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2021: Weak incomes, inflation push investors away from rights issues

By Helen Oji
28 December 2021   |   4:30 am
A lot of listed firms on the Nigerian Exchange Limited (NGX) may, in the near future, be controlled by foreign investors due to failure of existing shareholders to subscribe to rights issues offered by their companies...


• Nigerians may lose ownership of listed firms over loans for rights
• How weak growth, sluggish NGX performance, forex scare investors
• 10 firms list N906b shares on NGX in 2021 as investors initiate sell-offs

A lot of listed firms on the Nigerian Exchange Limited (NGX) may, in the near future, be controlled by foreign investors due to failure of existing shareholders to subscribe to rights issues offered by their companies as a result of rising poverty, inflation and devalued currency.

Right issues are the options given by a company to the existing shareholders to buy the shares of the company.

Already, stakeholders are worried that Nigerian shareholders, many of whom are already old and without proxies, are losing out in controlling stakes in some of the listed firms as their foreign counterparts and institutional investors are mopping up available rights, extending their controlling interests in the entities.

With many shareholders unable to take their rights, firms are increasing their exposure to foreign debts, especially to address challenges with access to foreign exchange for raw materials.

Indeed, the nation’s capital market has witnessed substantial rights issues in the last two years, as many listed firms explore fund raising options outside debt.

With many firms declaring very little profit and offering insignificant return on investment, shareholders have become weary and wary of renewing their stakes in the companies. This leaves a huge financing gap that foreigners, with foreign currencies easily fill and expand their grip on the firms.

The investors, who expressed worry about the quantum of rights issues floated in the market between 2020 and 2021 totaling over N50 billion, also cited the influence of foreign core investors in some multinational firms, which could alter ownership structures of the quoted companies to the detriment of the local shareholders.

The Guardian learnt that many of the core investors offered dollars denominated loans to these companies and sometimes equity, which will ultimately throw the company into a loss position in the likely effect of devaluation of the Naira.

Devaluation increases the debt burden of foreign-denominated loans when priced in the home currency. More so, these foreign debts become more difficult to service, reducing confidence among the people in their domestic currency.

On the other hand, because of the impact of the pandemic and inflation, many shareholders have become financially incapacitated to take up their rights.

But the investors argued that dollar denominated loans are heavily exposed to higher pay out, especially, when it has to do with Naira. The currency will be reduced in dollar terms, causing the company to spend more to pay off the dollar loans.

The Naira currently trades at about N580 to a dollar at the parallel market, notwithstanding challenges with access at the official channel for local producers.

Already, Deposit Money Banks (DMBs) that have been handed the sole responsibility of selling to personal/business travel allowance (PBTA) users after the ousting of bureau de change (BDC) operators, have resorted to rent-seeking.

The investors also argued against the backdrop of economic woes, which have continued to trigger apathy on the nations capital market since the 2016 recession exacerbated by the devastating effect of COVID-19 in 2020.

Publicity Secretary of the Independent Shareholders Association, Moses Igbrude, said: “A big challenge with floating rights issues at this time of instability and high dollar surge is that most core investors give dollar-denominated loans to these companies.

“It is unfortunate that these rights issues are happening at a time when the nation’s economic situation is not favourable to many local investors. By failing to take up their rights issue, the shareholders have lost the opportunity to increase their stake in these firms.

“Because of the pandemic, most shareholders do not have financial resources to take up their rights, it will surely affect the ownership structure of most companies after the completion of the whole exercise in favour of the core investors or some moneybags to the detriment of Nigeria investors.”

An independent investor, Amaechi Egbo, urged firms to domesticate issuances to hedge against dollar volatility.

According to him, a surge in the value of dollar as witnessed in the second and third quarter of the year will trigger more devaluation in the Naira, which will lead to a reduction in the value of the rights.

He said this would ultimately impact negatively on the bottom-line of companies that floated the right issue.

President of New Dimension Shareholders Association, Patrick Ajudua, described the 75 per cent foreign investors holdings as stipulated by the Companies and Allied Matters Act (CAMA) as worrisome.

