Avoid Stocks Of Holding Companies

Historical data shows that holding company shares might not be good for minority shareholders as the market traditionally values holding companies — an entity that controls a clutch of businesses — at a discount to their book value.

ET looked at valuations of nine holding companies listed on Indian stock exchanges. Specifically, they looked at one metric: the price-to-book value ratio. Book value is the total value of a company’s assets less intangible assets (like trademark or intellectual property) and liabilities. For seven of these nine holding companies, this ratio was less than 1, indicating under-valuation. The average discount-to-book value was 40%, and ranged from 4% (EID Parry) to 93% (UB Holdings). Aditya Birla Nuvo and Tata Investment Corporation were the two exceptions (See table). 

There are three reasons for a ‘holding company discount’. The first reason could be double incidence of dividend tax in certain cases. Say, a holding company (H) holds a stake in subsidiary (S). When S declares a dividend, it will pay 15% (plus surcharge of 5% and education cess of 2%) as dividend distribution tax and distribute the rest. Some of this dividend would flow to H. If H subsequently declares a dividend, it will also have to pay dividend tax. With one exception: if H holds more than 51% in S, it can claim the dividend it receives from S as a deduction while paying dividend tax.

The second reason could be “selective acquisition of cash flow” by the holding company, without considering interests of minority shareholders, as has happened in the two-stage, Holcim-Ambuja Cements deal valued at . 11,740 crore. In the first stage, Ambuja Cements will acquire 24% in Holcim India , the current holding company for the Swiss parent’s operation in India, for 3,500 crore. In other words, Ambuja would end up giving 92% of its cash in the process. Then, in the second stage, Holcim India would be merged with Ambuja Cements. At present, Holcim has 50.01% stake in ACC, which would be transferred to Ambuja Cements finally. So the promoter is able to selectively take out cash without giving a similar opportunity to minority shareholders,

The third reason for a ‘holding company discount’ enables promoters to use mergers and demergers as a tool to shift profits to themselves.Promoters create a mezzanine structure, which keeps changing based on changes in the regulatory environment, and shift profits to the promoter holding company.