Undiscovered Share Value: Riddle Wrapped in an Enigma!
This is more of a narration of a personal nature and those hard pressed for time may turn to something more worthwhile. 
Having made many dubious investments in the initial public offerings (IPOs) of the 1980s, the talk in the early 1990s, post the 1991 blockbuster Budget, of the lone Big Bull of the times striding the Dalal street that smart investors should pick shares which are going at a discount to the underlying business value sounded like a great idea.
The Bull was championing the shares of a particular cement company and was using free funds from the biggest bank in the town to jack up share prices. The idea of applying a thumb rule dollar value per tonne of installed capacity of cement sounded too esoteric for someone investing out of his measly monthly earnings. 
I wanted to play a smarter and safer game and was looking for more transparent ways of discovering the underlying value. 
There was a particular investment company that owned shares in many top companies of the day and lo and behold! The market price of the company was at a huge discount to the cumulative market price of the underlying investments. 
Mutual funds were still a few years away and the only comparable investment was Unit 1964 which had the net asset value (NAV) concept imbedded. It was a puzzle why the underlying value was not getting reflected and I saluted the Bull who had championed this new doctrine that had escaped every one’s attention! 
It was no big deal buying the first 50 shares of the company as the concept of market lot still held sway when shares were traded in paper form. As the market moved up over time, definitely not at the blinding speed seen nowadays, an intriguing picture emerged. 
The gap between the market price and underlying value kept increasing both in absolute terms and in percentage terms. 
For example, when I made the first investment at Rs60 when the underlying value was Rs100, as the market went up and if the underlying value moved to Rs200 the share price of this company moved to say, a maximum of Rs120 and often lower than that. The initial so-called gap in valuation, which was (100-60) 40 started enlarging to much higher numbers. 
Psychologically, the phenomenon induces one to buy rather than sell as there is perceived higher opportunity loss on selling at any time, but a higher opportunity to profit in future! 
I kept adding in 50s and 100s and found that the appointed time never came when wisdom would dawn on the market to bridge the gap and help me book my elusive profits! 
The company being highly pedigreed and distributing handsome dividends, I felt waiting for the right day should not make me regret. But it is yet to arrive as some of my early investments would soon be celebrating the 30th anniversary in my portfolio! 
I pat myself on the back for having shared a very novel and bright idea with the then chairman of the company that, at the interval of every five years, they should physically distribute a portion of their holdings to the shareholders of the company. 
Quite likely the security guard must have read my letter and put it in the nearest waste paper basket!
The later years saw more such investment companies emerge because of the phenomenon of many of the old conglomerates splitting the core manufacturing business and sundry group investments to placate either feuding family members or the more demanding foreign mutual funds that dislike mixing up of multiple businesses in a single entity. 
The Bajaj group was one such earlier case of separation of investments from other businesses, and their investment companies holding only their group investments are listed on the exchange; many smaller ones followed for the right and wrong reasons. All these companies quote at a significant discount to the value of the underlying investments. 
If this is the predicament in the all-knowing share market, where the best brains are supposed to be engaged in price discovery, where is the hope to get the right price if one holds shares in an unlisted private company, with stifling clauses in the articles of association, though holding investments in prized companies quoting at phenomenal prices?
The curse of ‘holding company discount’ an inscrutable doctrine that all valuers across the globe feel bound by, is the one to blame. This unique doctrine straddles all cultures, castes, creed, and languages! 
Just as the hero of the Shakespearean tale ‘Macbeth’ exclaimed “All the perfumes of Arabia cannot sweeten this hand;” all the valuers of the world, if brought together, cannot unshackle this shibboleth. So little difference the number of valuers can make, to the outcome. 
In conclusion whether one holds 1,800 shares of Tata Investments Ltd or 18% of Tata Sons P Ltd, the grief is the same! 
As the underlying value keeps increasing, the grief will be greater and neither Cyrus Mistry nor I will ever come out of this spell of the undiscovered value!!   
Should one fantasise that a business (man)-friendly government would find a legal fix for this riddle wrapped in an enigma! 
(The author is a CA and CS and retired as a partner at EY, Chennai heading tax and regulatory advice.) 
1 year ago
From big bull days to the current sad state of Cyrus Mistry, (he must be shocked by the mystery of the SC judge ment which denied his claim for the Executive Chairman which he himself declined and as this author ruminated forgot about the valuation of Tata Sons), the author has let a free rein of his wry/dry humour in such a short article. Mistry was in fact holding charge of the mystery Holding Company!

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