NSE Headquarters

The lobby at the National Assembly for legislation that makes it mandatory for multinationals to list on the Nigerian Stock Exchange, according to investment analysts, may have its pros and cons. But investment analysts contend that the effort by the NSE to relax the  listing rules will make the equities market more attractive, reports Festus Akanbi

As the effort to roll out the legislative framework that will compel multinational firms to list on the Nigerian Stock Exchange gains momentum, a groundswell of mixed reactions from investment analysts is building up on the policy they say could attract or deter the flow of foreign direct investment into Nigerian economy.

Advocates of the “compulsory listing” of multinational firms have argued that compelling big corporations in niche sectors of the Nigerian economy, especially the telecommunications and oil and gas companies to list on the exchange will significantly raise the capitalisation of the stock market which is currently estimated at slightly above $40 billion.

One of the architects of the planned legislation is the Central Bank governor, Mallam Sanusi Lamido Sanusi, who would like government to set a time frame within which multinationals yet to be listed on the exchange must do so. He made his case at last year’s economic summit, saying it was no longer reasonable for such companies to be left operating without providing some opportunities for Nigerians to own part of their equity for the economic benefit of the country.
Sanusi, who specifically fingered MTN, Chevron, Shell and other multinational companies as entities that should no longer be allowed to operate under the current arrangement that disallows Nigerians to own part of their shares, asked why the country could not enact a law to address the lapse. According to him, as a first option, the federal government should give an 18 month ultimatum to the companies to complete processes that would facilitate the listing of their shares on the stock exchange.

He said: “There is now the need for the federal government to come up with adequate legislation that will compel multinational companies such as MTN, Globacomm, Mobil Oil Company, Agip Oil, Texaco, and a host of others, to enlist in the nation’s stock exchange.”

A Lagos-based market analyst and investor, Mr. Abiodun Hakeem, who also keyed into Sanusi’s argument added, “There is need to urgently shore up the liquidity of Nigeria’s capital market which will in turn restore the much-needed investor confidence. “Getting the telecommunication firms as well as oil and gas multinationals to list on the exchange will boost liquidity that will transform the fortunes of the capital market,” he said.

Hakeem cited instances of some African countries that have legislations in place compelling multinationals to list on the host countries’ exchanges. He said, “In 2002, Kenya enacted the Foreign Investor Regulation, which compelled multinationals operating in the country to list on the capital market. The legislation, provided for a minimum of 25 per cent reserve of the issued share capital for local investors, while the balance of 75 per cent was left for other categories of investors.”

Note of Caution

Investment analysts, however, warned recently that the seeming exuberance of public office holders towards what has been described as an ambush against multinational firms could be counter-productive should the National Assembly buy into the policy.
A Lagos-based analyst, who spoke on the condition of anonymity, said it is wrong for anybody to think of compelling investors to list on the stock exchange. According to her, “Capital is very mobile; explaining that investors cannot be caged given the opportunities that await them in other markets anytime the environment is not conducive for them in Nigeria.”

She added that the Nigerian Investment Promotion Act, 1995, already provides for unconditional investment guarantees, and transfer of capital, profits and dividends to foreign companies operating in Nigeria. She advocated for an incentive scheme or legislation that will encourage listings by multinationals, rather than making it compulsory by law.

Equally, London-based Head of Macroeconomics, Standard Chartered Bank, Razia Khan, told THISDAY in an interview last week that although the proposed arrangement has the capacity to raise the capitalisation of the equities market, it is also capable of sending the wrong signal the international community. 
“Yes, it might raise the capitalisation of the NSE. On the other hand , a local listing requirement might also be seen as adding to the cost of doing business in Nigeria, and may therefore discourage some investors from being active in the country,” she said.
According to her, “If the sole aim of the authorities is to provide a boost to the NSE, there might be a better way to go about this. Create tax incentives for local listings (for both Nigerian and foreign firms). Do it in a non-coercive way, and it is more likely to yield positive results. There are few downsides – only upsides.”

Faulting the call for a compulsory listing of multinational firms in Nigeria, Khan added, “It might add to the perception of Nigeria as a place where there are onerous local listing requirements. A lot would depend on how important the Nigerian market was to the firm involved. Nigerian policymakers would also need to think about how much they needed that investment.”

