By Our Reporter
A raft of dealings at the Nigerian Stock Exchange (NSE) in outright violation of the rules for free float of shares may have resurrected the era of regulatory slumber.
Daily Sun findings reveal that a number of companies whose shares are traded on the NSE do so with deficiencies in shares free float (meaning that units of shares available for trading are less than the required minimum).
The implication is that investors in companies with smaller free float are at risk because they can exercise little control over the company. A company’s free float is important to potential shareholders because it offers insight into its stock volatility.
Stocks with small free float tend to be more volatile because there are only a limited number of shares that can be bought or sold in the event of major trading news. For the same reason, companies with larger free floats are generally less volatile.
For this reason, Rule 17.21, Free Float, Rulebook of The Exchange, 2015, states that “Every Issuer (quoted company) shall maintain the minimum free float which must at all times be held in the hands of the public in accordance with the Listing Standards under which the shares are admitted on the Daily Official List of The Exchange.”
According to the NSE, the free float requirement for companies on the Alternative Securities Market (ASeM) board is 15 per cent of market capitalisation; Main Board is 20 per cent of market capitalisation while companies on the Premium Board is 20 per cent of market capitalisation or above N40 billion on the date.
The rules notwithstanding, Union Bank of Nigeria (UBN), for instance, has been trading its shares in violation of NSE’s 20 per cent free float. Stockbrokers say that the lender’s 14.9 per cent free float is partly why its stock price has been very volatile.
Daily Sun learnt that the management of Nigerian Stock Exchange has since given the bank June 2017 deadline for compliance but it failed to meet the deadline.
Similarly, Caverton Offshore Support Group Plc, Infinity Trust Mortgage Plc, Interlinked Technology Plc, A.G. Leventis Plc, and several others also crossed the red line with respect to this rule.
Champion Breweries Plc, with 17.30 per cent free float is undergoing restructuring while Chellerams Plc with 14.87 per cent free float has applied to migrate to the ASeM Board where free float requirement is 15 per cent of market capitalisation and the application is currently being processed by the exchange.
Capital Hotel Plc with 2.62 per cent free float has until October 31, 2017 to comply and under watch list of NSE. Great Nigeria Insurance Plc with 16 per cent free float has concluded the first leg of the transaction. The management of the company has engaged the NSE on the next stage.
In a response to an emailed enquiry, the NSE Head of Corporate Communications, Mr. Olujimi Oromide, explained that the NSE Quotations Committee has taken the necessary steps to get the companies to rectify their respective free float deficiencies.
“Pursuant to the Rule 17.22, Free Float, Rulebook of The Exchange, 2015, the issuers listed in your mail have applied and obtained approval of the Quotations Committee of the National Council of The Exchange (QCN) for extension of time to comply with minimum free float requirements.
“The Exchange is in constant communication with the issuers to ensure compliance with the approval obtained from QCN,” Orojimi wrote in an emailed response.
He added: “However, in a situation where the issuer is not able to meet this requirement, Rule 17.22: Dealing with Free Float Deficiencies; Rulebook of The Exchange, 2015 provides as follows:
“(a) Where the free float falls below the minimum listing standard, the issuer must, as soon as practicable, announce that fact to The Exchange and The Exchange shall require the issuer to obtain the required float within a specified period. The issuer shall be required to notify its shareholders in writing within 10 business days of The Exchange’s decision that if the required float is not obtained within the specified timeframe The Exchange may suspend trading in the securities.
“(b) The Exchange may allow the issuer a period of one (1) year or such longer period as The Exchange may agree to retain its listing and rectify the deficiency. The issuer may be delisted if it fails to restore the percentage of securities in public hands after the period allowed,” Orojimi concluded.
The minimum free float requirements are to ensure an orderly and liquid market for their securities listed on the NSE based on the set standards under which they are listed.
Free float describes the proportion of shares of a publicly traded company that is traded in the stock market. In order to be listed on any stock exchange, companies have to satisfy particular free float requirements set down by the exchange.
These requirements can include a certain number of shares worth a certain amount and/or that the shares should represent a particular percentage of the total number of shares issued in the company. In the case of the NSE, it is 20 per cent.