The Nigerian Stock Exchange (NSE) will begin implementation of its new free float rules today, January 02, 2020.
The NSE, which had suspended the implementation of the new rules on May 31, 2019, has indicated that the new rules will now take effect on January 02, 2020. The new rules were initially scheduled to take effect on Monday June 3, 2019. Nigeriaโs apex capital market regulator, Securities and Exchange Commission (SEC) had approved the new rules on May 06, 2019.
The new rules require quoted companies to indicate their shareholding structure and compliance level with the minimum number of shares or capitalisation being held by minority retail shareholders in their half-year reports.
Under the existing rules, companies are only required to indicate shareholding structure in full-year report and are not under obligation to categorically indicate compliance with free float.
Free float, otherwise known as public float, refers to the number of shares of a quoted company held by ordinary shareholders other than those directly or indirectly held by its parent, subsidiary or associate companies or any subsidiaries or associates of its parent company; its directors who are holding office as directors of the entity and their close family members and any single individual or institutional shareholder holding a statutorily significant stake, which is 5.0 per cent and above in Nigeria.
The new rules, obtained by The Nation, indicate that companies shall also be required to undertake periodic self-assessment of their free float compliance and report any breach or shortfall to the Exchange. The new rules place the onus of investigation and compliance on the companies, in addition to existing surveillance by the capital market authorities.
According to the amended rules, every company shall independently review its free float every half-year or other reasonable time, and when there is a breach of its free float requirement, disclose this to the Exchange and immediately initiate the steps to remedy the default and comply with its free float requirement.
The amendment mandates the Exchange to commence the process of delisting any company that fails to respond to specific notice on free float default within 10 business days of receiving the notification or any company that fails to produce and submit an acceptable compliance plan to the Exchange within three months of being notified of falling short of free float under the Exchangeโs periodic โX-Compliance Reportโ.
The NSE is also expected to commence delisting process if the companyโs compliance plan is not acceptable to the Exchange, and the company fails to produce and submit an acceptable alternative plan within 21 business days of the Exchangeโs rejection of the initial plan. The NSE can also trigger the delisting process if the defaulting company is unable to return to a state of full compliance within such period as indicated in the companyโs compliance plan approved by the Exchange.
The amendment, in addition to existing percentage free float requirement, also provides the minimum number of minority retail shareholders and minimum capitalisation that can serve as alternative free float to percentage of shares.
Under the existing rules, companies listed on the premium board are required to have 20 per cent free float or more than N40 billion of their capitalisation in the hands of general investing public. Companies on the main board are required to have a minimum free float of 20 per cent of their market capitalisation, implying that 20 per cent of the companiesโ shareholdings must be available for minority retail shareholders. However, companies on the Alternative Securities Market (ASeM) are required to have 15 per cent free float.
With the amendments, free float of companies on the premium and main boards must be held by not less than 300 shareholders while those on Alternative Securities Market (ASeM) must be held by not less than 51 shareholders.
A new board, to be known as growth board, will have free float of between 10 to 15 per cent, which must be held by between 25 to 51 persons.
The amendments introduced capitalisation method, which previously applied only to premium board, for the other boards. Minimum value of free float for companies on the main board is N20 billion while ASeM and growth board have alternative value of N50 million.
The new rules however retain NSEโs prerogative to grant extension of time to any company to comply with the minimum free float requirements if the Exchange believes that the market can operate fairly and in an orderly manner with the companyโs existing level of free float or the NSE has received an undertaking from a majority shareholder or many shareholders with at least five per cent shareholding to make available to the minority retail investing public a specific number of securities required to restore the company to the required free float level within such period as the Exchange may approve.
Stock markets maintain minimum public float to prevent undue concentration of securities in the hands of the core investors and related interests, a situation that can make the stock to be susceptible to price manipulation. Besides, it provides the general investing public with opportunity to reasonably partake in the wealth creation by private enterprises.
Authorities at the NSE launched the review of the marketโs free float requirement after an exclusive report by The Nation that several quoted companies had failed to meet the free float requirement.
18 quoted companies have less-than-required minimum volume of shares for public trading, a major infraction that may adversely affect liquidity and efficient price discovery on the companies.
The overconcentration easily makes the companiesโ share prices susceptible to manipulation and detracts from stock marketโs objectives of wealth distribution, liquidity and efficient pricing.
According to the report, the defaulting companies included Union Bank of Nigeria, which currently has a free float of 14.94 per cent; Capital Hotel, 2.99 per cent; Great Nigerian Insurance, 16.0 per cent; AG Leventis, 11.64 per cent; Interlinked Technology, 14.50 per cent; Infinity Trust Mortgage, 3.50 per cent; Transcorp Hotels, 6.0 per cent; Ekocorp, 11.84 per cent; Champion Breweries, 17.17 per cent; Caverton Offshore Support Group, 17.30 per cent; The Tourist Company of Nigeria Plc, 3.58 per cent and E-Tranzact International Plc, which has a free float of 10.06 per cent.
Others were Aluminium Extrusion, 17.73 per cent; Union Dicon Salt, 18.0 per cent; Austin Laz & Company, 5.51 per cent; CWG, 15.97 per cent; Global Spectrum Energy Services, 7.01 per cent and Portland Paints & Product Nigeria (PPPN), which has a free float of 14.57 per cent, 5.43 percentage points below the 20 per cent minimum requirement.
