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  • Context (IE): SEBI proposes to lay a framework for price discovery of shares of listed investment companies (ICs) and listed investment holding companies (IHCs).
  • Currently, shares of some listed ICs or IHCs are traded infrequently at prices significantly lower than their disclosed book value.
  • These companies typically have no day-to-day operations and primarily hold investments in various asset classes, including shares of other listed companies.
  • A special call-auction mechanism without price band may be enabled for listed ICs and IHCs, whose shares are trading beyond a certain discount to their book value.
    • The concept of price bands was implemented as a risk management and surveillance measure to ensure orderly trading, appropriate price discovery, and market integrity.

Book Value

  • Book value, also known as net asset value, is the value of an asset based on its balance sheet account balance.
  • Book value is calculated by taking the aggregate value of all its and assets deducting all the liabilities from it.
  • Assets include both current and fixed assets, and liabilities include both current liabilities and non-current liabilities.

Investment Companies (ICs)

  • ICs are companies that earn major revenue from interest and capital appreciation from investments. They do not include rental income, which is classified under diversified commercial services.
  • Investment companies can be privately or publicly owned, and they engage in the management, sale, and marketing of investment products to the public.
  • An investment company can be a corporation, partnership, business trust or limited liability company (LLC) that pools money from investors on a collective basis.
  • The money pooled is invested, and the investors share any profits and losses incurred by the company according to each investor’s interest in the company.

Types of Investment Companies

  1. Mutual funds
  2. Closed-end funds
  3. Unit investment trusts

Investment Company - PMF IAS

Is a Hedge Fund an Investment Company?

  • Private investment funds that only accept money from investors with a substantial amount of assets (i.e., accredited investors) are not considered to be investment.
  • These funds are exempt from the registration requirements under the Investment Company Act of 1940, but they are still subject to other securities laws and regulations.

Pros of Investment Companies

  • Diversification: Investment companies offer investors different investment options to reduce risk. They do it by spreading the investment across different securities.
  • Liquidity: These companies provide clients with liquidity, meaning that investors can sell their shares anytime. The ability to provide client liquidity is essential to help manage financial emergencies.
  • Professional management: An investment company manages financial resources using strategies that an investor might not know about. Using their experience, these companies ensure investors access a wider range of investment products.

Cons of Investment Companies

  • Fees: Investment companies charge a higher fee for their services. This might reduce the overall return on investment.
  • Risk: An investment company’s securities might be more volatile than other investments, such as bonds. This primarily means that investors might lose money when the market falls or declines.

Investment Holding Companies (IHCs)

  • An IHC is either a public or private group holding entity that acts as a financial investor.
  • Its portfolio mainly consists of majority or minority equity stakes in private/publicly traded companies.
  • It generates profits from investing in other companies. This includes purchasing, selling, & owning stocks, bonds, mutual funds, real estate investment trusts, options contracts, & other investments.
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