SAM DIALA gives insight into the bulk of dormant equities that plagued the Nigerian Stock Exchange (NSE) in 2017, and the ‘relief’ brought about by the new pricing rule regime.

Measured by price movement and listing counts, not less than N151.5 billion investors’ fund was trapped in 46 dormant equities on the Nigerian Stock Exchange (NSE) as at December 31, 2017.  The affected stocks were listed in both the Primary Equity Market (PEM) segment and the Alternative Secondary Market (ASeM) category. For this assessment, dormant equities refer to stocks that recorded no price movement but remained static at their nominal value of 50 kobo per share, also referred to as “par value” during the review period. Virtually all of these stocks carried over their dormant status from 2016 and remained at the “par value” status in 2017. While there are other stagnant stocks with no price movement during the period, this report is restricted to those in the 50 kobo nominal value regime.

The stocks dormant status has far-reaching implications on the investors’ assets, the company, the capital market and the investment community.  For the investor, a dormant equity represents trapped asset; investment in this category earns no value by way of dividend or capital gain. It represents a “wrong” investment decision and could be counted as a loss because, over time, the asset yields no value to justify the investment. It is also a measure of the company’s performance. Listed companies whose stocks witnessed little or no price movement is a pointer that the organisation lacks breath; and may be living on life support. Over time, no annual general meeting (AGM) is held and employees of this organisation do not earn the desired respect in the industry. Survival and competition are by struggle and enhanced career progression is often a mirage. Majority of companies in this category run afoul of postlisting requirements of the NSE such as timely disclosure of financial performance. The NSE penalty for default in timely disclosure of financial performance is punitive.

The rules state that: “Any late submission of accounts shall attract a fine of One hundred thousand Naira (N100,000) per week from the due date until the date of submission. A listed company which contravenes any of the provisions of the Listing Rules and General Understanding and fails to pay the penalty imposed on it for such contravention on or before the due date shall be liable to a further fine of three hundred thousand Naira (N300,000) in addition to twenty-five thousand Naira (N25,000) per day for the period the violation continues.” For the capital market and the investing community, dormant equities represent a drag on the rallying move of the stocks. They impose on the authorities the challenge of multi-administrative costs, both in material and in man hour and in monitoring their compliance behaviour.

Dormant equities do not attract positive perception from foreign investors concerning the economy and the regulatory bodies because of their lag in the overall profitability of the capital market. Other characteristics of dormant stocks include their technical insolvency, negative shareholders value, negative shareholders equity and negative retained earnings. For instance, International Energy Insurance (IEI) Plc, a technically insolvent listed company recorded a negative shareholders fund of N2.75 billion, arising from N10.45 billion total liabilities as at September 2016, as against total assets of N7.69 billion. The company has negative retained earnings of N14.05 billion a trend that occurs when a company consistently records more losses than profits; in IEI case, this has been the trend since inception as a corporate body. Further probe of the company’s financial status showed that its solvency margin ratio is -1.71 per cent.

This suggests that the insurer is not only financially unstable but represents a red-flag warning to potential investors to take a closer look at the company before committing their money. Many insurance companies listed on the NSE are in similar state which has brought the sector to the public domain as one warehousing “Zombie stocks”, as a stock analysist put it. “The earlier we delist these ‘kobo-kobo’ stocks from The Exchange, the better for the market. These firms exist to absorb the value of investors’ assets and make the equities market look like a place to experiment how to invest one’s money”,  said Bamidele Ogunleye,  a Stockbroker in Lagos. “Equity market is the barometer that tells the economy. Dormant equities point to non-performing sectors where investors’ assets are lying waste and adding no value to the economy. The size of dormant equities on The Exchange calls for concern, especially in the sectors they belong. Such investments are already lost; you can imagine what such huge sum of money could do for you if invested in a viable area”, said Shehu Mallam Mikail, President, Constance Shareholders Association of Nigeria. Investigation revealed that the 46 dormant equities cut across 11 sectors among overall 177 listed companies. Further study showed that 19 of the 46 dormant equities representing 41.3 per cent belong to the Insurance industry categorised as “Insurance Carriers, Brokers & Services” in the Financial Service sector. Total value of the 19 dormant insurance equities was  N92.66 billion or 61.1 per cent. Insurance subsector has 26 listed companies, out of which 19 or 73 per cent were dormant during the review period. Other sub-sectors that contributed to the dormant equities lot are Services which featured eight companies representing 17.02 per cent, and Information & Communication Technology (ICT) with four companies or 8.51 per cent. Three companies in the Consumer Group, or 6.38 per cent each, also featured among dormant equities. Mortgage Carriers, Other Financial Institutions (all sub-sectors of Financial Services sector); Health Care and Oil & Gas had two companies each or 8.5 per cent. Four other sectors featured one company each. These are Agriculture (Crop Production), Construction/ Real Estate, Industrial Goods and Natural Resources.

