The Nigerian Exchange Limited (NGX)’s stipulate that every company listed on its premium and main boards, the two principal listing segments, ensure a minimum of 20 per cent of the company’s total shares is held by the public and available for public trading. This portion of shares that can be publicly traded is called free float. However, the market watchdogs appear to aid a trend that is not only diminishing the rights of minority shareholders, but increasingly making it a possibility for insiders to use their huge holdings to manipulate the stock market in Nigeria.
It is increasingly hard to tell private and public firms apart in Nigeria, given that the portion of companies’ shares regulators require to be owned by outsiders – persons other than companies’ directors and insiders – already negligible before now, is fast shrinking out, investigations show.
Aside the free float, the remaining 80 per cent of a quoted company’s shares could be held by a league of privileged investors called insiders, often comprising directors and their relatives, promoters and, in some cases, governments. The premium board has an elite class of companies that meet the most stringent corporate governance, capitalization and liquidity parameters.
As of July 11, at least 13 companies listed on the Lagos-based stock exchange fell short of the 20 per cent minimum free float requirement, according to data from Financial Times.
Such shortcoming can allow a powerful few sway a corporation in the direction they want, by overriding the resolutions of their boards as well as those of common stockholders. They can also manipulate share prices by refusing to sell their shares, or selling them in bits, forcing prices up.
Yet, even with these troubling implications, the defaulting public companies have not broken any regulation or law. The regulators, the Nigeria Exchange Limited and regulator the Securities and Exchange Commission (SEC), have provided a leeway for companies to sidestep the 20 per cent requirement, by requiring that they alternatively ensure the value of their shares in the public’s hand is equivalent to N40 billion or N20 billion minimum.
Market analysts say gatekeepers in Nigeria are letting down the guard on quoted companies and are literally aiding an abuse that could probably set up a devastating stock market collapse, the type witnessed in 2008 when Nigeria’s multi-trillion naira equities collapsed.
Increasingly, insiders of premium and main board firms have been storming the territory belonging to minority shareholders fast to claim parts of the latter’s statutory 20 per cent minimum shareholding, taking advantage of the escape clause provided by the regulators.
Skyway Aviation Handling Company (SAHCO) PLC, acquired by the Sifax Group from the Nigerian government after privatisation in 2009, is almost 100 per cent owned by its chairman, Taiwo Afolabi, and his wife, Folashade Afolabi, as of August 3, data from African ‘Xchanges, a website which tracks all the stock exchanges in Africa shows. Its free float is less than one per cent.
As of September 5, SAHCO’s less than one per cent capitalization stood at about N27.4 million, significantly less than the N20 billion prescribed by the escape clause. The figure was computed using the firm’s N4.05 share price as of Friday.
The ratio effectively makes the aviation ground handling services provider a private business masquerading as a public firm. SAHCO is not known to have faced the regulators’ sanctions.
According to the World Bank, “higher free float is commonly an indicator of better shareholder protection, since dispersed ownership necessitates stronger rights for minority shareholders.”
“When stock prices are divorced from fundamentals, it cements the public perception that markets can be manipulated — by a small group of insiders or a large group of determined traders — and therefore can’t be trusted,” equity analysts at New York Times said.
However, Godstime Iwenekhai, who heads NGX’s Listings Regulation unit, said, “the possibility of share price manipulation/market manipulation occurring is not largely or solely dependent on available float.”
“These egregious infractions can be perpetrated by holders of securities in companies with any stipulated free float, or even by persons who are not insiders.”
Even if possible, the likelihood of minority shareholders of a firm with a three per cent float, for instance, orchestrating price manipulation is almost non-existent compared to the insiders.
The regulatory gap allowed by the NGX, and the apparent lack of sanctions, certainly provides a cover for insider manipulation.
Abdulsamad Rabiu, chairman of BUA Group, executed a merger of his Obu Cement Company Limited and Cement Company of Northern Nigeria, in which he owned a majority stake, in January 2020.
