This content is from: Local Insights

Certainty of spin-offs in Nigeria

Banji Adenusi
In April 2013, the Nigerian Stock Exchange (NSE) launched the Alternative Securities Market (ASeM) as a parallel market to its main bourse – having rebranded the second tier securities market. The aim of the ASeM is to provide small and medium-scale enterprises and emerging businesses with a platform to access and raise long-term capital. Further to the launch, the NSE has updated its Green Book, which details the requirements for listing on the ASeM. What is most notable about the ASeM, however, is the flexibility it offers by way of less stringent regulations than would have been available to companies listed on the main bourse, such as the absence of a requirement for capitalisation or shareholders equity. It is important to note that the ASeM is only accessible to publicly-held companies, with such companies having a minimum of two years' operating track record.

One key introduction, targeted at ensuring conformity with international best accounting practices and management control, is the requirement that companies listing on the ASeM adopt the international financial reporting standards. The rule book further requires that the company offers 15% of its share capital to the public and be held by not less than 51 shareholders, with a lock-up period of 12 months post-listing, in which the promoters and directors of the company are required to hold a minimum of 50% of their shares held pre-listing in the company, where the listing is in connection with an initial public offering. In addition to this, the company is required to have a designated adviser, whose main responsibility is to ensure that the company meets all disclosure requirements in the ASeM rules.

By catering to the funding gap of companies whose specific characteristics preclude them from listing on the main board of the NSE, the ASeM rather opens up a plethora of possibilities and potential concerns. One is the cost associated with going public, which includes direct costs such as underwriting, initial listing fees, compliance costs, and indirect costs such as under-pricing, partial or total loss of control amongst others. When compared with the entire cost for listing on the main board, however, it becomes obvious that the NSE's pursuit is targeted at providing these smaller business entities with heightened exposure and liquidity at lower cost levels.

Considering the self-regulating nature of the board, one obvious lacuna in the rules is in respect of penalties and sanctions where listed companies fall short of the rules. In comparison, the UK Alternative Investment Market has a number of sanctions in place in this regard, ranging from warning notices to fines and cancellation of admission onto the board. While this shortcoming may be argued away as a utilitarian function, it nonetheless has the distinct possibility of creating a casino environment, as mooted by Roel Campos; consequently, investors have the responsibility of looking to the true value of their investment in these growth companies. Critics of the ASeM may equally argue against the less restrictive control and regulatory mechanisms in addition to the sub-optimal voluntary corporate governance standards, and while these may be valid arguments, the ASeM's safeguards are tailored towards market integrity. In the absence of minimum capitalization, and the minimum requirement of a two-year operating track record, the ASeM essentially charges the designated adviser (who is likewise assessed by the NSE and sanctioned where necessary) with the task of ensuring that companies fulfil the requirements for listing on the board. Consequently, the admission process requires rigorous financial and legal due diligence.

By providing access to long-term investment capital, a central trading system, liquidity for shareholders and a transparent price discovery mechanism, the ASeM's regulatory model would seem to be an optimal model for the Nigerian business environment. This is equally in view of the low compliance costs, and the fairly adequate level of disclosure and transparency required in such a self-regulatory market. As the Nigerian financial market races towards private equity and hedge funds in order to maximise investments, the timing of the ASeM could not have come at a better time, most importantly for growth companies.

Banji Adenusi

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