

 

No legal remedy yet

Minority shareholders at Elcid Investments have now approached Bombay High Court to get fair value price discovery. 3A Capital Services, a Mumbai brokerage firm, had filed a writ petition in Bombay High Court urging SEBI and BSE to intervene. 3A Capital Services held 5.5 per cent in Elcid Investments as on June 30, 2020, making it the largest public shareholder in the company.

"We had gone to the Bombay High Court when we failed to get any response from Sebi even after several correspondences with them. The current market price of Elcid is stuck at an artificially low level and no shareholder is willing to sell their stake at this price," said Rajan Shah, founder and managing director at 3A Capital Services.

"The stock is currently under 5 per cent circuit filter, and even if a few trades happen at the current market price, it gets locked in the upper circuit. By this process, it is going to take a decade to reach fair value and many investors will be booking losses on their investments," he said.

"The stock exchange and Sebi need to intervene and derive some mechanism to overcome this anomaly. Interestingly, even some of the directors in the company are buying shares at a premium to its trading price, which makes it evident that the current market price is not the fair value of the stock," said Shailesh Saraf, a minority shareholder in Elcid.

The petition suggested various ways by which a better price discovery can take place. One such was placing the stock under the 'call auction' mechanism. A call option session is currently applicable to new listings via IPO, or for stock which gets re-listed after a ban, amalgamation etc. These stocks are put under call auction on the first day of trading, and once the price is discovered, it is set to regular trading.

The petition has been accepted by the Bombay High Court, which asked BSE and SEBI to respond.

BSE, in its response, had said that it submitted a proposal to SEBI to consider cases such as Elcid for call auction mechanism, where the company has done an offer for sale or a QIB at a price significantly higher than its market price. This can help in re-rating the base price of these securities.

It further stated that the matter is under discussion in the relevant advisory committee at Sebi and BSE will be guided by directions from Sebi in this matter.

SEBI responded to the high court that there is no provision for revising the price of a security based on the floor price set by a de-listing offer or off-market transactions.

It also said the secondary markets advisory committee (SMAC). SMAC, while looking into this matter, had said that any policy changes should be for the interest of investors at large and not a particular entity. “Sebi is not bound to alter the policy for and towards the benefit of a single individual, which may have wide-scale implications in the securities market,” the Sebi response said.

SMAC also recommended studying global practices to understand alternative approaches in place to deal with such cases.

“There are various such holding companies, for some historic reasons, are listed on stock exchanges. In such cases, the shareholding is not all diverse. Even though the promoters claim that they hold only 75 per cent stake as per Sebi guidelines, they hold a lot more shares indirectly through friends and family, who are counted as public shareholders. So a fair price discovery in such cases is very difficult,” says Shriram Subramanian, founder and managing director of InGovern Research Services, a Bengaluru-based proxy advisory firm.

“Earlier this year [in March], Sebi floated a discussion paper regarding listed holding companies. The discussion paper has listed two options--either merge the holding company with the underlying listed company or de-list the holding company to provide an exit to the public shareholders. In both these options, the onus is more on the promoters than anybody else to give an exit to the minority shareholders,” he adds.

Email queries sent to Elcid Investments did not elicit any response till the time of publishing this report.

The matter is sub-judice, and the decision of Bombay High court is pending. Until then, the illiquid stock would continue to command a disproportionately high value in the grey market, yet at a massive discount to its estimated fair value.