The Case of Insurance The insurance industry is heavily affected by the dormant equity cloud on the NSE. This has far-reaching implications on an industry that is gasping for breath in a difficult operating environment. Most imperative is the drag on the Compulsory Insurance Scheme launched in September 2011, to rejig the sector, deepen insurance penetration and boost premium revenue as part of the 2007/2008 industry-wide reform. “The insurance sector is critical to the growth and development of a nation’s economy because of its potential to galvanize the optimal performance of other sectors through its peculiar operating mechanism which is risk-based. In this regard, the insurance mechanism reduces the capital needed by firms to operate, increases investments, fosters entrepreneurship by reducing uncertainty and expands available risk management options”, said Lazaasi Tobira, a Researcher for the Central Bank of Nigeria (CBN).

The Insurance industry is plagued with a myriad of drawbacks such as poor corporate governance, industry fragmentation, insider abuse, public mistrust, low ICT application and poor human capital/skill development. The Nigerian Council of Insurance Brokers (NCRIB) revealed that brokers indulge in collecting “Overriding Commission” (fraudulent rate-cutting) from insurance companies. Also, the prevalence of fake insurance policies, especially in the area of motor vehicle (MV) insurance (promoted by practitioners) constitutes great obstacle to the effective implementation of the Compulsory Insurance initiative.  Industry experts estimate that over threequarter of MV insurance policies are fake, resulting in over N10 billion revenue loss to the industry. In continuation of its determination to sanitise the system, the National Insurance Commission (NAICOM), embarked on industry asset verification early this year to pool data for the implementation of a Risk-Based Supervision (RBS) to determine the suitability of the operating companies.

“Those that fail to meet their statutory capital base may have their operating licences revoked,” Commissioner for Insurance, Mohammed Kari, said in a newspaper interview in February 2017. Kari also disclosed in March that year that NAICOM would commence vigorous implementation of the Builders Liability Insurance this year to boost insurance revenue. A twist in the narrative is that while the Insurance equity investment declines, premium revenue maintains exponential growth, hitting over N305 billion in 2014 (see graph).  Analysts argue that a sluggish insurance stock market with “impressive premium revenue growth” does not create the desired impact on the economy. They argue that if 19 of 26 listed insurance equities are dormant, this calls for concern as investors’ assets are at great risk; irrespective of industry premium revenue level.

Enter New Listing Rule Effective January 29, 2018, the apex capital market regulator, Securities & Exchange Commission (SEC), introduced a new listing rule that terminated the 50 kobo par value benchmark regime in the Nigerian Stock Exchange, and drastically reduced it to as low as 1 kobo. In effect, stocks listed on the NSE will now be traded as low as 1 kobo per share. The rule stated that notwithstanding its par value, the price of every share listed on The Exchange shall be determined by the market; however, no share shall trade below a price floor of one kobo per unit. The implication: share prices shall be allowed to trade as low as a floor price of one kobo. This, effectively, removes the rule which places minimum allowable price to trade for any stock  at its nominal value of 50 kobo, irrespective of the market forces. Investigation revealed that 13 insurance stocks were among the formerly dormant equities that have experienced price movement on the NSE since the commencement of the new price regime.

The companies include Linkage Assurance, Consolidated Hallmark Insurance, Unic Diversified Holdings and Multiverse Mining and Explorations. Others are WAPIC Insurance, Japaul Oil and Maritime, AIICO Insurance, Lassaco Insurance and Law Union & Rock Insurance. African Alliance Insurance, Royal Exchange, Linkage Assurance and NTN Cocoa are also ‘beneficiaries’ of the new pricing methodology.  (Note: Not all the dormant stocks stagnated in the 50 kobo par value regime.) Analysts at GTI Capital explained that the amended par value rules were intended to enhance market liquidity, narrow spread, transparency and efficiency. They added that the dormant equities that had been stagnant will now receive breath with the prices of traded shares going as low as one kobo per share. They predict that the new minimum value will trigger remarkable improvement in material price. “In our opinion, this new rule will lead to a considerable level of share price depreciation on some listed stocks (especially, insurance counters), below fifty kobo as investors seek to unlock their tied-up fund/ investment in that sector”, GTI analysts told LEADERSHIP, adding “this will also throw up opportunities such as mergers and acquisitions, price discoveries and corporate governance effectiveness.” A stockbroker, Mr Tunde Oyediran queried, “Some companies that were inactive before 29th January (2018) are being actively traded on now. Japau has done over 10 million units … at 38 kobo. What is the essence of pegging a stock at 50k with no liquidity, if that stock can be lowered and loosed liquidity?” “The new pricing rule will further weaken the dormant stocks because, at one kobo per share, the stock is as good as dead, irrespective of the liquidity it generates”, said Ogunleye.