It is increasingly hard to tell private and public firms apart in Nigeria, given that the portion of companies’ shares regulators require to be owned by outsiders – persons other than companies’ directors and insiders – already negligible before now, is fast shrinking out.

And market watchdogs appear to aid a trend that is not only diminishing the rights of minority shareholders, but increasingly making it a possibility for insiders to use their huge holdings to manipulate the market, a PREMIUM TIMES investigation has found.

The Nigerian Exchange Limited (NGX)’s rule stipulates that every company listed on its premium and main boards, the two principal listing segments, ensure a minimum of 20 per cent of the company’s total shares is held by the public and available for public trading. This portion of shares that can be publicly traded is called free float.

The remaining 80 per cent could be held by a league of privileged investors called insiders, often comprising directors and their relatives, promoters and, in some cases, governments. The premium board has an elite class of companies that meet the most stringent corporate governance, capitalisation and liquidity parameters.

As of July 11, at least 13 companies listed on the Lagos-based stock exchange fell short of the 20 per cent minimum free float requirement, according to data from Financial Times.

Such shortcoming can allow a powerful few sway a corporation in the direction they want, by overriding the resolutions of their boards as well as those of common stockholders. They can also manipulate share prices by refusing to sell their shares, or selling them in bits, forcing prices up.

Yet, even with these troubling implications, the defaulting public companies have not broken any regulation or law. The regulators, the Nigeria Exchange Limited and regulator the Securities and Exchange Commission (SEC), have provided a leeway for companies to sidestep the 20 per cent requirement, by requiring that they alternatively ensure the value of their shares in the public’s hand is equivalent to N40 billion or N20 billion minimum.

Market analysts say gatekeepers in Nigeria are letting down the guard on quoted companies and are literally aiding an abuse that could probably set up a devastating stock market collapse, the type witnessed in 2008 when Nigeria’s multi-trillion naira equities collapsed.

Increasingly, insiders of premium and main board firms have been storming the territory belonging to minority shareholders fast to claim parts of the latter’s statutory 20 per cent minimum shareholding, taking advantage of the escape clause provided by the regulators.

Some of the biggest corporations in Nigeria have exploited this clause for years to their advantage in what analysts say reek of market manipulation. In some cases, both rules may be flouted without consequences.

Skyway Aviation Handling Company (SAHCO) PLC, acquired by the Sifax Group from the Nigerian government after privatisation in 2009, is almost 100 per cent owned by its chairman, Taiwo Afolabi, and his wife, Folashade Afolabi, as of August 3, data from African ‘Xchanges, a website which tracks all the stock exchanges in Africa shows. Its free float is less than one per cent.

As of September 5, SAHCO’s less than one per cent capitalisation stood at about N27.4 million, significantly less than the N20 billion prescribed by the escape clause. The figure was computed using the firm’s N4.05 share price as of Friday.

The ratio effectively makes the aviation ground handling services provider a private business masquerading as a public firm. SAHCO is not known to have faced the regulators’ sanctions.

A list containing sanctioned individuals and firms which the NGX shared with PREMIUM TIMES does not include SAHCO. The list contains mostly small stockbroking firms and a few individuals and dates between 2013 and 2018.

Controversial Rules

Rule 12.2 subsection B5 of NGX’s rulebook says premium board firms may choose to disregard the 80 per cent limit provided the value of their shares in the public’s hand is equivalent to N40 billion minimum.

Introduced into the NGX legal framework on July 15, 2015, the capitalisation clause was accepted as a premium board rule the same day when SEC gave the go-ahead for its adoption.

In January 2020, the NGX relaxed the already lax regulation, extending that controversial privilege to corporations on the main board in an amendment that again received the blessing of market regulator, SEC.

The new rule gives main board firms the liberty to maintain a free float worth N20 billion in the event they are not able to meet the 20 per cent requirement.

“Clearly, it’s not something that is favourable for institutional and minority investors,” said Akinloye Ayorinde, research analyst at investment bank and broker United Capital Plc.

“First, it eliminates that sense of belonging in the company for most of these shareholders because previously when the former free float was 20 per cent basically, as an institutional investor, I can own a certain percentage.

