Opt for stock downgrade
Majority of core investors in Chellarams Plc have decided not to dilute the existing concentrated shareholding of the company. This is a major decision that will see the downgrading of one of Nigeria’s oldest companies from the main board of the stock market to the lowly third-tier board.
The directors and core investors in Chellarams had been required to restructure the company’s issued share capital in a way to dilute the existing concentrated shareholdings of the core investors and allow more investments from the general investing public.
Companies listed on the Nigerian Stock Exchange (NSE) are required to maintain a minimum free float for the set standards under which they are listed in order to ensure that there is an orderly and liquid market in their securities. The free float requirement for companies on the premium and main boards is 20 per cent while companies on the third tier board, otherwise known as Alternative Securities Market (ASeM), are required to have 15 per cent free float.
Chellarams, established in Nigeria in 1923 and quoted on the Exchange since 1977, has been on the main board of the Exchange for nearly four decades. But its minimum free float recently fell below the 20 per cent benchmark to 14.87 per cent. Authorities at the NSE had given the company extended timeline to restructure its share capital to comply with the minimum free float. The deadline expired on July 08, 2016.
The Nation’s check at the weekend indicated that the board of Chellarams has applied to the Exchange to downgrade the company from the main board to the ASeM. At 14.87 per cent of total issued share capital, the minimum number of shares of Chellarams in the hands of the general investing public is within the 15 per cent required for ASeM.
Ten other companies are in violation of the 20 per cent minimum float and have also been mandated by the NSE to restructure their share capital. These included Union Bank of Nigeria, which has a free float of 14.94 per cent; Capital Hotel, 2.23 per cent; Great Nigerian Insurance, 16.0 per cent; Nigerian Ropes, 13.96 per cent; AG Leventis, 11.64 per cent; Interlinked Technology, 14.26 per cent; Infinity Trust Mortgage, 1.13 per cent; Transcorp Hotels, 10.80 per cent; Caverton Offshore Support Group, 17.40 per cent and African Paints, which currently has a free float of 9.82 per cent.
The NSE has issued various deadlines to the defaulting companies including Union Bank of Nigeria, directed to ensure compliance by June 30, 2017; Capital Hotel, January 341, 2017; Great Nigerian Insurance, July 08, 2016; AG Leventis, March 31, 2017; Interlinked Technology, October 14, 2017; Infinity Trust Mortgage, October 31, 2016; Transcorp Hotels, December 12, 2017; Caverton Offshore Support Group, December 12, 2017 while African Paints has up till December 31, 2017 to restructure its share capital.
Free float, otherwise known as public float, refers to the number of shares of a quoted company held by ordinary shareholders other than those directly or indirectly held by its parent, subsidiary or associate companies or any subsidiaries or associates of its parent company; its directors, who are holding office as directors of the entity and their close family members and any single individual or institutional shareholder holding a statutorily significant stake, which is 5.0 per cent and above in Nigeria.
Thus, free float shares do not include shares held directly or indirectly by any officer, director, controlling shareholder or other concentrated, affiliated or family holdings.
Free float deadline is usually in deference to application by the management of a company for some period to comply with the free float. However, the company is required to provide quarterly disclosure report to the NSE on the efforts being made to fully comply by the deadline.
By the expiration of the deadline, a company is mandatorily required to have completed partial divestments or dilution of the ‘non-public’ shareholdings to free 20 per cent equity stake for public holding, unless the management of the NSE grants fresh waivers and extensions for the companies. In the extreme instance, a company with deficient public float may opt to delist its shares.
Stock markets maintain minimum public float to prevent undue concentration of securities in the hands of the core investors and related interests, a situation that can make the stock to be susceptible to price manipulation. Besides, it provides the general investing public with opportunity to reasonably partake in the wealth creation by private enterprises.