With benchmark indices crossing into frontier territory every day, promoters are looking for new ways to unlock value hidden in operating companies and improve their overall valuations, says Rajrishi Singhal

The Indian corporate sector is suddenly witnessing a mushrooming of holding companies. A large number of companies — especially those in the financial services sector — are rushing to set up holding companies. Here’s a sampler:

Bajaj Auto has decided to set up two new companies with one concentrating on auto manufacturing and marketing with the other focusing on financial services, including insurance. These two operating companies will be held by a holding company.

ICICI Bank has floated a separate company, called ICICI Financial Services, to hold its stakes in the insurance (both life and general) and asset management companies. This new holding company has received handsome valuation from the market.

The country’s largest commercial bank, SBI, is also looking to emulate the above example. That is, create holding companies below the bank level to hold its investments in only its insurance and MF businesses. The aim seems to be unlocking the value since the bank plans to sell 10% equity of the new holding company to investors.

The Tatas plan to return to the financial services business — which was earlier wound up following problems faced by Tata Finance (which was merged into Tata Motors) — through a new company called Tata Capital. From all indications, it seems that Tata Capital is going to be the holding company for the group’s foray into financial services — private equity, asset and vehicle financing, housing finance, capital market services, merchant banking as well as retail finance. Many of these activities are likely to be held in various one-down subsidiaries.

The government is also looking at creating a mega-holding company by merging all its three trading companies — State Trading Corporation, Minerals and Metals Trading Corporation and Project Export Corporation. This company, which will also engage in export and import, will in turn enter into a number of joint ventures with private sector global giants.

Ruia-run Essar group plans to delist key business units Essar Steel, Essar Oil, Essar Shipping from the Indian stock markets, bring them closer to global holding company Essar Global and list the holding company in the overseas markets to realise better valuations. Even Anil Agarwal’s global holding company, Vedanta Resources, listed on London Stock Exchange successfully.

Actually, holding companies are nothing new. They have been around for over 100 years, in different shapes and sizes. The managing agency structure that was favoured during the first wave of industrialisation in British India could also be called as a precursor to the current format. Under the arrangement, somebody would own a company and somebody else (the managing agency) would run it for a fee. This arrangement suited many sterling firm shareholders who were based in Britain but had their operations in India.

Sometimes the managing agency also owned substantial stakes in the operating companies. This system was finessed by Indian entrepreneurs to gain control over their own operating companies (The Oxford History of Indian Business, Dwijendra Tripathi); as a result, over time, managing agencies were transformed into proxy holding companies.