“At least I need to be carried along in terms of whatever business decisions and things that go on in the company, particularly if I have above maybe five per cent. Sometimes you can nominate maybe a member of the board of directors.

“But with the stock exchange’s new policy adjustment, if the majority owners of companies or insiders decide to now acquire more shares such that they eliminate most of the other investors … then obviously it discourages investors from investing in those particular companies.”

Mr Ayorinde said the latest policy shift might spark a liquidity crisis because the public float in many companies has become very small and “that’s one thing institutional investors don’t like.”

According to the World Bank, “higher free float is commonly an indicator of better shareholder protection, since dispersed ownership necessitates stronger rights for minority shareholders.”

World Bank

Analysts argue that some quoted companies are supposedly large not because they truly have commensurate market value or have earned that status by way of impressive financial performances over the years, but because they can create a scarcity of their shares in a way that raises their prices and market capitalisation. Market capitalisation is the product of the total number of a company’s shares and its share price.

“When stock prices are divorced from fundamentals, it cements the public perception that markets can be manipulated — by a small group of insiders or a large group of determined traders — and therefore can’t be trusted,” equity analysts at New York Times said.

“That could have long-term implications beyond what happens with AMC, GameStop or any other stock in the headlines.”

Godstime Iwenekhai, who heads NGX’s Listings Regulation unit, told PREMIUM TIMES “the possibility of share price manipulation/market manipulation occurring is not largely or solely dependent on available float.”

“These egregious infractions can be perpetrated by holders of securities in companies with any stipulated free float, or even by persons who are not insiders.”

Even if possible, the likelihood of minority shareholders of a firm with a three per cent float, for instance, orchestrating price manipulation is almost non-existent compared to the insiders.

The regulatory gap allowed by the NGX, and the apparent lack of sanctions, certainly provides a cover for insider manipulation.

“It creates room for market manipulation actually. Yes, I know there are requirements that insiders should always disclose whatever shares they are buying in their companies and things like that,” Mr Akinloye said of the new capitalisation clause.

“As an insider, if I own 95 per cent of the shares of my company and I want my share price to be at a certain level, I can easily go there to buy or sell or do anything because I am controlling the majority of the volume.”

BUA Cement Listing

Abdulsamad Rabiu, chairman of BUA Group, executed a merger of his Obu Cement Company Limited and Cement Company of Northern Nigeria, in which he owned a majority stake, in January 2020.

The ensuing entity, now known as BUA Cement Plc, became Nigeria’s fourth biggest company by market value, with a capitalisation of N1.18 trillion at listing.

Abdulsamad Rabiu, BUA Cement chairman

“…Rabiu pulled off a public listing that seemed to defy logic,” Forbes said in an article last year.

“Through the magic of the markets, the combined entity, BUA Cement Plc, which listed on the Nigeria Stock Exchange on January 8, 2020, is worth nearly 3 times what the two companies were worth before the merger.”

In less than a year, the company’s share price, originally listed at N35 per share had ballooned to N85.

The magic was simple. Mr Rabiu and his son held on to 98.5 per cent of the shares at listing, while only 1.5 per cent was available for the investing public to scramble for, easily creating a scarcity that turbocharged BUA Cement’s share price on the back of an overwhelming demand for its shares.

According to Forbes, that single factor lifted Mr Rabiu’s wealth by an incredible 77 per cent to $5.5 billion in just one year, making him the biggest mover on the Forbes African billionaire Index for 2021 and catapulting him to the sixth position on the ladder.

Although the cement-maker clearly fell short of the 20 per cent minimum free float requirement, it latched onto the loophole in the NGX rule that allows at least N40 billion worth of shares to be public-owned.

For a firm whose market capitalisation was N1.18 trillion at listing and which touched N2.88 trillion on January 4, a N40 billion requirement for the minimum value of its shares to be held by the public clearly came a far too lenient option by all standards.

Companies with a tiny float and whose shares are artificially scarce, tend to be quoted well above their real prices because they carry a value that is not their own.

