A few days ago, news broke that the House of Representatives was proposing a law that will compel companies of a certain size and above to go public and list on the stock exchange or risk sanctions. The bill, titled “Private Companies’ Conversion and Listing Bill 2013” which has already passed second reading, will force companies with annual turnover or shareholder funds in excess of N80billion or total assets above N40billion to go public or get fined 10per cent of annual turnover or jailed for two years for non-compliance.
According to Hon. Chris Emeka Azubogu who is the brain behind the bill, the law will help capture the informal economy in the GDP of the country, since the Nigerian Stock Exchange at a market capitalization of $100bn is only 20% of our GDP at $500bn. Not only that, he says that it will avail the companies of cheap funds at the capital market.
Thankfully, he has not claimed that the law will give “ordinary” Nigerians the opportunity to gain wealth by investing these companies, as the reason was the one given when this idea was first mooted in 2012. But I would not be surprised if this reason came up later, especially considering that there is a large section of the public that are smitten that foreigners are making money in our country, since many of the companies that will be affected are largely or wholly owned by foreign investors.
Personally, I think this is about the most stupid law I have seen any legislative assembly in Nigeria come up with – and there have been quite a number of stupid laws. The bill exposed the ignorance of the legislator in matters of economics and finance in many aspects.
Let me posit my reasons here:
- To start with, there is no country anywhere in the world where after investors have taken the risk of growing their businesses to a certain size, they are now forced to sell part of it by going public. This is not without good reason – such a law will scare investors and discourage entrepreneurship. The decision to go public is solely the decision of a company and its investors and it is done mainly for two reasons: to raise financing or when investors in the company are exiting the business and are cashing in on their investments. It is never and should never be a matter of compulsion.
- He has wrongly applied the definition of informal economy to push his inane idea. According to Wikipedia, an informal sector or economy is “that part of an economy that is not taxed, monitored by any form of government or included in any Gross National Product (GNP), unlike the formal economy.” This means that businesses in the informal sector are not even registered with the Corporate Affairs Commission, and do not officially exist. This refers to micro businesses such as market traders, the akara seller at your junction, the tailor in your neighborhood, your mechanic, etc. Going by the definition of the informal economy, the companies that will be forced to go public because of this proposed law cannot be said to be part of the informal economy. There is NO WAY a legal business will have up to with annual turnover or shareholder funds in excess of N80billion or total assets above N40billion and not be registered with the CAC, which then means they must be paying taxes through the FIRS and state tax authorities and are thus regulated by the government through its agencies. For example, MTN (annual turnover of N850bn) is also regulated by the Nigerian Communications Commission, which is the telecoms regulator for Nigeria.
- On the matter of accessing cheap funds from the capital market, it seems Hon. Azubogu does not realize that the Nigerian capital market is actually too small to meet the financing demands of companies of the size the law will target. There have been only two IPOs in Nigeria this year, which shows that there has been a lull in activities in the stock market. Also, Nigeria’s largest IPO ever was by First Bank which raised N100billion (less than $1bn), which is less than what many of the companies this proposed law will affect need. Contrastingly, as an example, MTN Nigeria raised a $3bn loan last year to expand their network from a consortium of local and foreign banks. Obviously, this is because the capital market will not meet this financing need that MTN has, not to mention banks are too eager to give them these loans at attractive rates because there is very little risk of them defaulting.
- The talk of funds from the capital market being cheap is also not true. Cost of equity (which is money raised by selling of shares) is more expensive than cost of debt (i.e. loans). This is because interest paid on debt is tax-deductible while cost of equity is dividend paid to shareholders, and that is not tax-exempt.
- Still on accessing funds from the capital market, if companies such as MTN, Globacom, Etisalat, Airtel, NLNG and all the other companies that fall squarely in the list of companies this proposed law will affect choose to go public, they will go for bigger capital markets that can meet their needs. For example, Alibaba Group, the Chinese e-commerce giant recently went public. But it did not choose to list on the Shanghai Stock Exchange, or even the Hong Kong Stock Exchange. Rather, it went for the New York Stock Exchange where it raised $20bn in one of the biggest IPOs in American history. Interestingly enough, Alibaba just started investing in the US and still makes the bulk of its revenues from China. The reason they chose the NYSE is simply because it is a much bigger stock exchange by transaction volume – in fact, it is the world’s largest stock exchange. It is also for this same reason that many Nigerian companies seeking equity financing (which is what is raised by selling of shares) beyond what the NSE can offer list on more than one stock exchange, also known as cross-listing:
Guaranty Trust Bank – NSE and London Stock Exchange
Zenith Bank – NSE and LSE
Diamond Bank – NSE and LSE
Oando – NSE, Johannesburg and Toronto
Dangote Cement – NSE & London (in the works)
Cross listing mostly happens when companies that started out in small markets grew into larger markets, as is obviously the case with all the above-listed companies whose are expanding internationally.
