Nigeria’s stock exchange and challenges of staying on the bourse

The delisting of seven companies from the Nigerian Stock Exchange (NSE) last year, which catapulted the number of companies that have exited the bourse in just over 10 years to 77 has raised concerns among investors and stakeholders.

As in other climes, regular dissemination of information about firms’ financial performances and any changes that can affect their operations, among others are standard requirements that must be fulfilled post-listing.

But over the years, many quoted companies have been violating this important obligation, thereby keeping investors in the dark about their financial health, among others. This failure to adhere to the principles of corporate governance has contributed majorly to the crisis in the NSE.

Across the world, most countries affected by the global financial meltdown of 2007-2008, which instigated a worldwide economic recession, bringing to a halt more than a decade of increasing prosperity for western economies and wiping a staggering $1t off the value of the world economy have recovered. But Nigerian investors are recounting their losses, even as they battle with perennial issues bedeviling the nation’s capital market.

Indeed, many ignorant investors have burnt their fingers by investing in some of the dormant companies, which do not furnish the market with their financials.

Following serial violation by this class of market players, the Securities and Exchange Commission (SEC) and the NSE wielded the big stick by delisting them from the daily official list of the exchange, after giving notices on the intention to delist them for failure to meet up with their post-listing requirements.

DELISTING refers to the removal of security from active trading and it generally occurs when a company goes private (voluntary), is bought out (merger and acquisition), declares bankruptcy or fails to meet listing requirements (compulsory delisting).

Companies can also voluntarily request to be delisted when they choose to become privately traded firms using a cost-benefit analysis- that the costs of being publicly listed exceed the benefits. Requests to delist often occur when companies are purchased by private equity firms and are to be reorganised by their new shareholders.

Such companies can apply for delisting to become privately traded. Also, when listed companies merge and trade as a new entity, the formerly separate companies voluntarily request to be delisted.

According to the NSE’s delisting process, companies are delisted for recurring and possibly irredeemable inability to comply with the listing requirements of the exchange, especially in the areas of timely and accurate rendition of operational and financial accounts and other corporate governance issues.

The Quotation Committee of the National Council of the NSE, which presides over listing and delisting of companies, approves the delisting of companies at a particular point in time.

The final delisting approval implies that the exchange has concluded and complied with the regulatory requirements in the delisting process, including the issuance of necessary notices, forbearances, fair hearing and probation without any rectification from the affected company.

The final delisting process outlines the step-by-step delisting process and implies an ongoing engagement of the affected company on the timeline for compliance with listing requirements in default.

Under compulsory delisting, the NSE authorities will, at a specified date, after completion of the delisting process and approvals, delist the shares of the affected company without any further recourse to the position of the board or shareholders of the affected company.

For the involuntary delisting of a company, the reasons include violating regulations and failing to meet minimum financial standards. Financial standards include filing financial statements promptly; a share price above a certain price; a minimum number of shareholders; a minimum market capitalisation, or certain revenue, profit, cash flow, and trading activity requirements.

When a company does not meet listing requirements, the Listing Department of the exchange issues a warning of non-compliance. If non-compliance continues, the exchange then goes ahead to delist the company’s stock.

It is on record that from 2006 to 2016, about 77 companies have delisted from the official list of the NSE. Investigation showed that about 12 of the 77 companies delisted voluntarily, 54 delisted due to failure to meet up with post-listing requirements, while 11 others delisted due to reforms or expansion within the sectors they operated in.

Some of these companies that have been delisted are Pinnacle Point Group Plc; Afroil Plc; Starcomms Plc; Big Treat Plc; Nigeria Wire & Cable Plc; Nigerian Sewing Machine Manufacturing Plc; Stokvis Nigeria Plc; Jos International Breweries; West Africa Glass Industries Plc; Navitues Energy Plc; Nigerian Ropes Plc; P.S Mandrides Plc, among others.

Some companies that delisted voluntarily said harsh operating environment, occasioned by the prevailing unfavorable business climate, especially in the last few years made them susceptible.

The parlous state of infrastructure, poor access roads to the ports, and the associated traffic gridlock, as well as the activities of multiple government agencies at the terminals, some claimed contributed to the current negative position of the manufacturing industry.

In addition to this, some claim that the relatively high cost of transactions on the NSE in the past also discouraged companies from listing, or even remaining listed, thereby forcing the exchange into struggling to attract the needed liquidity that impacts securities pricing.

