Market analysts explain implication of new pricing methodology

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MATTHEW OTOIJAGHA

Amendment to pricing methodology

According to plans, the Nigerian Stock Exchange’s Amended Par Value or nominal value and Pricing Methodology Rules will become effective on Monday, 29 January 2018

The Nigerian Stock Exchange, NSE, in its public education had restated that the amendments to Pricing Methodology and Par Value Rules, which can be found in Rules 15.29 and 15.30 respectively of the Rulebook of the Exchange, 2015, which have been approved by the Securities and Exchange Commission SEC will become effective on Monday, 29 January 2018.

The Rules specify the revised price limit, price movements and tick sizes price floor, minimum pricing increments and minimum quantity to be traded that will change the published price. The Rules also classify equity securities into different price groups in order to achieve this.

These revised Rules, According to the Exchange, will be implemented on The Exchange’s trading engine on the effective date. “The amended stratification of price movements, price limits and tick sizes aims at improving liquidity, narrowing spreads, and ensuring that all price improving up or down transactions are material, making the market more efficient for all participants”, said Mr. Abimbola Babalola, HoD Market Surveillance and Investigations Department.

In order to achieve the aforementioned aims of improved liquidity, narrowed spreads, material price improvements, and market efficiency, the amendments to the Pricing Methodology Rule included the introduction of a new price group known as “Group C”.

It should be noted that the new Group “C” consists of equity securities that are priced below Five Naira (N5.00) per share, for at least four of the last six months, or new security listings that are priced below Five Naira (N5.00) per share at the time of listing on The Exchange.

Mr. Babalola also told market participants that the new Par Value Rule specifies that the price of every share listed on The Exchange shall be determined by the market forces and equities may now trade below the erstwhile price floor of fifty Kobo per unit.

Therefore, he enjoined traders to ensure that as from the above stated effective date, all open and subsequent priced orders in equity securities comply with the amended requirements for each price Group of equities and in approved minimum increments, accordingly.  Investors were advised to contact their Stockbrokers to ascertain whether any of their open orders, will be impacted by this amendment.

Before now, the new pricing rule being introduced by the Nigerian Stock Exchange (NSE) was said to be causing anxiety among capital market operators and other stakeholders as fears heighten over the likely outcome of the regulatory move.

However, the Nigerian capital market operators have said that the new pricing rule would reduce artificial share prices of companies on the Nigerian Stock Exchange (NSE). Quoted companies on the main board of the Exchange are currently not allowed to trade below their nominal value or par value of 50 kobo. This had stopped the share prices of the companies at their nominal values.

But the new rules that will come up on January 29, 2018 will remove the stopgap that has supported stocks at their nominal value. The new rules will now allow shares of quoted companies to trade for as low as one kobo. Par value is the nominal value of a share as stated in the Memorandum of Association of the company, while price floor means the amount below which the price of one unit of a share shall not be permitted to trade and the minimum amount which must be paid for a share in the event of a drop in the unit price of that share.

Nevertheless, some market operators have expressed support for the new rule, which they said is in tandem with the market principle of demand and supply as price-determinant at the stock market. Also, regulatory documents obtained indicated that the amendments to the pricing technology at the stock market will see a categorisation of quoted companies under three groups with different pricing rules.

The tick size, the minimum price movement by which the price of a trading instrument can change, will also be lowered to as low as one kobo, though all quoted companies shall continue to trade within the current pricing band of 10 per cent maximum allowable change per day.

Under the new groupings and pricing rules, stocks under the first category, Group A, shall consist of large-cap equities that are priced at N100 per share. The second category, Group B, shall consist of medium-priced equities that are priced at N5 per share or above, but less than N100 per share, while the third category, Group C, consist of equities that are priced below N5 per share.

The new rules expectedly link price movements and minimum quantity of equities traded that will change the published price of an equity security. Stocks under Group A shall have price change with minimum of 10,000 units; stocks under Group B shall have price movement with a minimum of 50,000 units, while stocks under Group C shall have price change with minimum volume of 100,000 units.

The tick size, which is the minimum price movement that any equity shall trade, shall also be linked to the groups. Group A will have a tick size of 10 kobo, Group B, five kobo, while Group C will have a tick size of one kobo.

This implies that the share price of each stock shall be allowed to move up or down in multiples of its tick size. Investigation during the week revealed that not less than 47 equities will be affected in the new arrangement, cutting across 11 sectors among the 177 listed companies.

Further probe into all the market categories revealed that 19 of the 47 dormant equities are in the insurance sector, while services, communication and technology have eight and four equities respectively. While it may “boost” the nominal value of the equities concerned, it will also contribute to their poor rating in the market.

Speaking on this development, the managing director of HighCap Securities Limited, Mr. Kola Amzat, an authorized dealer from Qualinvest Capital Limited, said the implication is that all those stocks that were artificially kept at the par value of 50 kobo will now have to find their level.

He added that the price of any stocks in the market will be a correct reflection of the market value for the stock. He pointed out that the market is an auction market based on supply and demand at any given price and if it is the market price the demand for the stock will go up and will stimulate demand in the securities. He also noted that the impact on the market capitalization of stocks currently trading below N1 were insignificant, as this will not affect the total market capitalization, even as he said that the market capitalization of those stocks was not up to one-tenth of Dangote Cement total capitalization.

The chief operating officer of Invest Data Consulting Limited, Mr. Ambrose Omordion, said that the new rule is a welcome development that will boost trading activities and propel companies’ performance and corporate governance that will support the share price.

He pointed out that on the part of traders and investors, the new classification of A, B and C should guide when taking investment decision.

According to him, “This is the time investors should beware of penny stocks that can easily move to one kobo” he said, adding however that “Investors with a lot of penny stocks in their portfolio could be among the first to be hit by a sell of”.

He continued: “Stocks between 50 kobo per share and N1 per share could be in the firing line as investors reassess their values. While a stockbroker who spoke under anonymity noted that this development may likely lead to some company reducing the nominal value of their shares to one kobo per share via a scheme of share reconstruction, saying, “That way they could escape the wrath of a massive value accretion.

‘‘Whether that will be possible will depend on the regulation that SEC proposes around this.  This will be implemented by the end of January 2018. The implications are many but the most important is that it will increase trading of stocks which is lacking now and most of them can go as low as one kobo per share.”

Looking at prices of stocks on the NSE showed that there were only nine stocks under the “high-priced stocks” category of Group A. These include Dangote Cement Plc. Mobil Oil Nigeria Plc. Nestle Nigeria Plc. Nigerian Breweries, SIM Capital Fund, Skye Shelter Fund, Nigerian Energy Sector Fund (NESF), Total Nigeria and Seplat Petroleum Development Company.

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