This means that our stock market at present is better suited to attracting medium-scale firms than large firms in the oil and gas and telecoms sectors. The job for luring them to list should also be that of the NSE and not compelled by a law, and the decision to list should be that of the company.
- Lastly, the claim that such a law will afford “ordinary” or “common” Nigerians the opportunity to invest in profitable companies does not hold up. While there is no data that shows the percentage of Nigerians that are owners of shares, it does not take much to know that investing in shares in Nigeria is the preserve of people from middle-to-upper middle class and above. After all, this is a country that has 63% of its people living below the poverty line – in other words, living on less than N200 a day. If these people get disposable income, they choose to invest it in businesses that they understand better and will bring in profits quickly such as starting micro businesses. Even worse, the stock market crash of 2008 affected the confidence of many Nigerians in investing in shares. The bulk of investors in our stock market remain institutional investors (pension funds, equity funds, mutual funds, etc) and high net-worth individuals. If a company such as MTN will go public in Nigeria, its share price will be well out of the reach of these common Nigerians our legislators are claiming to have in mind. Circa 2008, I read a newspaper report that some investors in MTN were planning to dispose their shares and the price of the shares was said to be between $5 and $8 per share. Adjusting for inflation alone, these shares will be cheap at $12/share. Most IPOs demand that you buy a minimum of 1000 shares to be a shareholder, so for MTN, that will be $12000 or N2million. So, how many of these “common” Nigerians have disposable income of up to N2million to invest?
- Another lastly – a company does not have to be publicly owned before people can benefit from the wealth it is creating. Three years ago, the Nigerian Bottling Company (bottlers of Coca-Cola, Fanta, et al) went private and off the stock exchange when its majority shareholder, Coca-Cola Hellenic bought out the other shareholders. But it was the same time the NBC outsourced transportation of its products, and entrepreneurs cashed in. This is in addition to distributors of their products. The same goes for telecom companies which have created an ecosystem with hundreds of companies and entrepreneurs from micro, small to medium scale sizes – be it your recharge card seller, phone sellers, phone repairman, large distributors of airtime, etc.
If our legislators are serious about growing our economy and creating wealth for the common man, there are far better ways at doing that:
- How about passing the Warehousing Receipt System Bill into law which will help farmers and traders use their commodities as collateral for financing? This bill was at the stage of second reading since October last year, but has still not been passed into law.
- Nigeria has been steadily regressing in our position on the Doing Business rankings by the World Bank which rates about 185 countries on the ease of doing business on 8 factors. For example, it takes two day to register a business in Rwanda, but 28 days to do same in Nigeria. It also costs 9.7% of income per capita to register a business in Egypt, but 58% in Nigeria [see comparisons here]. How about the House of Reps using its power of oversight to make government agencies improve the ease of doing business?
- If they are worried about capital flight from Nigeria, why not amend the Investment Promotion Act that allows investors to repatriate 100 per cent of their profit if they choose to? Why not place a limit on the percentage that can be repatriated?
- Lastly, if he is worried about growing the stock market, why not pay more attention to the Alternative Securities Market which is our equivalent of London Stock Exchange’s AIM and reduce the cost of listing for SMEs. That’s a more profitable venture than this stupid bill.
These are but just a few ideas they should start with, rather than passing a law that will negatively impact on the economy and amounts to nothing.
Such bills actually stifle entrepreneurship and discourage foreign investment. Nigeria is positioning as a frontier market and investment destination and competes with several markets (some in Africa) for FDI, which is why 100% repatriation is allowed, pioneer status given etc. If you force companies to list, it completely negates the thought behind those investment incentives.
For example, there are large foreign corporations whose investments in agriculture (OLAM) and health/technology (GE) far outweigh any benefits of getting them to list locally.
This bill is akin to a land grab.