She was of the opinion that “in time, the tightened regulatory environment would instill more confidence in the NSE. (In the past, this was seen to be a big drawback). Ongoing structural improvements in the Nigerian economy, as well as a larger savings pool from domestic institutional investors will also help.”

Nigerian Equities Market

In a comprehensive research on the nation’s stock market, BGL Plc, a leading investment and financial advisory firm, recently wrote that the Nigerian equities market was not a true representation of the broader economy. “At $40 billion, the market capitalisation of the NSE pales into insignificance when compared to South Africa’s market value of approximately $854 billion, for example. The Nigerian economy has big corporations that can truly help with catching up. The listing of the telecoms firms alone can add another $45 billion to the market’s value.

“It is baffling that with agriculture’s significant contribution to GDP, it only represents a minute fraction of the value of the equities market. Even at its five year peak in 2007 when agriculture contributed 42 per cent to the GDP, the market capitalisation of the quoted agriculture companies contributed a meagre 0.36 per cent to the market value.”
BGL noted that the sector currently has only five companies listed is even a more damning commentary. Of these five companies, two dominate the sector. Okomu and Presco are primarily into palm oil production and are the most prominent listed companies in the agriculture sector.

The Nigerian Bureau of Statistics further reported that current GDP figures do not fully capture the contributions of relatively new sectors like telecommunications. Starcomms remains the only telecom firm listed on the exchange and a bad testament at that. Following a string of losses after listing, Starcomms has remained stuck at its 50 kobo par value since August 19, last year.

BGL therefore noted that while companies like MTN may be extremely profitable (with total revenues of N749 billion and EBITDA of N473 billion in 2010), there could also be wacky listings in the telecoms sector with lower than expected revenues and earnings profile.

Lessons from the Past

It warned that blanket conscription of telecoms firms into the exchange could bring both the good and the bad, which may undermine investors’ wealth. This concern also extends to the oil and gas sector which has its risks and rewards in equal measure.

“We have our fears about forcing multinational companies to list on the Nigerian Stock Exchange. We believe getting these firms to list should be done in an orderly way and not a crack-handed manner. Forcing them to list could lead to a repeat of history when the military regime in the 1970s overzealously nationalised foreign-owned companies to force the last colonialists out of the Southern African region and protest against apartheid in South Africa. As a result of that episode, Nigeria lost first rate multinationals like British Petroleum and Barclays Bank.

“Oddly enough, the current status of the two firms that metamorphosed from that nationalisation -African Petroleum and Union Bank, respectively, may be signposts that if badly managed, the process could prove to be a costly exercise. Union Bank needed a costly government bailout in recent times while African Petroleum left investors burnt from stock price infractions. Repeating this through legislation could create yet another conundrum that may take decades to undo,” BGL pointed out.

Beyond Telecoms and Oil                                                            

BGL further observed that “recent press reports infer that there are plans to draw up a legislation to force big multinational corporations to list, the target being companies in the oil and gas and telecommunications sectors. Some of the firms that could be affected include Chevron, Shell and Mobil in the oil and gas sector. Firms in the telecoms sector include MTN, Etisalat, Airtel and Globacom.”

Though the fixation is on these sectors and firms, BGL argued that if this rule of revenue is used to determine listing, many firms outside these sectors could be affected. “For instance, none of the top 20 non-oil exporters in Nigeria, which collectively earned $1.5 billion in revenue in 2011, from exports of mostly agricultural products is listed on the NSE.

“For all the cries about poor state of the agriculture sector, the bulk of these companies deal in agricultural commodities. This implies that using this rule of revenue will affect more firms beyond the targeted ones.

“The implementation of a listing legislation may encourage some of these firms to move production and operational headquarters into other countries in the region while still enjoying tariff-free access to the Nigerian market.
“In addition, as Nigerian builds more local brands which are expanding into the rest of the continent, these companies could become victims of reciprocal or copycat legislations. Nigerian brands that could be affected include Dangote Cement, First Bank of Nigeria Plc, Zenith Bank Plc, GTBank Plc, United Bank for Africa Plc, and Access Bank Plc,” it warned.