For instance, the NSE fee structure shows an array of fees paid by listed firms to include NSE fees; CSCS fees; SEC fees; Value Added Tax; Stamp Duty, and Brokerage Commission. All these exclude securities-tied fees also payable by the listing or delisting corporate outfits.

In July 2014, the former Finance Minister and Coordinator of the Economy, Dr. Ngozi Okonjo-Iweala, had approved the elimination of stamp duties and VAT on market transactions, noting that this was a panacea to reviving the Nigerian bourse, which then struggled to bounce back since its crash during the global recession in 2009.

Okonjo-Iweala noted that a vibrant capital market was essential to the government’s Economic Transformation Agenda, especially in terms of raising the much-needed long-term financing for critical infrastructure and the housing sector.

She had said: “Research (by the IMF and the World Bank) has shown that solid economic growth in any country is closely linked to the joint development of the banking sector and the capital markets. While the banking sector has already been cleaned-up, the capital market needs some intervention.

“Taxes on stock exchange transaction fees are as high as 12 percent (five percent in VAT and up to seven percent in stamp duties) – much higher than in other jurisdictions, and these constitute a major disincentive to investing in the Nigerian capital market. I will like to announce that the Federal Government has consented to: Waive the 0.075 percent stamp duties payable on stock exchange transaction fees,” and “exempt from VAT, commissions: (a) earned on traded values of shares, (b) payable to the Securities and Exchange Commission (SEC), and (c) payable to the Nigerian Stock Exchange (NSE), and the Central Securities Clearing System (CSCS); by including these commissions in the list of VAT-exempt goods and services.”

Unfortunately, at the expiration of the five years (in July last year), and in the absence of a further extension, dealing members were directed to charge VAT effective July 25, 2019, on all commissions applicable to capital market transactions, an action they described as a disincentive to investment.

The Chief Research Officer, Investdata Consulting, Ambrose Omordion, who said the restoration of VAT on all transactions will discourage investors’ participation in the market, described the move as multiple taxations considering the withholding tax on dividend being collected by the government, and other charges paid to regulators.

He, therefore instead called for policies that will spur market activities and resuscitate the economy.

HOWEVER, not long ago, the NSE to achieve a world-class capital market reiterated its commitment to maintaining a zero-tolerance posture for dealing with member firms and quoted companies.

This complies with its determination to shift gears and drive innovations that are centered on increasing global visibility for the Nigerian market.

The Chief Executive Officer of the NSE, Oscar Onyema, while speaking at an investors’ forum noted that the exchange has proposed several rules to codify the accepted mode of engagement in the market, adding that of particular interest was its proposed Related Parties Transaction Rule, and Rules Around the Conduct of AGMs.

Onyema, who said the NSE’s focus has been on revamping corporate governance, improving human capacity, cleansing and restructuring the market, improving technology, product development, and advocacy for changes to the policy, added that good corporate governance would ensure the existence of solid companies in Nigeria.

While pointing out that the idea of forcing companies to list on the nation’s bourse may lead to infractions in the market, he stressed that a lot of energy had been committed to building the foundational aspect of the market in terms of transparency, orderliness, fairness, disclosure, and enforcement of rules and regulations.

“In the short-term, you will see the huge volatility, but that should not distract from those fundamental elements about good companies making good money, running under a well-governed exchange structure, and a well-regulated market structure. These factors will combine to shore up investors’ confidence in these challenging times,” he stated.

Be that as it may, some investors have bemoaned the huge capital flight and the rise in the number of companies delisted from the NSE from 2016 to 2019. The volatility witnessed in the nation’s stock market within the three years, many say was partly due to the delisting of 36 firms valued at N253.6b.

The delisting, they maintained, implied direct loss of similar value to investors, who may not be able to unlock such value in the absence of a regular stock exchange.

The stakeholders categorically stated that the impact of MTN and Airtel listing on the NSE within the period was not felt in the market due to the huge amount of funds that exited the market within the period.

Even though the listing of two telecoms giants in 2019 increased the NSE market capitalisation by N1.83t, and N1.36t, the All-share index, which measures the performance of listed equities tumbled by 4, 314.93 points or 16.3 percent in 10 months, from 30, 771.32 points at which it opened for trading on Thursday, January 3, 2019, to 26, 456.39 as at Tuesday, November 12, 2019.

