Legal ‘ills” in (Nigerian) Stock Exchange

[Gengen]

The objectives of this thread are:

• Identify “legal” ills that exist in the trading on the stock exchange. They are not limited only to Nigerian Stock exchange
• Advise regulatory authorities (NSE, SEC, etc) on the best way to address these issues. Since we are on the web, they might be members of this forum or visiting as guests. As we all know, many ‘good’ heads are better than one. They too could have identified this but may not know the best way to address it
• As we all know, full eradication these legal ills may be fully impossible. However, while they are still massively on, we can advice each other on the best way to plan our financial investment to avoid, ‘partake’ and/or benefit from them

Some of the legal ills that I can think of now are:

• Unjustifiable or Long Technical suspension
• Long waiting period for Share certificates of Public offers
• ‘Pumping up’ share prices prior to public offers
• Scarcity of shares during rapid rise of prices. May be real or orchestrated.
• Planting of indirect wrong messages or ‘baits’ in media about company
• Etc

Your response format is open to you. However, I suggest the following response format.

• Legal Ill - …….. (As Reply header) Narative should follow in reply body area
• How it is being (mis)used
• Suggestions to eliminate or reduce the effect
• Advise each other on how to structure our investments to avoid, ‘partake’ and/or benefit from them

As the starter, I will reply using the format suggested.

[Gengen]

In my opinion, Transcorp price has been suspended for unjustifiable reasons. What is the official reason? Some have even changed the technical suspension to PERSONAL SUSPENSION. A way shareholders show there acceptance/rejection of a company’s actions/operations is by trading in that stock. (Remember Unilever and Cadbury) Denying shareholders that right by long price freeze is wrong and will interpreted as something shady.

If Transcorp's management

• partook in buying Kaduna/PH refinery (wrongly or rightly), now cancelled or ...
• misinformed the public about appointing Kolade as a member of their board
• acquire government properties being privatized in suspicious circumstances
• acquire Nitel with no noticeable improvement or plan for improvement
• suggestions that Dangote, a major shareholder, ‘undercutting’ Transcorp in a deal
• etc.

then DO NOT DENY shareholders their right to reply by market price driven price trading in their stock. Publicly traded companies are always conscious of the impact of their actions on their share price.

How it is being (mis)used
While this price freeze is one the following might be happening:

• Dumping of shares by the ‘big guys’ at the frozen price (not market driven price)
• Those that have insider information that can make the price increase or fall, will start acquiring or dumping the shares at the frozen price.
• Company carry out unpopular investments or policies since they are not bothered about shareholders’ perception

Suggestions to eliminate or reduce the effect

• NSE Director General should not be a Director in a publicly traded company. This leads to (perceived) conflict of interest
• Set up a committee of carefully selected stakeholders to determine whether to do a price freeze or not, and how long it should last.

Investment advice

• Dump the shares now and invest in others (Short term investors)
• Take the risk, hold and watch out what will happen (Long tem investors)
• However, remember, a patient dog may not have any bone to eat o !

[Yusuf]

Thanks Gengen for the writeup. I complained about this freezing of transcorp share without any reason whatsoever. Most of your solutions were what I proferred too. The DG of NSE shoud not be on the board of any listed company. It is wrong. It is not done in any place.

This made me remember what one of our investment club member said when Transcorp share was out. He said all companies that Ndidi Okereke (DG NSE) has sited as a board member always failed. Base on that, he refused to buy Transcorp share. Companies like: ABOSELDEHYDE LABS. PLC etc.

Maybe the woman wanted to prove people wrong either by crook or crude way!! Watch out!!

[olusolakemmy]

there are so many problem in the trading system in nigeria.
first among all is co-operate deceiving the public, it is a crime take cadbury for instance, you are duping people indirectky more or less.

another issue is freezing of prices, companies are the one that usualy apply for their shares to be suspended, may be due to plan reconstruction, public, private placement or right issue. But the circumstances surrounding transcorp suspension is simple, NDIDI who i respect alot, is a director in transcorp, end of story. so i believe the tech susp on transcorp is not a proper thing.
We cant stop her from taking upinterest in any company she chooses, the law only affect banks director.

the pumping up of prices before PO, we cant control it, the company in question usualy caused high demand by buying up shares onthe floor,this could go on for 3-wks, enough to tripple the price. so how do u control that? most of these companies do not buy in their names, but registered other smaller organisations to do.

the issue of certifiate verification is something i cant understand, but i think delay is a tool use by companies so that their will be price balancing.

[Davicade]

The manipulation of Transcorp shares is a case that should be referred to EFCC.I believe this can be classsed as an economic and financial crime.The arbitrary technical suspension appears to be an attempt to stop the downward spiral of Transcorp.If we are looking to enhance and deepen the NSE this must not be allowed to continue.
This action serves as a mean to debar true value to current investors

Transcorp states 100% nigerian 100% world class
I see the Nigerian bit but not the world class bit.

