Government policies, FX stifle new listings on NGX
Companies looking to list on the Nigerian Exchange are grappling with stringent government policies, high compliance costs, and foreign exchange volatility. Experts warn that without strategic policy reforms and tax incentives, market activity could remain sluggish, impacting investor confidence and economic growth, writes Temitope Aina
Companies are approaching new listings on the Nigerian Exchange with caution, as they navigate regulatory requirements, compliance costs, and economic uncertainties. Analysts note that corporate governance obligations and filing fees influence listing decisions, while foreign exchange volatility impacts investor confidence.
Despite these challenges, experts believe that strategic policy adjustments and supportive incentives could enhance market participation.
Impact of government policies on listing decisions
Speaking on the issue Chief Executive Officer of Cowry Treasurers Limited, Charles Sanni, has attributed the absence of new listings on the Nigerian Exchange Limited to restrictive government policies and economic volatility.
Sanni noted that current fiscal and monetary policies are creating capital burdens for companies considering listing on the exchange. He explained that high regulatory costs and economic uncertainties are discouraging primary issuers from entering the market.
“The policies from the government right now are more about regulating the economy with both fiscal and monetary directions. What this means is, if I’m listed on the stock exchange, it becomes a huge capital burden for me, especially if the government policies like the high driving rate are expensive. It defeats the purpose of listing,” he said.
Sanni highlighted that no new companies have been listed recently, as potential issuers are cautious of incurring costs associated with filing fees and quarterly reports. He also pointed out that foreign exchange volatility is deterring portfolio investors, leading to a reduced attraction for listings.
“Before now, there haven’t been any new listings on the exchange. No primary issuers are coming in because everyone is careful not to incur unnecessary fees. They don’t want to worry about filing fees or submitting quarterly reports. Also, the influx of portfolio investors hasn’t been felt much because, with the volatility in the foreign exchange market, there’s nothing attractive about listing on the exchange,” he explained.
He added that federal government bonds are crowding out the private sector, as investors avoid long-term bonds due to economic uncertainty.
“Right now, nobody wants to invest in long-term bonds because you don’t know what the situation will be like in the next ten years. No one is even touching long-term federal government bonds,” Sanni said.
He noted that while MTN and Airtel are currently listed on the NGX, the exposure of business strategies to competitors could discourage other companies from considering listings.
“If the policies change, there are sectors that would want to come to the market. Today, agriculture contributes a lot to the GDP of the country. If the policies are favorable, they will come in. The manufacturing sector is struggling, and for them to consider listing, we need to look at infrastructure issues,” he stated.
Sanni urged the NGX and the Securities and Exchange Commission (SEC) to collaborate on reducing listing costs and leveraging technology to enhance trading activities.
“The NGX can help by adjusting the fees, but it’s not just about NGX. You also have to go through the SEC. It involves both of them. Our settlement system is working well, and if you ask me, NGX has done a good job. But they need to be more technology-driven so that more shares can be traded under a depository arrangement system,” he concluded.
Governance, accountability hurdles
The National Coordinator of the Progressive Shareholders Association of Nigeria, Boniface Okezie, has blamed stringent governance penalties and strict shareholder accountability requirements for discouraging companies from listing on the Nigerian Exchange Limited.
Okezie explained that the current regulatory framework is making it difficult for companies to recognise the benefits of going public, thereby limiting new listings on the exchange.
“The overbearing governance penalties and the level of accountability to shareholders are the main reasons companies are hesitant to list on the NGX. The requirements are just too strict, and it’s making it difficult for companies to see the benefits of going public. The policies need to be reviewed to make them more favourable,” he said.
He argued that if the regulatory environment were more accommodating, more private companies would be encouraged to go public, ultimately creating jobs and boosting the economy.
“If we had companies like 7Up listed, it would create jobs and boost the economy. But instead, these private companies prefer to stay off the exchange, pay their taxes quietly, and move on. They see no reason to go public and deal with all the regulatory hassles,” Okezie noted.
He added that the government’s rigid policies, which require companies to comply with numerous regulations, are acting as bottlenecks that discourage potential listings.
“The government policies are just too rigid. You must register this and that, comply with countless regulations, and these requirements serve as bottlenecks. It discourages companies from listing because they don’t want to be tied down by excessive rules and penalties,” he explained.
Okezie called on regulators to review and simplify the listing requirements to encourage more companies to participate in the capital market, thereby stimulating economic growth.
