Stock market volatility fuelled by companies with locked-in shares

The current rate of volatility in Nigeria’s stock market will continue unless regulatory push is stronger to cause companies release most of their locked-in shares (smaller free float) into the hands of wiling investing public.

‘Free float’ is generally described as all shares held by investors, other than restricted shares held by company insiders. In stock investing, a company’s free float is important to potential investors because it offers insight into the company’s stock volatility.

Though, the Nigerian Bourse requires free float deficient companies to provide quarterly reports on their compliance plans with this important post-listing requirements, BusinessDay checks reveal that the number of companies with smaller free float increased by eight in two years, from a low 15 in August 2018 to 23 as at August 14, 2020.

The big names that have joined this growing list and the percent of their shares in the hands of the investing public are BUA Cement plc (1.15%), Transcorp Hotels plc (6%), Notore Chemical Industries plc (10.02%), Union Bank of Nigeria plc (8.41%), Medview Airline plc (14.16%), Lafarge Africa plc (16.13%), and Caverton Offshore Support Group plc (17.89%).

Stocks with small free float tend to be more volatile because there are only a limited number of shares that can be bought or sold in the event of major trading news. For the same reason, companies with larger free floats are generally less volatile. In all, investors prefer to invest in stocks with a large free float, as they can purchase or sell a significant number of shares without heavily impacting the share price.

As shown in their associated Compliance Status Indicator (CSI) codes, these listed free float deficient companies are already stigmatised with either BLS (Below Listing Standard), Delisting in Process (DIP), Below Regulatory Standard (BRS) or BMR (Below Listing Standard, Missed Regulatory Filing and Restructuring).

There is free float requirement for every company listed on the various Board of the Exchange. For entry into the Growth Board segment, company requires a minimum free float of 10 percent of the issued and fully paid up shares, or the value of its free float is equal to or above N50 million; while for the standard segment of the Growth Board, company requires a minimum free float of 15 percent of the issued and fully paid up shares or the value of its free float is equal to or above N50 million.

For the Alternative Securities Market (ASeM), company requires a minimum free float of 15 percent of issued and fully paid up shares or the value of its free float is equal to or above N50 million.

The Main Board requires a minimum free float of 20 percent of the issued and fully paid up shares or the value of its free float is equal to or above N20 billion. For Premium Board listed stocks, there is a minimum free float of 20 percent of issued and fully paid up shares or the value of their free float is equal to or above N40 billion.

Other companies with smaller free float are: Infinity Trust Mortgage Bank plc (0.93%), The Tourist Company of Nigeria plc (1.75%), Capital Hotels plc (2.99%), Golden Guinea Breweries plc (16.72%), Ellah Lakes plc (13.85%), Ekocorp plc (12.64%), Portland Paints & Products Nigeria plc (14.57%), CWG plc (15.97%), etc.

In line with the Nigerian Stock Exchange (NSE) listings requirement, companies listed on the Exchange 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 for their securities.

Other deficient companies are: Aluminium Extrusion Industries plc (16.51%), Union Dicon Salt plc (18%), eTranzact International plc (18.22%), Champion Breweries plc (17.26%), Prestige Assurance plc (18.95%), Austin Laz & Company plc (19.36%), Arbico plc (19.96%), and Skyway Aviation Handling Company plc (7.6%).

The NSE said the deficient companies that applied for waivers from the Regulation Committee of the National Council of The Exchange (RegCom), “have specifically provided compliance plans with tentative timelines to support their requests.”

Most of the deficient companies have compliance due date ranging from 2020 to 2023, according to NSE report.

“The RegCom considered and approved an extended timeframe for the companies to regain compliance with the listings requirement. The companies are however required to also provide quarterly disclosure reports to The Exchange detailing their level of implementation of the compliance plans,” the Exchange said in its recent X-Compliance Report.

The X-Compliance Report is a transparency initiative of the NSE, which is designed to maintain market integrity and protect investors by providing compliance related information on all listed companies.