Liquidity: 22 companies threaten free float of stocks

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About 22 companies may have fallen into default positions in the stock market free float rules as at last week.

Free float requirements of the Nigerian Exchange Limited, NGX, stipulated that quoted companies should have 20 percent of their issued share capital available for trading at any point in time while they could also leverage their market capitalization to the tune of N40 billion available for trading to remain within the regulatory threshold in any trading day.

The NGX rule was created to enable liquidity in the stock market while guarding against price distortion arising from limited shares supply.

Financial Vanguard findings last week shows that both market constraints and equity structures of the affected companies have made it difficult for compliance to the set standard.

But some analysts and market operators say that the share supply constraints in the market was caused by promoters and major shareholders of listed companies that refused to dilute their holdings and bring the required number of shares to the investing public.

Some of the companies that may have recorded free float deficiencies as at last week are Union Bank of Nigeria Plc N12.7 billion, International Breweries N14.9 billion, Notore Chemical Industries Plc N10.0 billion, Medview Airline Plc N2.2 billion, Transcorp Hotels N1.6billion, Ellah Lakes N1.2 billion, UPDC N1.1 billion, Prestige Assurance N983.6 million, Champion Breweries N901.0 million.

Others include: Abbey Mortgage Bank N696.8 million, Aluminium Extrusion Industries N257.6 million, Austin Laz & Company N424.4 million, Capital Hotels N142.6 million, CWG Plc N503.9 million, Ekocorp Plc N371.8 million, Golden Guinea Breweries N83.4 million, Infinity Trust Mortgage Bank N51.2 million, Living Trust Mortgage Bank N2.6 million, Portland Paints & Products Nigeria N291.6 million, The Tourist Company of Nigeria Plc N111.4 million, and Union Dicon Salt N485.3 million.

NGX reaction

Responding to this development, Chief Executive Officer, NGX Regulation (NGX RegCo) Limited, Ms. Tinuade Awe, said: “In line with the provisions of The Exchange’s Rules Governing Free Float Requirements, listed companies can comply with the free float requirement either by the percentage of total shares in the hands of the public (free float) or the value of the free float (market capitalization).

“Free Float is the percentage or value of shares that an issuer has outstanding and available to be traded on an exchange. In order to determine what shares classify as available to be traded, shares held directly or indirectly by promoters, directors and their close relatives; strategic investors holding five percent (5 per cent) and above of the issued share capital; or government are excluded from the calculation of the percentage or value. Thus, only shares held by persons who are outside of those outlined are included in the percentage or value calculation.”

Clarifying what the Exchange mean by “entry standard and entry segment” as contained in Schedule 7 of free float, she said : “NGX or The Exchange currently has three (3) Boards on which the shares of companies can be listed. They are the Premium, Main and Growth Boards.

The entry and standard segments for listing apply strictly to the Growth Board which is designed for small and medium sized companies seeking to raise capital and simulate growth. The Entry Segment is for companies with market capitalization of Fifty Million Naira (N50m) to Five Hundred Million Naira (N500m) while the Standard Segment is for companies with market capitalization of about Five Hundred Million Naira (N500m) to Four Billion Naira (N4bn).”

On whether the fluctuation of daily prices of stocks affect the free float in terms of value of free float as contained in schedule 7, Awe said: “Yes, the daily price of the shares of the company could affect the free float value of a listed company. As provided for in The Exchange’s Rules Governing Free Float Requirements companies can comply with the free float requirement either by the percentage of shares in the hands of the public (free float) or the value of the free float (market capitalization).

“The market capitalization in calculated by multiplying the number of shares listed by the price of the shares. Thus, where there is a fluctuation in the share price, free float can be affected.”

Analysts/Operators react

Analyst and Head of Investment & Research at Fidelity Securities Limited, FSL, Mr Victor Chiazor said: “The NSE rule on free float requires listed companies to have a minimum of 20 per cent shares in issue in the hands of the public or a minimum of N40 billion worth of its shares in the hands of the public.

“Over the years the NSE has asked companies yet to meet the requirements to forward to the Exchange an action plan and time line on how they plan to achieve this NSE requirement.

“Most companies have sent in frameworks on their plans but unfortunately most of these companies have been unable to meet the set objectives.”

On why companies are not complying to the rule, he said: “Going by the structure of the market we know that achieving this requirement for a few companies may be tough but we believe the NSE has given enough time for this to be implemented and we believe it may be time to put in place tougher sanctions on companies yet to meet the requirements so as to achieve a level playing field for all listed entities.

“The current share price of listed companies who have not met the minimum free float requirement may not be a true reflection of what it should be as investors are only scrambling to buy the limited shares available in public and this position needs to be set right to bring confidence to the market at large.”

In his own part, analyst and Managing Director, APT Securities Limited, Mallam Garba Kurfi said: “Companies that did not meet up with the floating limit is not their fault in my understanding. Is there any demand of the shares did not sale? It’s there wasn’t enough demand off the shares to sale to meet up the requirements.

“But for those that choose to be classified as premium stocks have a new minimum by value of N40billion which is lower than 20 per cent as requested to meet up.”

On whether companies are intentionally flouting the rule to keep much holdings to themselves, he said: “No if you are premium listed companies you need just N40billion worth of value in the hands of the public and that is why Dangote Cement Plc meet up otherwise can our market absorb 20 per cent of the issued and paid up capital; that is about a trillion naira. Other companies defaulting are not delivering to market expectations as the market is not ready to pick up the 20 per cent.”

Reacting as well, analyst and Chief Operating Officer, InvestData Consulting Limited, Mr Ambrose Omordion, said: “The issue of free float or what we call lack of float in the market leads to overvaluation of some stocks because there is lack of volume to move the price of shares either upward and downward. Most of these companies refused to allow the public to have total benefit of free float.”

On what the regulators should do to ensure compliance, he said: “The regulators are not doing anything meaningful to address the issue of illiquidity. I will encourage the NGX to also bite by placing sanctions and penalties where necessary so that these defaulting companies can sit up so that there will be confidence in the market.

“The regulators should be unbiased umpires that regulate the market. They should not play hanky-panky especially with the big listed companies who had refused to float 20 per cent to the investing public. The regulators should enforce compliance to make the companies play the rules of the game.

“The use of technology in the market is a very good innovation that is there to boost market participation and fair play. Free float will promote transparency, equity and improve confidence.

“The promoters should not keep much of these shares to themselves because without volume prices cannot move or they will remain flat. If there are lot of activities, the investing public will benefit and the economy in general would be boosted through improved market which is used as barometer for growth.”

Companies’ response
As at the time of reporting all enquiries sent to defaulted companies were not responded to except for Prestige Assurance Plc.

The Prestige Assurance said: “The Board has written to the Exchange about it and we are working on it to meet the requirement.”