Ms Ndidi Okereke`s position in The NSE and directorship in Transcorp is in question.

Other main markets are currently experiencing reduction in value investors in those markets may be looking at NSE as a potential place to invest and this sort of unilateral action regarding Transcorp may stop potential investors.

It is a sad situation as it does not allow a possible purchase of Transcorp by professionals who may let us see a truly world class nigerian conglomerate.
Potential is nothing without commiserate actions.

[dotunk]

Transcorp is a disappointment, inspite of all the names that make it up. i think it was amistake to have brought in the president to endorse the company. it might have been a reaction from nigerians against him that has led to the calamity that befell the company.

they have changed CEOs at least 3 times, what else?

As ragrds the price, if the tech suspension is lifted the price only one position to go and that is down. its going to fall like a stack of cards and that time my friends is the time to buy and buy craizily.

for thi=ose who already have and dony know what to do with the stock since the certificates are not even available, i advice that you wwrite it off as a bad investment but also wait for the price to fall and also buy.

when the price falls to a reasonable price then the forces of demand and supply will come to play and then the real price of the stock will be seen.

the company should also perform credibly in order to keep turnover up so as to declare good results at year end.

[wanaj0]

Depending on when you enter. Those that bought the PO are mugus! By then Ndidi and co have already divested! Most people did not bother to read the propsectus.

For those that bought the private placment at N1.00 and those that bought at N6.00, it is difficult for them to make a loss! They've already got a stock split.

Transcorp is a classic case of people buying hype without reading! This was a company that stated that they will not make profit for the first four years! Yes they are a start-up company. But why stick with them when there are other alternatives!

[Gengen]

Almost all offers state now that they are prepared for massive oversubscription. There have also been some offers in the past with ridiculous values. I just read that Sec is planning to address this. In the Financial Standard of 28/09/07 states "Sec pegs absorption of oversubscribed offer at 25%". (Welcome to Financial Standard News) I believe this, in addition to making Issuing houses underwrite 80% of any offer, are steps in the right direction. What I believe was being done are:

1. State a low number of shares for sale (while intentionally planning for larger number)
2. Do an analysis of future prospects of the company based on low total number of shares. With this, future projections like PE, EPS, DPS, etc will look good.
3. Drop a carrot that the company is prepared to absorb over subscription. With this all of us will rush to buy without looking at the implication of this over subscription on future projections. The possible (not definite) impacts are reduced EPS, DPS etc
4. However, when we realize this, the company has already pocketed our money and the best we can do is to sell on the secondary market.

However if the combined policies of:

(a) Limiting over subscription to 25% and
(b) Issuing houses underwrite 80% of any offer

are truthfully IMPLEMENTED, we all will benefit because:

1. BALANCED shares prices (with probably BALANCED analysis) will be reflected in any offer: This is because the Issuing house and Company making offer will do a THOROUGH analysis to come up with a good BALANCED offer price. The Issuing house will not want to buy up the unsold shares if undersubscribed (offer price too high) and Company making offer will want to realise less than its projected income from offer (offer price too low). Oversubscription is currently beneficial to both Issuing house (makes money on percentage basis) and company making offer.

[Gengen]

One phenomenon I have noticed is that many companies are doing share splits (or giving Bonus shares) immediately after a public offer WITHOUT with the new buyers being LEGALLY unqualified to benefit (that is, it would be stated in the offer prospectus). The impact is huge especially if the outstanding shares of the company is low.

For elaboration, I will use the current Japual offer as an example. PLEASE NOTE I AM NOT IMPLYING THAT THIS WILL BE THE CASE WITH THIS OFFER.

Japaul seems to be a good buy at offer price of N3.95 compared to the current market price of N6.02.

However, note the following quote from the offer prospectus (making it LEGAL):

"The new shares being offered shall rank pari-passu in all respects with the
issued Ordinary shares of the Company, except that they will NOT qualify for any dividend or bonus declared for the year ending 31 December 2007"

The dividend or bonus at year end is, of course, not yet determined.

I am not implying any hanky panky from Japaul. However, the possibility of share dilution ('bonus' shares) immediately after an offer without the new buyers being qualified is not ruled out.

Continuing using Japual as an example again. The figures are from their prospectus.

Outstanding Shares...................1,166,196,180
Rights/Public Offer.....................1,299,037,233
Total Shares (with no bonus).......2,465,233,413

Future forecast performance (PE, EPS, DPS, etc) are based on this Total number of Shares (with no bonus)

Just for discussion sake, if the company gives 3 shares for every one (1) held, (the impact will be huge). The statistics will then be as follows:

Outstanding Shares...................1,166,196,180
Bonus shares............................3,498,588,540
Rights/Public Offer.....................1,299,037,233
Total Shares (with bonus).......... 5,963,821,953

Theoretically, this means that all the projections per unit share would be reduced by 58%.