ALSO, as the Coronavirus disease (COVID-19) continues to disrupt businesses and people’s way of life, stakeholders in the exchange argue that industries and the entire manufacturing sector may be the worst hit.

They are therefore warning that if the government fails to roll out incentives to boost the sector and cushion the impact of the crisis, more companies would ultimately delist from the stock market.

Indeed many beleaguered companies in the sector could be eligible for the government’s stimulus support, but there is a real possibility that the crisis may result in bankruptcy for some manufacturers, as declining demand for goods, production, and revenue challenges, along with debt obligations take their cumulative toll.

Even though most companies already have their business continuity plans, these may not fully address the fast-moving and unpredictable variables of an outbreak such as COVID-19.

Typical contingency plans ensure operational effectiveness following events like natural disasters, cyber incidents, and power outages, among others. They do not generally take into account issues like widespread quarantines, extended school closures, and added travel restrictions that may occur in the case of a health emergency.

More so, manufacturers would face continued weakening links in their supply chain, as some vendors and suppliers will likely face operational or financial struggles of their own.

Also, some major industrial companies are beginning to close their facilities and are mulling layoffs to help curb the spread of the virus, as well as for economic reasons.

The Securities and Exchange Commission (SEC), the apex market regulator recently expressed commitment to tackle the delisting of public companies and ensure the listing of multinationals.

According to the acting Director-General of SEC Ms. Mary Uduk, delisting by quoted companies poses a threat to the development and growth of the capital market.

“Increased in delisting by public companies pose a threat to the market because quite a number of them are highly capitalised,” she said.

Uduk, who stressed that the delisting of some highly capitalised companies affects the growth of the market, added that some companies complained of tax issues, so the commission would engage the government to address the issue after the committee’s mandate.

She said that the apex capital market regulator would work in line with the committee’s recommendations.

Uduk said that the SEC was open to amendments that must be in line with international best practices in its bid to support the growth of the market, adding that it was also collaborating with the Corporate Affairs Commission (CAC) to obtain the list of companies not quoted on any of the exchanges in the country.

She said: “We look at it from two perspectives: voluntary delisting and regulatory delisting. What are we doing as regulators is to influence and encourage more listings in the market. We had a committee and that committee has made recommendations and we are at the implementation stage now. What we are doing is to look at how to encourage listing based on sector approach.

“What one sector needs, may be different from what another sector needs. We are engaging with them and have itemised issues and now implementing them. We are trying to see that we encourage listing via incentives. We are also trying to address the issue of time to market so that they are not discouraged as they are converging to come to the market so that they can raise the funding within the shortest time possible. We are still having engagements with them, and we are also getting more companies listing. You are aware of all the listings we have had this year,” she said.

An independent investor, Amaechi Egbo pointed out that supply chain disruptions due to the pandemic were likely to increase the cost of business for manufacturing and industries.

According to him, poor purchasing power, declining consumer demands, and potentially severe retail-traffic declines are factors that would impact negatively on the sector.

He stressed the need for the government to provoke more domestic demands in the economy post-pandemic so that the demand can drive supply for consumer companies to make a profit.

Egbo pointed out that this would make it cheap for people to borrow while companies can employ, hire, and train more members of their workforces.

Investdata Consulting Limited chief, Omordion who described delisting as a disincentive to market growth, also argued that the government must grant tax incentives to listed firms to enable them to enjoy the benefits of being listed as obtainable in the global market.

“These companies exited from the exchange because they are not benefiting directly. This is because the environment is impacting negatively on their bottom-line; they are paying fees to remain listed.

“Again, the cost of meeting the exchange requirement is high, the Nigerian government should know that the economy needs the support of the capital market to grow. So, there is a need for policies that would support investment and reduce the cost of transactions.”

He pointed out that there is a need for the market, including listed firms, to be cautious and avoid any actions that could further erode investors’ confidence.

The Publicity Secretary, Independence Shareholders Association of Nigeria, Moses Igbrude, lamented that investors, especially domestic retail investors always suffer significant losses whenever companies were delisted, urging the government to pursue friendly policies and initiatives to push the market forward.

Igbrude suggested that regulators should mandate voluntarily delisted firms to list on the Over -the -counter market so that interested investors can retain their holdings in those firms.

He also urged capital market regulators to allow those listed companies that are not meeting the post-listing requirements to remain a ‘public focus,’ noting that institutional investors may develop an interest in such companies and decide to invest in them.