Desirable SEC and NSE Interventions - Policy and Implementation Issues

[riskreturn]

INTRODUCTION: Dear members of this house,

I belief we should have discussions on those things we feel Sec and/or NSE can do to serve us better and improve workings of the stock market. While it may be argued that this is purely an academic execise as neither SEC nor NSE authorities read the SMN blog, interventions generally agreed as desirable here can directly or indirectly filter into the ears of those in position of doing something, including SEC and NSE authorities.

To set the ball rolling, I mention just one of several things I believe NSE should do to improve things. This has to do with improvement of its website. It is difficult access The Nigerian Stock Exchange - Live! to access the real time stock quotes. I once tried the same for the East Carribean joint stock market and I found that the difference was clear. Also, the website should be frequently updated to give us information about number of shares outstanding for each stock, highest and lowest stock price in the last 52 weeks, P/E ratio at current price, etc. While such information is already in the website, they relate to 2006 or before - which is ridiculous. An employees can be assigned to do this (and, probably nothing else), as it is not cost ineffective doing so. Given the huge amounts of money accruing to NSE (a good fraction of trillion Naira per year due to upsurge in the value of transations), NSE has no reason to complain of lack of money in doing all these. In addition, for the reason of transparency, there should be an oversight body for NSE (without compromising its independence) to carry out an audit of its finances. It is desirable to know the outlet of the sizeable fractions of trillion Naira that must have accrued to it in the last few years. Its statutory monopoly status (arising from the fact that other stock exchanges are not being allowed to compete with it) should be at a price, in the form of greater transparency and accountability.

[Monwowo]

While SEC/NSE might not read this write-ups, I agree that this is a good discussion to have. However, what prevents one from writing to the appropriate parliamentary committee(s) on finance/investment issues. It is just unfortunate that our representatives are at the top levels doing something different from what they are supposed to be doing if representing us. I hope that by doing write-ups including to editors of financial news magazines about this issues will prompt some reactions/actions sooner or later.

[hispy99]

For one, new companies should not be allowed to list their shares till they can provide evidence that they have dispatched share certificates to ALL shareholders and verfication of certificates is allowed. This will stop the practice where only a few shareholders drive up the price of newly listed companies.

[Gengen]

Originally Posted by hispy99

For one, new companies should not be allowed to list their shares till they can provide evidence that they have dispatched share certificates to ALL shareholders and verfication of certificates is allowed. This will stop the practice where only a few shareholders drive up the price of newly listed companies.

I recommend a slight modification. They should NOT get access to the funds raised until ALL share certificates are dispatched to ALL shareholders and enough time given for verfication of certificates. For a typical Naija, it is only when their money is tied down that they will react. If implemented, you will be surprised at the rate this problem will dissappear.

This can also be applied to Public offers.

[riskreturn]

On a different but related issue concerning public offers, SEC should make and enforce rules whereby:

(i) the time table stated in the offer prospectus (including allotment date; listing date; date for returned cheques for non- and partial allotments; etc) must be adhered and deviations should attract sanctions considered enough to prevent abuses. Deviations should be accidental and unavoidable, and not what is already known in advance before issuing the offer prospectus. Such sanctions would gurad against delayed issuance of certificates and return of refund cheques.

(ii) the mode of allotment (under a few feasible over-subscription scenarios like 200%; 300% and 400% over-subscription levels), e.g whether ultra-progressive type as done by Japau Oil or proportional or even rgressive method, to be adopted subject to SEC approval should also be indicated in the offer prospectus to inform subscribers in reaching a decision as to whether to subscribe.

(ii) where allotted shares will not benefit from any pending dividend and/or bonus benefit (as in the case of First Bank PO and Japaul Oil PO), the MAXIMUM dividend per share and bonus ratio to be recommended to the Annual General Meeting for approval should also be indicated in the prospectus to guide would-be subscribers regarding the cheapness or otherwise of the shares. Otherwise, hardly would anything prevent an issuer from taking subscribers for a ride by issuing, say a 1:1 bonus, which would serve to double the P/E ratio or expensiveness of the shares being issued.

[hispy99]

Originally Posted by riskreturn

On a different but related issue concerning public offers, SEC should make and enforce rules whereby:

(i) the time table stated in the offer prospectus (including allotment date; listing date; date for returned cheques for non- and partial allotments; etc) must be adhered and deviations should attract sanctions considered enough to prevent abuses. Deviations should be accidental and unavoidable, and not what is already known in advance before issuing the offer prospectus. Such sanctions would gurad against delayed issuance of certificates and return of refund cheques.