Ayodeji Ebo, head, retail investment at Chapel Hill Denham, acknowledged “it is possible (that insiders of companies with tiny float dictate the direction share prices will go) because they control a major part of it.”

“But because of corporate governance, they will also be mindful of not trying to manipulate,” he added.

MTN Nigeria’s Listing

The listing of the Nigerian unit of Johannesburg-based wireless operator, MTN, on the NGX in May 2019 got off to a turbulent start, and provoked a mixed bag of reactions from authorities and analysts.

Few days into MTN Nigeria’s debut, the pace of increase of its share price was so unprecedented it swiftly drew the attention and involvement of SEC and the Economic and Financial Crimes Commission, which on suspecting a foul play, was compelled to meddle.

The telecom heavyweight got admission into the premium board listing around 20.4 billion common shares at N90 per share by introduction after the transaction got a go-ahead from SEC.

MTN Office

That brought its market value to N1.832 trillion, which ballooned to N3.033 trillion in just six days in a development that would rank as the most dramatic and puzzling rise in share price for a newly listed stock in Nigeria’s stock market history.

A frantic rush for the telco’s shares followed as the share price rocketed 60 per cent in its fourth day and posted consecutive gains in its first six trading sessions.

The twin factors of MTN having a tiny float of less than five per cent at listing and its humongous reputation as Africa’s largest mobile network operator opened a floodgate of explosive demand for its shares, helping blow its share price out of proportion to its real value.

“Suspicions grew among public investors and stakeholders. It was one of two options, shares were either being hoarded – market manipulation – to propel a higher share price before any share offering through an IPO or that the Exchange was conniving with existing shareholders of the company to avoid releasing larger share volumes for trading,” said Ajifowoke Gbenga, business journalist at Ventures Africa.

This Day newspaper quoted a source as saying MTNN’s original request for listing got turned down by the NSE (now NGX) because of “grey areas and requests for certain waivers made by the company” before the application was reviewed again without SEC’s authorisation.

About two weeks after the listing, EFCC officials launched a crackdown and swooped on MTNN’s Ikoyi’s office to question the telco’s management staff and demand documents connected to the listing.

Heineken B.V.

Heineken B.V, after discovering great potential in the Nigerian beer market, commissioned its special purpose entity named Raysun Nigeria Limited to mop up new shares in Champion Breweries equivalent to 24.3 per cent of the latter’s common stock.

The deal valued at over N4.9 billion, according to an NGX document, lifted Heineken’s existing stake from 60.4 per cent to 84.7 per cent, making it the majority owner of the company, a status it also holds in the country’s biggest beer-maker, Nigerian Breweries.

The sky-high jump in share price that followed was not so much of investors’ confidence in Heineken’s management ability or reputation driving huge demand for Champion Breweries shares as the scarcity Heineken’s enlarged stake had created as reported elsewhere.

According to African ‘Xchanges data, Champion Breweries’s shares more than tripled within three weeks following the acquisition, its market capitalisation surging from N7.3 billion (at N0.93 per unit) to N29.4 billion (N3.76 per unit).

As of August 3, 2020, the portion of Champion Breweries’s shares held by the public was not up to one-tenth.

The Nation, citing analysts’ reactions, said “… the new transaction has created deeper free float deficiency for Champion Breweries.”

A Lesson from India

When the scale of a company’s share ownership is tilted more in the way of insiders, limited liquidity in its shares usually follows.

“A lot of fund managers look at liquidity. They look at average volume before they buy stocks. You don’t want to buy shares that you cannot sell. So if you don’t ensure that you have average volume or you look at the value that is substantial, nobody will buy into those stocks because you will be trapped,” Mr Ebo said.

Between November 2020 and last June 2, the shares of Orchid Pharma Limited, an Indian drug-maker soared 7,700 per cent, prompting the country’s securities regulator and analysts to scrutinise the unusually big jump, according to Bloomberg.

Close to 99 per cent of Orchid’s shares were held by founders and lenders, leaving barely 2,000 of the company’s shares to be traded daily on average.

