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New Pricing Rule Jolts Dormant Equities In Insurance, Other Sectors

Capital Market operators believe that insurance services would be the most affected sector in the new pricing rule being introduced by the Securities and Exchange Commission (SEC), writes Joy Onyemaechi

On the 2nd of June the Securities and Exchange Commission gave its nod for the Nigerian Stock Exchange (NSE) to adjust the nominal share price on the floor of the Exchange at 1 kobo. This represents a 98 per cent drop from the current floor price of 50 kobo.

The 50 kobo price floor which is the lowest any stock could be sold was introduced during the crash of the Nigerian capital market in 2008 in order to salvage the values of the crashing stocks. The new rule which was put forth by NSE in March and has now been approved states that: “Notwithstanding its par value, the price of every share listed on the Exchange shall be determined by the market, save that no share shall trade below a price floor of 1 kobo per unit.” Prior to the approval, stocks could not trade below the floor price of 50 kobo but following the approval, share prices can drop as low as 1 kobo.

This allows market forces to determine the minimum price at which shares can be bought and sold. Over the years, many companies’ especially insurance companies have remained relatively stagnant and a large per cent of them especially the insurance companies have remained at the nominal value of 50 kobo at which they were quoted in the market. A survey of companies quoted on the exchange showed that 44 of them have remained at their nominal values for so long. 22 which is 50 per cent of the stocks which have been moribound are insurance companies. The insurance sector for so long has lost the confidence of investors who see the sector as not being viable and so a waste of investment. This has made most of the stocks illiquid for so long.

In order to boost investors’ confidence and the liquidity of the market, SEC approved the downward review of the Par value for stocks to be traded as low as 1 kobo. Though NSE is yet to officially communicate when the implementation of the rule will commence, market operators have expressed worry that the new rules may not add the much needed value that would lift the equity market. Bola Adeeko of the Nigerian Stock Exchange who spoke on behalf of the exchange said that the development would have a positive effect on the market. “There would be increase in trading in the market.” On the effect on the illiquid stocks he said that the ability to trade at 50 kobo does not affect the company’s ability to trade. “A good company would always be a good company and a bad performing company would always perform badly irrespective of the floor price.

All factors were put into consideration before the policy was put into place so there should be no problem. Speaking with operators in the market, Mike Chukwu of Asset Wise Capital said that the initial 50 kobo par value was fixed to protect investors during the melt down in2008 because when there is a melt down there would be panic to sell stocks. This suggests that were it not for the 50 kobo price floor, the stocks would have fallen below 50 kobo. Now with the new 1kobo as Par value, those moribound stocks would be open to take over which is hostile investors who would want to take over the companies.

On the impact on the market as a whole, Mr. Mike said that those who put their stocks up as collateral would have problem if the value of those stocks drop below 50 kobo. They would be required to put up additional security as collateral. In terms of the impact on the books of the company he said that the sector that would be mostly affected is the insurance sector in which most companies are illiquid. Since the share prices are now allowed to drop below 50 kobo, most insurance stocks would see the values of their stocks crashing and would need more shares to be maintained in the books to meet the minimum shares required by law to be maintained in the books of the company. Mr Mike ended by saying the policy would spur most of the companies which just relaxed at 50 kobo per share to work harder as they know that if they do not do something to make their shares attractive their share prices are likely to keep falling which would have a great effect on their capital base.

Mr Anthony Ikpea said most of the moribound stocks are insurance companies and they are likely to fall below 50 kobo and this would reduce the value in the portfolio of these companies. Also market capitalization would drop if there is a fall in the value of the stocks below 50 kobo. Going further he also said with 50 kobo most investors were not happy with the moribound stocks. A further drop would tempt the investors to lay off their stocks. Mr Sola Oni of Sofonix Investment and Communication Ltd said that the Par Value of 1 kobo would promote liquidity as if the share prices drop below 1 kobo, there would be room for improvement as investors who could not buy the shares when it was 50 kobo would be interested in the shares.

Due to the new found interest in the shares such shares would become liquid and seen as doing well which would attract more customers which might lead to the share price rising above the original 50 kobo. Mr. Sola said that SEC took the right decision as it is not right to make a market price bound just because some stocks are not doing well. Mr. Ndubuisi Osina of Osubi Investments and Communication Ltd said the development would favour newly incorporated companies as they would have more shares to offer to the public for subscription.

On the other hand due to too many shares the records will become too cumbersome for the registrars to reconcile. He also said that the policy was only a gimmick by SEC to wipe out those stocks which are not performing well from the market. According to him if the value of the shares fall to 1 kobo, the share become worthless and not worthy of remaining in the market. “If the a stock falls to 20 kobo for example then later rises to 30 kobo people would perceive the stock to have made a profit and would be interested in buying the stocks which would boost their liquidity. It’s a two sided venture.” Those companies especially the insurance sector have more work to do so that they do not lose out of the market.

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