(ii) the mode of allotment (under a few feasible over-subscription scenarios like 200%; 300% and 400% over-subscription levels), e.g whether ultra-progressive type as done by Japau Oil or proportional or even rgressive method, to be adopted subject to SEC approval should also be indicated in the offer prospectus to inform subscribers in reaching a decision as to whether to subscribe.

(ii) where allotted shares will not benefit from any pending dividend and/or bonus benefit (as in the case of First Bank PO and Japaul Oil PO), the MAXIMUM dividend per share and bonus ratio to be recommended to the Annual General Meeting for approval should also be indicated in the prospectus to guide would-be subscribers regarding the cheapness or otherwise of the shares. Otherwise, hardly would anything prevent an issuer from taking subscribers for a ride by issuing, say a 1:1 bonus, which would serve to double the P/E ratio or expensiveness of the shares being issued.

Good idea, but this will be difficult to implement. Dividend is dependent on the performance of the company throughout the year. It might be tough to expect a company to state the dividend to be paid at year end if for example the PO was done in the 3rd month of the company's fiscal year. Anything can happen in the last 9 months of the year.

[riskreturn]

Originally Posted by hispy99

Good idea, but this will be difficult to implement. Dividend is dependent on the performance of the company throughout the year. It might be tough to expect a company to state the dividend to be paid at year end if for example the PO was done in the 3rd month of the company's fiscal year. Anything can happen in the last 9 months of the year.

Exclusion of PO subscribers from next dividend/bonus in the PO prospectus is done when the PO opens not later than about 3 months or 4 months before end of financial year - otherwise there would be no moral justification for excluding the PO subscribers as a more transparent, effective and efficient way would be to include them and correspondingly raise the PO offer price to reflect the end-year benefits awaiting them. So, the coy must have had a good picture of what the end-year result would look like. In any case, they are to state the MAXIMUM benefits to recommend to the AGM, implying that even if the worst happens, they can still pay less than the MAXIMUM (including paying nothing). And, if unexpected huge fortune happens in the last 4 months, they simply have to reserve it till when the PO subscribers too will be able to partake in it - afterall, the unanticipated windwall must have happened or come to light(during the last 4 months of the financial year) after the subscribers too probably have staked risked their monies in subscribing for new shares.

[hispy99]

Originally Posted by riskreturn

Exclusion of PO subscribers from next dividend/bonus in the PO prospectus is done when the PO opens not later than about 3 months or 4 months before end of financial year - otherwise there would be no moral justification for excluding the PO subscribers as a more transparent, effective and efficient way would be to include them and correspondingly raise the PO offer price to reflect the end-year benefits awaiting them. So, the coy must have had a good picture of what the end-year result would look like. In any case, they are to state the MAXIMUM benefits to recommend to the AGM, implying that even if the worst happens, they can still pay less than the MAXIMUM (including paying nothing). And, if unexpected huge fortune happens in the last 4 months, they simply have to reserve it till when the PO subscribers too will be able to partake in it - afterall, the unanticipated windwall must have happened or come to light(during the last 4 months of the financial year) after the subscribers too probably have staked risked their monies in subscribing for new shares.

A lot more complicated than this. Investors are fickle, if you declare the maximum benefit, then expectations are set at that level. How may times have we gone through a prospectus and compared the comapny's actuals to the forecasts in the prospectus? I have read comments that imply that companies that fall short of their projections "fudged" those numbers. At the beginning of the year, every company makes a projection, but this is an estimate at best, you hope that the actual is close to the projection, but sometimes things happen. Take First Bank for instance. Let's assume they did an IPO at the beginning of the year they made the loan to IIL and had an intention of paying say N1 dividend. What you are implying is that they add this expected "N1" to the IPO price? What happens if FB now has to write off this loan in the same year and they decide not to pay dividends. As a subscriber to the IPO, have you not been cheated of N1?

[riskreturn]

Originally Posted by hispy99

A lot more complicated than this. Investors are fickle, if you declare the maximum benefit, then expectations are set at that level. How may times have we gone through a prospectus and compared the comapny's actuals to the forecasts in the prospectus? I have read comments that imply that companies that fall short of their projections "fudged" those numbers. At the beginning of the year, every company makes a projection, but this is an estimate at best, you hope that the actual is close to the projection, but sometimes things happen. Take First Bank for instance. Let's assume they did an IPO at the beginning of the year they made the loan to IIL and had an intention of paying say N1 dividend. What you are implying is that they add this expected "N1" to the IPO price? What happens if FB now has to write off this loan in than year and they decide not to pay dividends. As a subscriber to the IPO, have you not been cheated of N1?