According to him, if the core investors mop up five per cent indirectly, in addition to the 75 per cent already held, they have the legal powers to delist at any slightest reason.

“We have been advocating a downward review to 60 per cent for both direct and indirect holdings for foreign investors. This will reassure local investors that this foreign investors will not just wake up and decide to delist simply because they have the required percentage to do so.”

MEANWHILE, declining economic growth and poor stock market performance as well as foreign exchange uncertainty have continued to scare investors from participating actively on the NGX.

Investors pointed out that shares that were denounced by Nigerian shareholders were allotted to technical partners that requested for additional units, which puts local investors in a disadvantage since the listing rules allow a core investor to hold up to a maximum of 80 per cent instead of the initial 70 per cent that Nigerian shareholders describe as detrimental to their investment.

A cursory look at five of the companies dominating the rights issue boom accounting for N50 billion floated show that Consolidated Hallmark Insurance Plc offered by way of rights issue 2,032,500,000 ordinary shares of 50 kobo each at 52 kobo per share; while E-Tranzact International Plc offered 4.67 billion ordinary shares of 50 kobo each at N1.50 per share. The rights were pre-allotted on the basis of 10 new ordinary shares for every nine ordinary shares held as at March 25, 2020.

For Wema Bank, the management disclosed plans to raise N40 billion via a rights issue transaction, which is a sale of new shares to existing shareholders.

Also, Abbey Mortgage Bank Plc floated a rights issue of 3.69 ordinary shares of 50 kobo each at 82 kobo per share on the basis of four new ordinary shares for every seven ordinary shares held as at October 8, 2020.

Transcorp Hotels Plc successfully raised the rights issue of 2,642,124,511 ordinary shares, which was 99.3 per cent subscribed despite the prevailing macro-economic challenges.

NPF Microfinance Bank undertook a rights issue to raise about N3.4 billion from existing shareholders and a public offer to raise N1.07 billion from the general investing public.

In addition, ABC Transport Plc through its stockbroker, FSL Securities Limited, submitted an application to NGX for the approval and listing of a rights issue of 1,127,236,000 ordinary shares of 50 kobo each at 35 kobo per share, on the basis of 68 new ordinary shares for every 100 ordinary shares held.

Capital is critical for business growth. Companies raise capital either through debt or equity. Debt is issued in the form of bonds, and equity is issued in the form of shares. When a company issues new bonds or common stock, it is referred to as a new issue.

THE NGX last week closed on a negative note amid sell-offs and buy-interests as the benchmark All-Share Index (ASI) depreciated by 34 basis points, as the festive season kicked in. The NGX ASI closed at 42,244.22 points, to reflect a decline of 0.34 per cent from the previous trading day and a Year-to-Date (YTD) return of 4.90 per cent.

The market capitalisation also decreased by N75.34 billion. At the close of the market last Thursday, the stock exchange market value stood at N22.05 trillion from N22.13 trillion on the previous trading day.

The NGX in the outgoing year has listed N906.4 billion raised from new issues of equities from 10 companies.

Under new listing, Ronchess Global Resources Plc listed by introduction 91 million ordinary valued at N7.371 billion; Nigerian Exchange Group (NGXGroup) Plc (N31.720 billion); Guaranty Trust Holding Company (GTCO) (N840.260 billion); and Briclinks Africa Plc (N62.6 million).

On supplementary listing are Jaiz Bank Plc, Chemical and Allied Products (CAP), Mutual Benefits Assurance Plc, Etranzact International Plc, SUNU Assurance and Transcorp Hotels listed shares worth N3.3 billion, N1.730 billion, N4.8 billion, N3.652 billion, N3.011 billion and N9.934 billion, respectively.

The Managing Director of HighCap Securities Limited, Mr. David Adonri, noted that in terms of equity new issue, it has been scanty and it was the recent MTN Nigeria Communications (MTNN) public offer that gave primary market a boost.

He said: “Otherwise, the equity new issues market was almost inactive in 2021. Most of the primary issues in 2021 were from fixed income and debt instrument and the federal government actually took control of the market. Generally, the new issue market is still suboptimal, it has not recovered fully to the pre-melt down era.”