Stories by Chinenye Anuforo
Capital markets play a critical role in economic development by pooling domestic savings and mobilising foreign capital for productive long-term investment. In this way, it facilitates and promotes the process of economic growth in the country.
Over the years, the nation’s capital market has played a fundamental role in enabling businesses raise capital and diverting them to productive channels. It is with the help of capital market that long-term funds are raised by the business community for expansion by selling shares of ownership of the company in a public market.
However, this basic function of the stock market has come into question since after the market crash in 2009. Going back in history, the primary market, particularly the Initial Public Offerings (IPOs) in the Nigerian Stock Exchange (NSE) experienced the strongest activity between 2006 and 2008, which helped boost investment appetite from the retail end of the market.
According to the data from Proshare, between 2006 and 2010, the market recorded about 180 different offers. The number of IPOs alone in the market within the period was 88. Public offers totalled up to 54. Thirty-eight rights issues were recorded. In 2006, the number of securities (IPOs, public offers and rights issues) in the market was 79. The figure dropped drastically to eight in 2010. But the global economic meltdown in 2009 made the capital market less efficient in channeling the required capital that is needed for business expansion.
In 2014, NSE witnessed the listing of Seplat Petroleum Development Company after a successful IPO on April 14, 2014 and in 2015 Transcorp Hotels carried out an IPO.
IPO is the process by which a private company can go public by sale of its stocks to the general public. It could be a new, young company or an old company, which decides to be listed on an exchange and hence goes public.
Companies can raise equity capital with the help of an IPO by issuing new shares to the public or the existing shareholders can sell their shares to the public without raising any fresh capital. A company offering its shares to the public is not obliged to repay the capital to public investors.
The company, which offers its shares, known as an “issuer”, does so with the help of investment banks. After IPO, the company’s shares are traded in an open market. Those shares can be further sold by investors through secondary market trading.
Analysts believe that the overall weak macroeconomic scenario, the sustained negative market sentiments, coupled with other factors such as falling oil prices and the tension in the socio-political space, have not encouraged successful primary market activities.
Specifically, the Chief Executive Officer of Cowry Asset Management Limited, Mr. Johnson Chukwu, had stated that IPOs cannot thrive in an environment where the secondary market is not vibrant. According to him, “several reasons entice companies to list on the NSE. One, they expect that the market will appropriately buy them and that the market has a premium to the intrinsic worth as to justify investors having to trade their equities. Again, that there is liquidity in the equities market so that people can actually buy and trade their shares. Lastly, that the listing will give them better access to credit.”
He maintained that the stock market has become unattractive to companies because of the absence of these three factors, saying, “unfortunately, in a bearish and dampened equities market, these factors are not present. Until there is a significant recovery in the secondary market, one should not expect a re-launch in IPO.”
Corroborating, in a recent media chat, the Managing Director of NASD OTC Plc, Bola Ajomale, explained that for issuers to approach the market to raise capital, there must be some reasonable level of recovery, pointing out that there was need for government to initiate strategic policies that would grow businesses in Nigeria, while stockbrokers must also ensure that issuers raise money in a manner that is competitive and less expensive.
“We need an economy where issuers can see growth, which must impact on their businesses. It is when the business expands that companies can approach the market to raise capital. Issuers must also see a market that is growing. They must see that the market is right for an issuer to come,” he said.
The Managing Director of Investdata Limited, a capital market analyst, Mr. Ambrose Omordion, also explained that the complete absence of IPOs and public offers in the equities market can be attributed to the depressed nature of the economy and the low level of confidence among the investing public.
He explained that rights issue and public offers cannot thrive in an environment where the secondary market (trading on the floor of the exchange) is not vibrant, explaining that several reasons entice companies to list on the exchange.
He pointed out that until there is a significant recovery in the secondary market, one should not expect a re-launch in offer of securities. “The economy is weak and the market pricing reflects earning capacity of companies and these earning capacities have been weakened by the inflationary period the economy is witnessing,” Omordion said.
However, the Managing Director of Highcap Securities Limited, Mr. David Adonri, said the restoration of investors’ confidence in the secondary market will automatically lead to revival of the IPO market.
According to him, “when an economy is in recession, equities are depressed; issuers switch to financing by debt, especially when benchmark interest rate is below inflation rate.”