The ensuing entity, now known as BUA Cement Plc, became Nigeria’s fourth biggest company by market value, with a capitalization of N1.18 trillion at listing.
“…Rabiu pulled off a public listing that seemed to defy logic,” Forbes said in an article last year.
“Through the magic of the markets, the combined entity, BUA Cement Plc, which listed on the Nigeria Stock Exchange on January 8, 2020, is worth nearly 3 times what the two companies were worth before the merger.” In less than a year, the company’s share price, originally listed at N35 per share had ballooned to N85.
The magic was simple. Mr Rabiu and his son held on to 98.5 percent of the shares at listing, while only 1.5 per cent was available for the investing public to scramble for, easily creating a scarcity that turbocharged BUA Cement’s share price on the back of an overwhelming demand for its shares.
According to Forbes, that single factor lifted Mr Rabiu’s wealth by an incredible 77 percent to $5.5billion in just one year, him the biggest mover on the Forbes African billionaire Index for 2021 and catapulting him to the sixth position on the ladder.
Although the cement-maker clearly fell short of the 20 per cent minimum free float requirement, it latched onto the loophole in the NGX rule that allows at least N40 billion worth of shares to be public-owned.
For a firm whose market capitalization was N1.18 trillion at listing and which touched N2.88 trillion on January 4, a N40 billion requirement for the minimum value of its shares to be held by the public clearly came a far too lenient option by all standards.
Companies with a tiny float and whose shares are artificially scarce, tend to be quoted well above their real prices because they carry a value that is not their own.
The listing of the Nigerian unit of Johannesburg-based wireless operator, MTN, on the NGX in May 2019 got off to a turbulent start, and provoked a mixed bag of reactions from authorities and analysts. MTN got admission into the premium board listing around 20.4 billion common shares at N90 per share by introduction after the transaction got a go-ahead from SEC.
That brought its market value to N1.832 trillion, which ballooned to N3.033 trillion in just six days in a development that would rank as the most dramatic and puzzling rise in share price for a newly listed stock in Nigeria’s stock market history.
Few days into MTN Nigeria’s debut, the pace of increase of its share price was so unprecedented it swiftly drew the attention and involvement of SEC and the Economic and Financial Crimes Commission, which on suspecting a foul play, was compelled to meddle.
The twin factors of MTN having a tiny float of less than five per cent at listing and its humongous reputation as Africa’s largest mobile network operator opened a floodgate of explosive demand for its shares, helping blow its share price out of proportion to its real value.
“Suspicions had grown among public investors and stakeholders. It was one of two options, shares were either being hoarded – market manipulation – to propel a higher share price before any share offering through an IPO or that the Exchange was conniving with existing shareholders of the company to avoid releasing larger share volumes for trading,” said Ajifowoke Gbenga, business journalist at Ventures Africa.
Heineken B.V, after discovering great potential in the Nigerian beer market, commissioned its special purpose entity named Raysun Nigeria Limited to mop up new shares in Champion Breweries equivalent to 24.3 per cent of the latter’s common stock.
The deal valued at over N4.9 billion, according to an NGX document, lifted Heineken’s existing stake from 60.4 per cent to 84.7 per cent, making it the majority owner of the company, a status it also holds in the country’s biggest beer-maker, Nigerian Breweries.
According to African ‘Xchange’s data, Champion Breweries’ shares more than tripled within three weeks following the acquisition, its market capitalization surging from N7.3 billion (at N0.93 per unit) to N29.4 billion (N3.76 per unit).
As of August 3, 2020, the portion of Champion Breweries’ shares held by the public was not up to one-tenth.
Foreign portfolio investment into the Nigerian stock market shrank from N96.74 billion as of June 2019 to N23.42 billion at the end of June 2021, figures from the NGX’s Domestic and Foreign Portfolio Investment Reports show.
Analysts say the inadequacies in the regulatory framework of the NGX may open up a credibility gap and deal a blow to the image for an exchange, which itself transitioned to a quoted company this year.
They argue in support of strengthening regulations and enabling laws.