August 16, (THEWILL) – Lack of benefits is forcing many companies to have a second thought concerning listing on the Nigerian Exchange, writes MIKE UZOR
Nigerian Exchange’s (NGX) two delisting windows have become busy of late. On the one hand, the exchange has thrown out four companies from its compulsory delisting window. On the other hand, 11 Plc jumped out from the voluntary exit window. On the compulsory window, the four companies – Evans Medical Plc, Nigerian-German Chemical Plc, Roads Nigeria Plc and Unic Diversified Holdings Plc – were delisted for poor performance on corporate governance and compliance with the rules of the stock exchange.
The main purpose of compulsory delisting is to prevent a stock exchange from misleading investors in making buy/sell decisions on companies that aren’t sound. An exchange’s duty to protect investors is accomplished by ensuring that price makers do not make the wrong prices. Price making at a stock exchange is a function of constant and timely information communicated by listed companies.
Failure to communicate operating information as and when due means that the risk of making a wrong price on a stock is on the increase. Somebody could lose a fortune when a wrong price is made. A stock exchange will be sorry for letting that happen on its platform.
Some compulsory delisting triggers on major exchanges include persistent price closure below a set benchmark, drop in market capitalization, equity capital and revenue below minimum standards.
On the voluntary window, market regulators may have to learn a new lesson – that their own poor performance is fast approaching a flashpoint. More than 12 years from the global financial crisis, NGX has consistently failed to perform its prime function as a medium for public offers for listed companies in need of new money.
Since then, companies, big and small, have lost the primary benefit of being listed on the exchange, which is the vast market for raking in critically needed low cost, risk capital for capacity building, expansions projects and new ventures. Listed companies have therefore stepped back to bank borrowings and rights issues just as do non-listed companies.
Market regulators so far appear to turn a blind eye to a deep rooted matter on which their very existence depends. NGX appears to be comfortable flying on the secondary market engine for its own survival after losing the main primary market engine that feeds listed companies. Companies are coming to a discovery that being listed has become more of a name than the real benefits of having access to low cost public funding. There is a growing realisation on the part of listed companies that their primary purpose of listing isn’t just to have their shares traded on the exchange.
Trading of listed companies’ shares on the exchange is no more than an incentive; it is indeed a marketing tool for companies seeking new money through public offers. This is normally the shadow market that is prompted by the primary market that powers companies’ value building operations.
The shadow market for trading listed companies is more for speculative traders than investors where foreign portfolio traders are mostly in charge. No matter how huge the volume of shares exchanged from day to day, it puts no money in the hands of the issuing companies. It doesn’t help a company one bit in pursuit of its corporate purpose of building the value that is mirrored and traded in the secondary market.
The present state of the stock market is somewhat a change in the promise and expectations on the basis of which companies sort exchange listing. Against the promise of low cost public offers, companies undertook to be guided by stricter reporting and corporate governance rules than non-listed companies. Now, having to observe the stringent rules of listing without the attaching benefit is the crux of the matter that is prompting a rethink of exchange listing among companies.
With public offers being a dead-end street, shareholders can organise rights issues on their own without the services of the stock exchange. They can buy and sell the company’s shares at the NASD over-the-counter market and the company can borrow directly or through the issue of debt instruments. A delisted company may still retain its public limited status. Essentially what will change is where its shares are listed and traded – which will be from the stock exchange to the OTC trading platform. If the stock is liquid on the stock exchange, it can be expected to retain its liquidity on the OTC market.
The foregoing appears to underscore a unanimous approval by 11 Plc shareholders for delisting the company’s shares from NGX last year. A press statement issued by the company last February said, “The success of the special resolution was due to the acceptable justifications for the delisting”.
Placing 11 Plc side by side with its non-listed majority shareholder – NIPCO Plc – shareholders apparently found no benefit worth hanging on as a listed company. “In addition, the shareholders were aware of the successes that NIPCO has recorded at NIPCO Plc and the impressive returns it has churned out to its shareholders over time. Hence, the total support for the resolution at the AGM”, the press statement said.
According to the company, its shares will still be tradable as they will be listed on the NASD OTC. The delisting, it said, “is only a cessation of trading of the company’s shares on the NSE platform”.
Since stock exchange trading is presently dominated by speculative traders scouting for gains from share price movements, delisting seems promising to reclaim the company from speculators – who have little or no interest in its future back to investors.
Whether exchange listing helps or hurts a company may become an issue in consideration on corporate strategy papers in the immediate years ahead. The message may not be that clear for now, but it is implicit for NGX that the days of armchair business at the exchange are fast rolling over.
The exchange faults companies for persistent non-compliance with its post listing rules. So also are companies beginning to fault the exchange for its inability to heal its long broken primary market leg.
The exchange places companies under delisting watch-lists due to recurring failures to comply with international best practices and corporate governance rules. Companies also expect the exchange to self-examine itself whether it is meeting the international best practices of the benefits that listed companies derive from exchanges.
•Uzor is an economist and investment analyst.
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