Make the Market Competitive

As a way out, BGL said, “Rather than a short-sighted approach to conscripting listings on the exchange, we should strive to build a competitive market that makes it relatively easy for businesses to freely enter or exit. This market will not only attract more Nigerian corporations but will serve as the regional hub to West African companies seeking to list and raise capital as well as to the entire continent.”

Other analysts added that if the government is bent on deepening the equities market, it should start with the listing of public utilities. “We should not take our big utilities and public corporations off our radar. Should NNPC and PHCN not be the first to cast the stone? Petrobras, the Brazilian version of the NNPC is listed on the country’s exchange and the government only holds 48 per cent of the publicly quoted equity holding in the company,” volunteered one investment banker.

Another approach outlined was the need to deepen the bond market and create a virile secondary market for corporate bonds. Analysts said that by doing this, we could encourage some of the target companies to meet short to medium-term funding needs through corporate bonds without necessarily listing their equities.

Relaxing Listing Rules

Meanwhile, as public office holders continue to make a case for listing of multinationals, the management of the stock exchange has restated that it is putting in place incentives that would encourage major companies in the telecommunications, power, oil and gas sectors of the economy to list their shares.

Chief Executive Officer, NSE, Oscar Oyeama stated this at the recent Capital Market Solicitors Association (CSMA) members’ forum in Lagos. The forum hosted by Babalakin Co. had as it theme: “Re-awakening the Capital Market through Participation of Key Players in the Economy.”

The NSE boss noted that in the first place, the listing rules of the exchange had been reviewed so as to make it easier for these companies to access the Nigerian capital market and eventually list their shares. He disclosed that regarding the power sector, the exchange was in active engagement with the Bureau for Public Enterprises, which is in charge of the privatisation of the power distribution and generation companies, to ensure that the Share Purchase Agreements incorporate clauses that would ensure that those companies are listed.

“Our new listing requirements have reduced the required track record for a company wanting to list from five to three years and even below. This is permissible if the company has a core investor with a strong track record. Indeed, BPE has been advised that an immediate listing – as soon as the sale to core investors is finalised – is now possible under our new listing requirements,” he said.

Onyema added that in the oil and gas sector, the exchange was also discussing extensively with indigenous oil and gas upstream companies, and was hopeful of seeing the first listing in this sub-sector in 2012. “This group of companies was particularly vocal in calling for a change to our listing requirements. Their feedback has been taken on board in the new listing requirements and we believe that the prospects for indigenous upstream companies to list are now higher,” he said.

“Parliament needs to lead the fray and is doing so to ensure that national economic growth is engendered via the 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 telecoms 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 so many 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 willing businesses, 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.
As a sign of its commitment to incentivise multinationals to list on the stock exchange, its head of Listing and Retention, Mrs. Tarba Peterside, last week announced that they had received commitment from some companies since the introduction of the new listing requirements on the exchange.

According to her, “There are so many things we can do and are already doing to attract companies to the market. We are building a strong pipeline, but the decision as to when a company comes to the market is dependent on the company. Companies look at market conditions that are perceived as being favourable to them. Our job is to make sure that the pipeline is ready for them when they are prepared to get listed.”

She reeled out the new criteria for companies wanting to list their equities as those that will be traded on the Alternative 1 segment, which must post a consolidated pre-tax profit of at least N300 million for at least three years (as against five years previously), with a pre-tax profit of at least N100 million in two of those three years.

Also, companies willing to list on the exchange, henceforth, must have been in operation for three years, have three years financials and the date of the last audited accounts must not be more than nine months. Other notable changes to the listing requirements is the amendment that permits promoters and key stakeholders to retain 50 per cent of a company’s shares pre-initial public offering for 12 months.

In addition, companies wishing to be listed on the Alternative 1 market must be registered as public limited liability companies as provided by the Companies and Allied Matters Act. They would also have to migrate from General Accounting Reporting Standards to International Financial Reporting Standards.

On the other hand, companies wanting to list on the main board, must have a cumulative consolidated pre-tax profit of N600 million within one or two years, must have an operating track record of three years and a core investor or evidence of strong technical partner with substantial equity and involvement in management. Companies heading to the main board must also have three year financials, of which the date of the last audit shall not exceed nine months.