NSE Headquarters
Eromosele Abiodun writes that efforts by the Nigerian Stock Exchange (NSE) to get international oil companies (IOCs) and major telecommunications companies operating in the country to list on the exchange received a boost recently when the Securities and Exchange Commission (SEC) approved its amended rules, asking if this set of new listing rules would really attract the multinationals?
Despite several transformational exercise the exchange has gone through in recent years, the bid by the NSE to get multinational oil and telecommunications companies operating in the country to list on the exchange has not yielded the needed fruits.
As at today, the only telecoms company(Starcomms Plc) listed on the NSE has been making losses since 2006. On the other hand, oil firms listed on the exchange are downstream operators. Even upstream operators promoted by Nigerian prefers to list on Exchanges in Europe. For example, Afren Nigeria Limited, an oil and gas exploration and production company sponsored by Nigerians is quoted on the London Stock Exchange (LSE).
Most of the companies however, cite illiquidity challenges and the NSE’s listing rules as their reasons for not listing on the Nigerian exchange
Telcos, Oil Firms Law
To improve the trend, stakeholders in the capital market have been putting heads together to find a way out. On its part, the NSE had to relax it rules, a move that was recently approved by the SEC.
For instance, a leading commercial law firm, Babalakin Co, recently facilitated a forum where this issue was discussed.
The law firm hosted the Capital Market Solicitors Association of Nigeria’s quarterly seminar in Lagos with theme: “Re-awakening the Capital Market through Participation of Key Players in the Economy.”
Also, the Chairman, House of Representatives Committee on Capital Market and Institutions, Herman Hembe, has sponsored a bill that would make it mandatory for oil majors to be listed on the NSE.
At the seminar, the bill for the compulsory listing of telecommunications and petroleum operators in the capital market was critically examined.
A Senior Associate at Babalakin Co, Mrs. Abimbola Nibson-Niboro, said that considering the implication of the bill, there was the need to for a robust discourse and awareness about the bill.
“The proposed compulsory listing is aimed at compelling the companies to go public and list their shares on the NSE. The aim is to boost the capacity of the capital market and stimulate economic growth. The move is also to encourage transparency in the operations of the companies particularly those within the petroleum industry as public companies are required to comply with more stringent corporate governance principles that tend to foster accountability and better practices.
“Most of the target companies have foreign affiliations and this raises one of the many concerns that the policy implementation may discourage foreign investors from setting up shops in Nigeria. Other concerns are that the Nigerian capital market may not be able to accommodate the anticipated listings and this may lead to a crisis situation,” she said.
Law on Listing Oil Firms
Hembe said his bill was already before the House of Representatives, saying that the Committee would work with its counterpart in the Senate to ensure that the bill became law before the end of 2012.
“Parliament needs to lead the fray and is doing so to ensure that national economic growth is engendered via capital market. We are in the process of looking at the bill, having useful engagements within parliament and with other stakeholders that will lead to the passage of the bill to an act we can all be proud of,” he said.
According to him, contrary to apprehension that the bill would make it compulsory for the telcos and upstream oil firms to list their shares on the Exchange, the Committee is working towards a law that would encourage those firms to list and enjoy numerous benefits.
“To engender a willingness to participate, we should provide a legislation that covers incentives, unbundling of stringent eligibility requirements that create high barriers for potential entrants and hinder participation by willingness business and the adoption of options that promote foreign investment in our economy under terms that support our national interest without exposing the market to the dangers of the past,” he said.
He noted that the overall goal of the project (legislation) was to deepen the equities market and support the wealth creation initiatives of the NSE in a manner that allows it reflect and complete economic loop between key economic sectors and market segments on the bourse.
“The House committee intends to work closely with the NSE, Securities and Exchange Commission (SEC), Ministry of Trade and Commerce and the Ministry of Finance on providing fiscal and legislative backing for clear and unambiguous set of rules that local and foreign players can relate to using best practice benchmarks,” Hembe said.
New Listings Rules
However, the Exchange recently recorded a major milestone in its quest to attract more listings as the amendment proposed to its listing rules was approved by the SEC.
The Chief Executive Officer of the NSE, Mr. Oscar Onyema, said that the Exchange embarked on reviewing the listings rules because some of the stakeholders including prospects, listed companies, issuing houses, and brokers asserted that the listings rules were inflexible.
Onyema said: “The requirement that companies must have a five-year financial and operating track record has been cited as hindrance to many companies that would have been listed on The Exchange. Specifically, this is said to have led to the exclusion of some exploration and production companies which are not in a position to provide such records.”
“Our research reflects that many leading exchanges have greater flexibility than we do, particularly on the quantitative requirements in the area of profit, market capitalization, price, public float, among others”.
The General Manager, Listings Sales and Retention, NSE, Mrs. Taba Peterside, explained that the main board listing requirements for New York Stock Exchange (NYSE), London Stock Exchange (LSE), Johannesburg Stock Exchange (JSE), Singapore Stock Exchange (SSE), NASDAQ and other leading exchanges were reviewed vis-à-vis the NSE.
She added that the alternative board listing requirements for Alternext (New York Stock Exchange), AIM (London Stock Exchange), AltX (Johannesburg Stock Exchange), ACE (Malaysia Stock Exchange), Catalist (Singapore Stock Exchange ) and other leading exchanges were also reviewed vis a vis ASeM.
