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Chukwu: Businesses that ignore demands of fourth industrial revolution may not survive post- COVID-19

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Chief Executive Officer (CEO) of Cowry Asset Management Limited, Johnson Chukwu, in this interview with HELEN OJI, listed the nation’s abysmal growth, harsh operating environment and lack of incentives as some of the factors fuelling the delisting of firms from the Nigerian Stock Exchange (NSE). Chukwu, an economist also pointed out that businesses that have been rendered unviable due to changes in the society, arising from the effect of COVID -19 crisis will eventually delist from the exchange.

After the 2008/2009 financial meltdown, the Nigerian Stock Exchange (NSE) has not recorded up to 15 1POs, but more than 70 companies have delisted from the daily official list of the exchange. What could be responsible for this?
There are several reasons why many companies have not been seeking for listing on the Nigerian Stock Exchange (NSE) since the 2008/2009 financial meltdown. Chief amongst them is the failure of the secondary market to recover fully from the losses suffered during the meltdown, hence stock prices of many quoted companies have been trading below their intrinsic value, and in some instances, even below their net asset value.

When stocks are trading below their value, unlisted companies wouldn’t want to come to the market to seek capital in the form of Initial Public Offer (IPOs) of shares, as the market will not likely price their shares appropriately.

A vibrant secondary equity market is a sine qua non for an active primary equity market.

On the delisting of more than 70 companies from the exchange, the primary motivation for listing is to be able to attract cheaper and larger funding from the primary equities market. In a market environment where such funding source becomes more expensive than others, companies may not have the incentive to remain listed, given the high reporting and disclosure costs associated with being a publicly quoted company.

Secondly, the low prices of equities since the market crashed has encouraged core investors and parent companies of some quoted companies to bid for the acquisition of more shares of such companies and revert their ownership to private.

Most of the companies that delisted both voluntarily and involuntarily cited harsh operating environment. How harsh is this operating environment?
The harsh environment that the delisted companies are referring to is basically the Nigerian macro-economic environment. Recall that the Nigerian economy was growing at an average of over 7.5 per cent up until 2015 when the GDP growth rate declined to 2.79 percent. Subsequent to 2015, the economy has not been able to achieve an average growth rate of up to two percent per annum, which is even below the population growth rate of about 2.7 percent per annum.

With such slow growth rate coupled with a persistent increase in inflation rate and local currency devaluation, many companies are struggling to maintain their operational scale as consumer demand keeps declining due to lower per capital income and increasing level of unemployment.

Do you foresee many companies delisting from the exchange both voluntarily and involuntarily at the end of the COVID-19 pandemic?   
The Nigerian economy, just like the global economy, will likely go through some form of transformation after the pandemic. Some business models will no longer be viable as a result of changes in social engagements, while new businesses will emerge to take advantage of new opportunities. Consequently, those businesses whose object clause have been rendered unviable as a result of changes in the society will have to either voluntarily or involuntarily delist from the exchange. It is expected that most businesses will adopt technology in the provision of their services or interaction with the customers hence any business that fails to adapt to the demands of this fourth industrial revolution, driven by technology and artificial intelligence, may not survive for a longtime.  Any business that fails to adapt to the demands of this fourth industrial revolution, driven by technology and artificial intelligence, may not survive for a longtime. 

Are there measures that the government and regulators can take to attract more IPOs post COVID-19?
The most important measure the government can take to attract more IPOs of shares is to evolve economic policies that would, in the first place, minimise the likely impact of COVID-19 on the Nigerian economy, and ultimately restore economic growth to the pre-2015 levels.

 
The emphasis of the government economic policies should shift from poverty alleviation to wealth creation. Poverty alleviation as the primary objective of economic policies has never lifted any economy to sustained economic growth and development, rather wealth creation with necessary safety nets for the vulnerable is what drove economic growth in China, South East Asian and even the few Africa countries that are serving as beacons of hope on the continent.
 
On what the regulators can do to attract IPOs after the pandemic, I think that they should focus their energies on maintaining high level of corporate governance standards as well as broadening the depth and breadth of the market through introduction of new products and encouragement of viable businesses to list on the exchange.

What palliatives can government provide for manufacturers to boost their operations and reduce incessant delisting?
In terms of palliatives or support that government can avail manufacturers to boost their operations and reduce delisting of already quoted manufacturing businesses, as I stated earlier, the most important incentive is to improve the macro-economic environment and make it more attractive to investors.
 
Secondly, government should continue to work on improving the ease of doing business in Nigeria such as the time and cost of getting permits, paying taxes, registering property titles, settling commercial disputes, etc.

In addition to these, government can introduce, for a limited period, discriminatory taxes in the form of lower corporate taxes and dividend rates for quoted companies.
 
This will not only incentivise already quoted companies to remain listed, but will attract those that are not quoted to seek for listing.


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