Cost of compliance, disclosure requirements
Also commenting, a Professor of Forensic Accounting at Copperstone University in Zambia, , Richard Mayungbe, once a company lists on the NGX, it is required to disclose a wide range of financial information, including profits, expenses, and strategic decisions, leading to heightened transparency.
He stated that this level of disclosure exposes the company’s financials to public scrutiny and competitors, potentially weakening its competitive edge adding that in contrast, private companies maintain more operational privacy, avoiding the need for quarterly earnings reports or detailed explanations of financial decisions to shareholders or regulators.
Advantages/disadvantages of staying private
Mayungbe emphasised that staying private allows companies to manage their tax liabilities more efficiently and avoid the costly regulatory compliance associated with being public. This flexibility enables businesses to operate with fewer constraints and maintain strategic secrecy.
He further outlined several advantages of delisting or staying private. One benefit is the reduced regulatory burden. Private companies face fewer regulations and reporting requirements, leading to cost savings on legal and compliance expenses. There is also greater control and decision-making freedom, as management can make strategic decisions without the pressure from shareholders or analysts, allowing for long-term planning.
He noted that private companies are not obligated to disclose as much information publicly, helping them protect sensitive business strategies from competitors adding that they also enjoy cost savings by avoiding public listing expenses, which reduces financial burdens related to legal fees, compliance, and investor relations.
However, he also pointed out several disadvantages of staying private. One major drawback is limited access to capital, as private companies may find it challenging to raise funds compared to public companies that have access to equity markets. Additionally, there is reduced liquidity for shareholders, as shares of private companies are not publicly traded, making it difficult for shareholders to sell their investments.
Mayungbe noted that private firms might face a higher cost of capital since they are perceived as riskier by investors, leading to potentially higher interest rates. Valuation challenges also arise because determining the value of a private company is more complex and subjective without a public market price.
He also explained that while reduced public transparency can be seen as an advantage, it can also lead to less accountability and governance issues. Management challenges may arise due to concentrated ownership, potentially resulting in less effective decision-making.
Mayungbe observed that public companies benefit from enhanced visibility and credibility in the market, which private companies may lose upon going private. There is also the risk of financial strain from leveraged buyouts, as companies may take on significant debt to go private, increasing financial risk.
The transition process itself is costly, with substantial legal and transaction expenses, potentially causing short-term financial challenges. Additionally, employee morale and retention issues may occur due to the absence of stock-based incentives, which are common in public companies.
Mayungbe concluded that rigid governance rules and regulatory demands in Nigeria are the main reasons companies avoid listing on the NGX.
He argued that the overbearing compliance requirements create bottlenecks that discourage companies from going public. He suggested that more flexible and supportive government policies could attract more companies to list on the NGX, ultimately boosting the economy.
Corporate governance, market liquidity
The Group Managing Director of Cowry Asset Management Limited, Johnson Chukwu, has attributed the decline in new listings on the Nigerian Exchange Limited to the high cost of corporate governance and post-listing obligations.
Chukwu noted that while government policies play a role, the primary deterrent is the operational and administrative costs companies incur to meet corporate governance requirements.
“It’s not really about government policies. When a company decides to get listed on the NGX, it comes with a lot of corporate governance requirements. They have to comply with post-listing obligations, including appointing independent directors and ensuring that their quarterly reports are submitted on time. These requirements create additional administrative and operational costs, and companies are starting to question whether the benefits of being listed are worth these expenses,” he explained.
To attract more companies to the capital market, Chukwu suggested that reducing corporate tax could offset compliance costs and make listing more appealing.
“To make the market more attractive, one solution could be to reduce corporate tax. If companies see that they can save on taxes by listing, it might offset the cost of compliance and encourage more companies to go public,” he said.
Chukwu added that while market liquidity is not a major concern, the high-interest rate environment and the current economic climate are influencing investor decisions.
“When it comes to market liquidity, I don’t think that’s where the challenge is today.
The liquidity is there, but the current economic climate is definitely affecting investor decisions. Interest rates are so high right now that some investors are struggling to keep up. They are being cautious because the high-interest environment impacts their investment returns,” he noted.
He emphasised that a combination of corporate governance costs, high-interest rates, and the prevailing economic climate is influencing companies’ decisions on whether to go public.
The recurring theme among industry voices is the need for policy reforms to ease the regulatory and financial burdens on companies. If addressed, this could potentially revive interest in public listing and enhance market activity on the NGX.
Call for policy adjustments
The recurring theme among these industry voices is the need for policy reforms to ease the regulatory and financial burdens on companies. If addressed, this could potentially revive interest in public listing and enhance market activity on the NGX.
