IPO resuscitation in capital market

In any model economy, such as Nigeria’s is struggling to become, efficient and vibrant capital market contributes hugely to economic development .

As elsewhere, the Nigerian Stock Exchange (NSE) is a key determinant of the Nigerian financial system, providing essential facilities for companies and government to raise money for business expansion through investors.

Ultimately, members of the society and not just the investors, derive some benefits.

Over the years,the nation’s stock market has played a fundamental role in enabling businesses raise capital , often looked upon as the most significant source for companies to raise additional financial capital for expansion by selling shares of ownership of the company in a public market. 


Unfortunately, this basic function has increasingly come into question in the aftermath of the global financial crisis

In 2007 and 2008, 
Initial Public Offerings (IPO)s were common before the market witnessed a downturn and companies began avoiding IPOs, embracing mostly rights issues and bonds.

Only Seplat Petroleum Development Company Plc and Transcorp Hotels Plc made IPOs last year. While Seplat’s, which was a global IPO, was 100 per cent successful, that of Transcorp Hotels Plc recorded 50 per cent subscription.

The capital market has been incapable of providing the needed funds required to fortify the equity standings of several listed companies in the clutches of debt overhangs. 


Debt to equity ratios have risen sharply in the last two years as investors pull money out of the financial system, making Initial Public Offerings doubtful.

Analysts believe that the overall weak macroeconomic scenario, the sustained negative market sentiments in the year, coupled with other factors such as falling oil prices, and the tension in the socio-political space, have not encouraged successful primary market activities.

Some other planned IPOs were placed on hold due to the prevailing negative market sentiments, driven by growing uncertainties on the back of falling oil price and other macro-economic challenges.

There have been growing agitations for multinationals in the telecoms, oil and gas to list on the nation’s bourse by way of public offer for purchase by interested members of the investing public.

Experts have argued that compelling big corporations in niche sectors of the Nigerian economy, especially those in telecommunications , oil and gas to list on the exchange will significantly raise the capitalisation of the stock market which is currently estimated at slightly above N9 trillion.
 
There is no gainsaying the fact that the listings of these giants would ultimately shore up the liquidity of Nigerian capital market, which will in turn restore the much-needed investors’ confidence.
 
Nonetheless, sectorial analysis of the market shows that the telecommunication sector is under-represented. MTN, if listed would become the first major national telecom company shares to be traded on the NSE.

The Chief Executive Officer of the Nigerian Stock Exchange (NSE) Oscar Onyema at the 5th Standard Bank West Africa Investors’ Conference held in Lagos in 2014 assured stakeholders that the equity market would witness increased number of IPOs from prospective companies.
  
But that optimism has not been actualised in spite of efforts made by the NSE since 2012 to roll out initiatives that will compel companies, especially multinational firms to list on the Exchange.

The NSE had provided a legislation that covers incentives, unbundling of stringent eligibility requirements that create high barriers for potential entrants and hinder participation by willing businesses as well as adopted options that promote foreign investment in the economy.

Regrettably, the nation’ capital market has recorded unprecedented lull due to volatile forex and macro-economic concerns. The market experienced sustained volatility as investors’ exited positions and speculators went bargain-hunting.

Specifically, market capitalisation of quoted equities which stood at N11,237 trillion as at January 5, 2015 stood at N9, 619 trillion as at Friday, July 29, 2016 down by N1.6 trillion or 16.7per cent in 18 months, while the All-share Index slid by 5896. 33 points from 33,943.29 to 28,009.93.

Total transitions for the first half of the year also decreased by N43.95 percent from N1.113 trillion recorded in 2015 to N624.41 in 2016, a decline of N488 billion.

This is in spite of strategies and strict regulatory framework and reforms introduced by the regulators to reposition the market for growth and development as well as increased the dividend yields of shares to investors.

An investment analyst, Johnson Chukwu explained that IPOs cannot thrive in an environment where the secondary market is not vibrant.
 
“Several reasons entice companies to list on the Exchange.

One, that they expect that the market will appropriately buy them and that the market has a premium to the intrinsic worth as to justify investors having to trade their equities.

Again, that there is liquidity in the equities market so that people can actually buy and trade their shares.    
 
Lastly, that the listing will give them better access to credit. “

Chukwu, who is also the Managing Director of Cowry Asset Management Limited, argued that the stock market has become unattractive to companies because of the absence of these three factors.

“Unfortunately, in a bearish and dampened equities market, these factors are not present. Until there is a significant recovery in the secondary market, one should not expect a re-launch in IPO.

“The economy is weak and the market pricing reflects earning capacity of companies and these earning capacities has been weakened by inflationary period the economy is witnessing.”
 
He attributed the weak economy to hostile and inconsistent macro-economic policy and regulatory environments and lack of transparency in economic management.

He added that government should develop more focused strategies that will economically empower indigenous firms and multinationals and hence stimulate their interest in investments.
The Managing Director of Capital Bancorp Plc, Aigboje Higo explained that for the capital market to attract any IPO, government must establish a national savings strategy to ensure a large pool of long-term investment funds for companies.

According to him, the investment fund would serve as a window for listed companies that want to raise capital to boost operations.

He, however, noted that the investment fund would not work in a country that is besieged with such macro economic challenges like Nigeria.

“The economy must grow, good macroeconomic policies must be in place like tax incentives, reduction of transaction costs.”

The Managing Director of NASD OTC Plc, Bola Ajomale explained that for issuers to approach the market to raise capital, there must be some reasonable level of recovery.

He pointed out that there was need for government to initiate strategic policies that would grow businesses in Nigeria adding that stockbrokers must also ensure that issuers raise money in a manner that is competitive and less expensive.

“We need an economy where issuers can see growth. The growth must impact on their businesses; it is when the business expands that companies can approach the market to raise capital. Issuers must also see a market that is growing. They must see that the market is right for an issuer to come.”

An independent investor, Amaechi Egbo explained that government should make listing in the nation’s bourse less stringent and consider abolishing withholding tax on dividends.

According to him, there was need for government should also provide more incentives to companies that are listed on the stock exchange.

He argued that this may mean some loss of revenue to the government at the initial stage, but, however maintained that the actual benefits to the company will be more than compensate for any previous losses.

Corroborating that view, a stockbroker who spoke on condition of anonymity explained that aside ensuring macro economic stability, the NSE must review the entire listing processes and requirements.

He noted that the Exchange’s cost of listing still remains one of the highest when compared with other emerging markets.

“Government should provide some incentives to companies that are listed on the stock exchange. It will reduce the operating costs of most enterprises and the cost of new projects.

This would demand greater innovations and efficiency of our stock market. As the pace of economic activities increases in the market due to relaxed listing requirements, so will the financing requirements and the need to enhance savings mobilization,” he added.