Shedding more light on the amendment, Peterside said that the new rules determined quantitative criteria suitable for the Exchange from comparison with other exchanges and an analysis of current listed companies over a three-year period.
The exchange, noted also consulted widely with existing listed companies, prospects and other industry stakeholders and expressed the belief that the new listing requirements would act as a major catalyst to attracting new companies to list on the Exchange.
Experts’ View
However, experts believe the situation will remain the same in the years ahead if the NSE do not make effort to deepen the stock market.
While presenting a paper titled, “Spurring the next wave of listings: Telecoms, Oil and Gas companies, challenges and possibilities, at a forum in Lagos, Managing Director and Chief Executive Officer of Seplat Petroleum Development Company Limited, Mr. Austin Avuru, stated that the primary limitation of the NSE was its low debt of liquidity, adding that an average daily trade value of N2 billion ($13 million) could not provide liquidity to sustain a few oil and gas producing companies.
He said: “A $2.5 billion company like Afren require a minimum float of $625 million. Therefore, investors will be looking for a much more liquid Exchange to provide them the comfort of easy exit whenever they want to.”
He added that the NSE should provide the local visibility and the indigenous flag, which the Nigerian companies need to fly around the world.
“Needless to say that the listing a few of such companies will greatly help to deepen the NSE. The recent spate of divestment by Shell, Total and Eni would provide the right size and mix of assets to attract attention o the LSE. If the process is successfully concluded, it would most likely throw up some three to four Nigerian independents on the London and Nigerian Stock exchanges,” he said.
While encouraging the NSE to embrace small companies, he stressed that other Exchanges in developed countries have a lot of small to medium size oil and gas exploration and production companies listed on their official list.
He said: “Companies are set up with minimum seed capital and then listed, even before they actually acquire oil and gas leases. Their listing then becomes a veritable platform for raising capital quite quickly once they acquire assets for development.”
This, he said, has greatly enhanced the growth potential of such companies as their ready access to capital gives them competitive edge over their peers.
“The largest pool of investors in the oil and gas sector is fund managers (private equity funds, insurance pools and sovereign wealth funds). This category of investors often cash out at some predetermined internal rate of return threshold. Their preference, therefore, would naturally be in listed companies, which provide them easy exit when they are ready to cash out, ”he said.
The Need to List
While encouraging start-ups to list on the NSE, Avuru said a listed company could raise equity funds from a diverse pool of investors to finance viable expansion, new acquisitions or reduce debt overhang stressing that a well-run company with attractive performance indices can take advantage of market liquidity to raise much needed capital in relatively short time.
A listed company, he added, offered its shareholders liquidity for their shares as the shares could be traded and are convertible to instant cash,
“Similarly, the shareholder’s net-worth in respect of his holding in the company is an open, daily report.”
Listed companies, he said, run an open book and are subjected to very strict reporting and disclosure rules and standards.
He said these high standards, in turn, establish a high level of credibility on these companies. Avuru further stated that credibility levels also confer favourable credit ratings on such companies.
“Mergers, acquisitions and capital injections, especially of a cross border nature are much easier done with listed companies because of the ease and transparency in valuation and relative ease of due diligence, “he said.
Why Nigeria businesses Are Reluctant
Speaking on the reluctance by companies in Nigeria to list, he said: “The answer may be quite simple. A country like ours with very low standards of accountability and business ethics will make it very attractive to stay away from the strict scrutiny of listed companies. It is so easy to get away with tax avoidance and various shades of fraudulent dealings resulting in much higher profit margins that the scrutiny of a public listing becomes a major distraction and an avoidable headache.”
He added that there was also the issue of control, noting “most Nigerian entrepreneurs like to exert a vice grip on their businesses and would hate to lose this control to corporate governance rules that apply to listed companies.
Also public offers of shares result in dilution of the original promoters/shareholders of the Company, a phenomenon that is very unpopular with most Nigerian entrepreneurs.”
Avuru noted that a country with a shallow capital market was often reflective of a poor corporate culture and depth.
He said what you find in that circumstance, was the absence of a large number of long term, sustainable businesses. He said most businesses in such an environment hardly survive their founders and often sacrifice long-term business sustainability for short term financial successes.”
Oil and Gas
Avuru added that oil and gas exploration and production, generally referred to in industry parlance as the upstream sector, is a high risk, high reward business.
The biggest risks, he said, derived mainly from three key variables: Exploration success/failure, reservoir/production performance and commodity (oil and gas) price.
“Even in a success case, the gestation period between exploration and actual production and sale of crude oil or natural gas would typically range from five to fifteen years. Thus the combination of high business risk, capital intensity and long gestation period means that young, upstart companies must look principally to large pools of equity funding as their primary sources of finance. Debt and combination instruments can then ride on the back of equity support to provide bridge or additional funding, “he said.
He added that on the London, Toronto and New York Stock Exchanges were to be found a lot of small to medium sized oil and gas exploration and production companies.
“In many cases, particularly on the Toronto Exchange and the Alternative Market in London (AIM), companies are set up with minimum seed capital and then listed, even before they actually acquire oil and gas leases. Their listing then becomes a veritable platform for raising capital quite quickly once they acquire assets for development. This has greatly enhanced the growth potentials of such companies as their ready access to capital gives them a competitive edge over their peers,” he said.