Should share splits immediately after an offer be allowed? A big NO. Although the possibility of such a huge bonus is low, a company having the LEGAL right to do this after a share split should be stopped. Companies can just wait, check level of subscription and DO ANYTHING it likes. The new buyers will then be subjected to this value depreciation.

[pumping]

Thanks for bringing this up. I absolutely agree with you on this one. First Bank PO suffered the same fate for example.

[yodiyokun]

Originally Posted by Gengen

One phenomenon I have noticed is that many companies are doing share splits (or giving Bonus shares) immediately after a public offer WITHOUT with the new buyers being LEGALLY unqualified to benefit (that is, it would be stated in the offer prospectus). The impact is huge especially if the outstanding shares of the company is low.

For elaboration, I will use the current Japual offer as an example. PLEASE NOTE I AM NOT IMPLYING THAT THIS WILL BE THE CASE WITH THIS OFFER.

Japaul seems to be a good buy at offer price of N3.95 compared to the current market price of N6.02.

However, note the following quote from the offer prospectus (making it LEGAL):

"The new shares being offered shall rank pari-passu in all respects with the
issued Ordinary shares of the Company, except that they will NOT qualify for any dividend or bonus declared for the year ending 31 December 2007"

The dividend or bonus at year end is, of course, not yet determined.

I am not implying any hanky panky from Japaul. However, the possibility of share dilution ('bonus' shares) immediately after an offer without the new buyers being qualified is not ruled out.

Continuing using Japual as an example again. The figures are from their prospectus.

Outstanding Shares...................1,166,196,180
Rights/Public Offer.....................1,299,037,233
Total Shares (with no bonus).......2,465,233,413

Future forecast performance (PE, EPS, DPS, etc) are based on this Total number of Shares (with no bonus)

Just for discussion sake, if the company gives 3 shares for every one (1) held, (the impact will be huge). The statistics will then be as follows:

Outstanding Shares...................1,166,196,180
Bonus shares............................3,498,588,540
Rights/Public Offer.....................1,299,037,233
Total Shares (with bonus).......... 5,963,821,953

Theoretically, this means that all the projections per unit share would be reduced by 58%.

Should share splits immediately after an offer be allowed? A big NO. Although the possibility of such a huge bonus is low, a company having the LEGAL right to do this after a share split should be stopped. Companies can just wait, check level of subscription and DO ANYTHING it likes. The new buyers will then be subjected to this value depreciation.

Your hypothetical bonus share is way over the top. I have not heard any company giving 3 for 2 talkless of 3 for 1, the highest they can do is 1 for 1.

@ 1 for 1 bonus, the projections per unit share would be reduced by aprox 28%.
Thats still a sizeable reduction.

[Yusuf]

Originally Posted by yodiyokun

Your hypothetical bonus share is way over the top. I have not heard any company giving 3 for 2 talkless of 3 for 1, the highest they can do is 1 for 1.

@ 1 for 1 bonus, the projections per unit share would be reduced by aprox 28%.
Thats still a sizeable reduction.

The guy was just trying to drive home his point by using bogus hypotetical figures so that we can appreciate what he is passing through. One thing is should, the law is made by the rich and they will always make room to beat the law. It happens everywhere. Even in the so call advance countries like US.

Don't bother about the projections, it may never be like that for any company. Even FBN that Pumping was referring to, what was the percentage dilution from the stock split?

[pumping]

Originally Posted by Yusuf

.... Even FBN that Pumping was referring to, what was the percentage dilution from the stock split?

Yusuf,

FBN was particularly interesting. Compare the % change from the dilution with the % discount for the PO offer and you see this is very significant indeed.
FBN PO was sold at a discount of around 17.5% and then you get a dilution of around 16% after bonus shares of 1 for 6 if I recall correctly. For many, the discount which is offered to PO subscribers is a main attraction to buy into the PO but this discount can eventually be a mirage. We are not even factoring in dividend in this case.
My take is that you are better off if you were able to get FBN before TS or the moment the TS was lifted. At least you get all your shares up front and the value is about the same.

[hispy99]

Originally Posted by Yusuf

The guy was just trying to drive home his point by using bogus hypotetical figures so that we can appreciate what he is passing through. One thing is should, the law is made by the rich and they will always make room to beat the law. It happens everywhere. Even in the so call advance countries like US.

Don't bother about the projections, it may never be like that for any company. Even FBN that Pumping was referring to, what was the percentage dilution from the stock split?

It's the principle that is very important here. These companies and the issueing houses go about promoting the offer and the "excellent discount" investors will get by buying into the offer. If the discount is a big selling point by the company and their advisers, why should they use "back door" to take away the discount?

[Meki]

Originally Posted by yodiyokun

Your hypothetical bonus share is way over the top. I have not heard any company giving 3 for 2 talkless of 3 for 1, the highest they can do is 1 for 1.

@ 1 for 1 bonus, the p