There is no cheating whatsoever. The very day one subscribes for shares in a PO, one has committed to assuming the same degree of risk as the existing shareholders. So, if some unexpected misfortunes happen between the time of subscribing for shares and the end of the next financial year, there would be no cheating if the PO subscribers shares the adverse consequences (including low dividend/bonus) with the exiting shareholders, just as if one shares in any unexpected fortunes too.

[hispy99]

Originally Posted by riskreturn

There is no cheating whatsoever. The very day one subscribes for shares in a PO, one has committed to assuming the same degree of risk as the existing shareholders. So, if some unexpected misfortunes happen between the time of subscribing for shares and the end of the next financial year, there would be no cheating if the PO subscribers shares the adverse consequences (including low dividend/bonus) with the exiting shareholders, just as if one shares in any unexpected fortunes too.

BTW, Dividends are included in the prospectus anyway, so this is not a very good example by me...maybe the focus should be on bonus

[riskreturn]

Originally Posted by hispy99

BTW, Dividends are included in the prospectus anyway, so this is not a very good example by me...maybe the focus should be on bonus

I agre with you that it is bonus (e.g. 1: 1 type, raising pre-offer P/E ratio by 100%) that gives much room for a possible abuse and rip off of PO subscribers.

[riskreturn]

Today, 04:41 PM
donchisel
Member Join Date: Jun 2007
Posts: 40
Rep Power: 0


Re: MarketWatch

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Quote:
Originally Posted by riskreturn
I think it is only the banking stock (and, to some extent, insurance stock) market that has crashed. Other segments of the market have not crashed and shares there are still richly valued, in the main.

I feel that the 100000 unit rule is one of the major contributor to the low ASI. Notice that Nestle and most oil stocks will trade high during the day and fall back to previous open prices.

This is the same with other low capitized stocks which hardly trade above a 100k units.

I guess that NSE will reverse this rule someday to allow northward movement of ASI.

[riskreturn]

Originally Posted by riskreturn

Today, 04:41 PM
donchisel
Member Join Date: Jun 2007
Posts: 40
Rep Power: 0


Re: MarketWatch

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Quote:
Originally Posted by riskreturn
I think it is only the banking stock (and, to some extent, insurance stock) market that has crashed. Other segments of the market have not crashed and shares there are still richly valued, in the main.

I feel that the 100000 unit rule is one of the major contributor to the low ASI. Notice that Nestle and most oil stocks will trade high during the day and fall back to previous open prices.

This is the same with other low capitized stocks which hardly trade above a 100k units.

I guess that NSE will reverse this rule someday to allow northward movement of ASI.

There is no doubt that this 100,000 units benchmark rule is not working well. Yesterday, only one oil coy stock traded above the benchmark. This also affect many stocks with 3-didgit Naira price. The NSE should have been a bit more scientific in its rule to cater for this situation. This would require specification in terms of units (for low-priced stocks) and Naira value (for high-priced stocks), whichever is attained first. Specifically, the rule should have been 100,000 units or, say, 5 million Naira - whichiever is attained first. By this, a stock trading at 100 Naira per share would only need 50,000 traded units to qualify for a change in price while another trading at 300 Naira per share would need less that 18,000 units. For stocks trading at 50,000 Naira or below, they would still need minimum traded units of 100,000 units, as before.

[Michael]

Originally Posted by riskreturn

There is no doubt that this 100,000 units benchmark rule is not working well. Yesterday, only one oil coy stock traded above the benchmark. This also affect many stocks with 3-didgit Naira price. The NSE should have been a bit more scientific in its rule to cater for this situation. This would require specification in terms of units (for low-priced stocks) and Naira value (for high-priced stocks), whichever is attained first. Specifically, the rule should have been 100,000 units or, say, 5 million Naira - whichiever is attained first. By this, a stock trading at 100 Naira per share would only need 50,000 traded units to qualify for a change in price while another trading at 300 Naira per share would need less that 18,000 units. For stocks trading at 50,000 Naira or below, they would still need minimum traded units of 100,000 units, as before.

I am getting really tired of this ineptitude in high places. It is this callousness that is scaring people from the market, and with good reason.