Orchid, which had just crept out of bankruptcy, found tremendous demand from investors desperate to own parts of the negligible floating stock, helping the share price to hit the maximum upward daily limit almost 100 times within seven months.

It followed that the stock, which was quoted at 18 rupees on November 3, began a steep crash in early April after it hit 2,680 rupees and fell to 1,401.95 rupees on June 2.

“Such rallies could pose considerable risks for investors as those firms typically don’t have good fundamentals, according to some market watchers,” Bloomberg’s Ashutosh Joshi.

India’s market watchdog, sensing a bigger danger ahead, is contemplating cutting the time given to firms wanting to re-list after bankruptcy resolution to raise their public shareholding to a minimum of 10 per cent within six months from the present 18 months.

It will maintain the rule mandating companies of this type to ultimately attain at least 25 per cent free float within three years of relisting.

Other jurisdictions

While Page 436 item xxii of SEC’s rulebook recognises insider trading and market manipulation as “designated categories of offences,” the same commission that approved the capitalisation clause that makes it easy for premium and companies to manipulate shares if they wish.

SEC did not respond to multiple requests for comment. Its spokesperson, Efe Ebelo, did not reply to messages or answer calls.

In defending the alternative regulation, the NGX argued that free float by capitalization is the practice in other jurisdictions like Hong Kong, Shanghai and B3 (Stock Exchange of Brazil), where waivers are granted to highly capitalised companies with less number of shares in the hands of the investing public but with high value of shares.

But B3, located in São Paulo, Brazil, operates a minimum free float of 25 per cent across its listing segments without the capitalisation option, contrary to that claim.

The Hong Kong Stock Exchange and Shanghai do not permit the option also. However, these two allow reduction of the 25 per cent minimum free float in cases where companies have certain high threshold levels of market value.

The soft clause easing the path of entry for companies onto the premium and main boards is also absent in those of the Johannesburg Stock Exchange (JSE), the only equity market bigger than Nigeria’s in Africa, as it is in bourses like Brazil’s São Paulo Stock Exchange, National Stock Exchange of India and even London Stock Exchange (LSE).

JSE runs a 20 per cent free float in its premium board listing, while Brazil, India and the UK each operate 25 per cent without any of all welcoming the capitalisation option.

In fact, moves by the British government with support from LSE authorities to water down its public float has been drawing fierce pushback from the shareholder community since the review began in November 2020.

The government wants the percentage slashed from 25 per cent to 15 per cent but institutional investors including mutual funds and pension managers fear the campaign will do enormous damage to corporate governance standards, with insinuation that what authorities hope will bring flexibility to the system will instead promote abuse.

Analysts observe that institutional investors who most times account for most of the activity and hefty flow of cash into and out of the open market, abandon stocks with small free float because those shares lack the liquidity needed to make them easily tradeable and their price movement and volatile.

“Before you take decisions to buy (shares in) a company, the fact that the free float of a company is small is a red flag,” Mr Akinloye said.

“When you particularly find investors from like UK, one of these things you look at is the free float of the company. They want to be sure that whenever they want to sell, if the free float is very small, the insiders will be controlling the liquidity of the stock and if they decide they are not selling just because you want to drive prices higher and people want to buy.”

Mr Iwenekhai of the NGX said the capitalisation clause requiring companies to meet the free float requirement through value was not designed to assist companies to subvert the rules.

“The intent is to provide an alternative for companies to meet the free float requirement where market conditions do not allow substantial shareholders to sell down their holdings.”

Foreign portfolio investment (FPI) into the Nigerian FPI into the Nigerian stock market shrank from N96.74 billion as of June 2019 to N23.42 billion at the end of June this year, figures from the NGX’s Domestic and Foreign Portfolio Investment Reports show.

Analysts say the inadequacies in the regulatory framework of the NGX may open up a credibility gap and deal a blow to the image for an exchange, which itself transitioned to a quoted company this year.

They argue in support of strengthening regulations and enabling laws.

The chairpersons of Senate and House of Representatives committees on capital market, Ibikunle Amosun, and Ibrahim Babangida respectively, did not answer phone calls and text messages from PREMIUM TIMES seeking comment.

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