Lagos — Controversies have continued to trail the introduction of share reconstruction by some companies especially the banks, since after the banking sector consolidation exercise in 2005.

Shareholders are up in arms against the introduction of share reconstruction and are agitating for share buy-back scheme.

What is Share Reconstruction?

Share reconstruction is the reduction of the number of shares in a company's issued share capital without any reduction in the market value of the shares. For instance, a company with 10 billion units of ordinary shares of 50k each with a market price of N5.00 at the stock exchange, can decide to reconstruct two shares into one. This will reduce the company's number of issued share capital from 10 billion units to 5 billion units but will increase the market value on the stock exchange by two times N5.00 i.e. N10.00 per share, on the stock exchange. Nearly all the banks that had a union of more than three have reconstructed their shares.

Some of the banks are Access Bank, Platinum-Habib Bank, Skye etc

For instance, Platinum-Habib Bank Plc that was in 19th position in March, moved up to 18th position with a market value of N115.51 billion after its share reconstruction in 2007. A total of 6,435,024,933 shares of the bank were admitted on the Daily Official List at N16.29 per share, following the conclusion of its share reconstruction. Consequently, the Managing Director of the bank, Mr Francis Atuche promised shareholders during the bank's initial public offering that the bank will not undertake a second round of share reconstruction.

According to him then: "We have already done the needed share reconstruction. In going forward, we believe we will grow our earnings and profits enough to provide more than adequate returns to our shareholders." Opponents of share reconstruction see it as a way of management running away from being caught in the web of low return on capital or delivering and creating value for shareholders by reducing the number of shares in their stock.

Timothy Adesiyan on the other hand, who represented another group formerly led by Akintunde Asalu, said that NSE should not wait for the December 31, 2008 deadline for dematerialising certificates but rather allow investors post it to the CSCS. Citing an instance why this move should be considered, he said that during share reconstruction of some companies on the Exchange, they never asked them to submit their certificates and the reconstruction was done effectively.

But Capital Market authorities have stated that share buy-back can only work in the country when the Companies and Allied Matters Act (1990) is completely amended. However, it would be noted that the recapitalisation of the banking sector led to unprecedented number of shares, for which some of the banks reconstructed their shares. The banks that reconstructed their shares said they did it so as to deliver improved returns in terms of cash dividends and bonus issues to their shareholders.

With the benefit of last year's returns to shareholders, some of them have said that the share reconstruction has rather left them worse off. They, therefore, advised banks and other companies to consider other ways of rewarding them and thus look at the option of share buy-back. Apparently determined to justify the desirability of share buy-back in Nigeria, shareholders under the aegis of Independent Shareholders Association of Nigeria (ISAN) brought experts from parts of the world where the practice has been on, to Abuja recently to share their experiences.

At the workshop, Minister of State for Finance, Mr. Remi Babalola said that the government would ensure that the necessary legal and regulatory framework is put in place for share buy-back to work in the country. "It is commendable that the move is coming from the private sector. The workshop is also highly commendable. Initiatives like these are what we are talking about. I am here to endorse this workshop and assuring you that the Federal Government will ensure that the necessary framework is in place for its workability when it becomes operational in the country," Babalola said.

The Chairman of the Senate Committee on Capital Market, Senator Ganiyu Solomon and his counterpart at the House of Representatives, Mr. Ahmed Wadada, gave the assurance that the CAMA would be amended to remove the confusing provisions so as to make share buy-back practicable in Nigeria.

Meanwhile, the apex regulator, Securities and Exchange Commission (SEC ) seems to oppose the execution of share buy-back in Nigeria. The Director-General of the Commission, Mr. Musa Al-Faki had at the workshop said that one of the reasons the practice is being avoided in Nigeria is to prevent its possible abuse in the market. He added that share buy-back can make a company to be highly geared (a situation where amount of debt is much higher than equity).

Al-Faki said, "The immediate effects of a high gearing are insolvency risk and financial distress costs, which collectively undermine the shareholders' value and interest in the company."

He said that generally, share buy-back has been rebuked for being a tool by which management can illegally manipulate their companies' share prices through mopping, thereby creating artificial scarcity in the market and subsequent price increase.

Al-Faki said considering the many arguments for and few against a share buy-back strategy, it would appear share repurchase will enhance wealth creation and in effect, broaden the Nigerian capital market. It has been globally accepted that the quality of a regulatory environment is a major index necessary to attract invertible funds. The quality of a regulatory environment, particularly, as concerning the capital market, is measured by the following, amongst others: Efficacy of the laws, including improved legal processes, empowered regulator and conduct of the officials of the regulator; presence of business practices and ethics which promote transparency and good corporate governance. Do corporate managers behave in manners consistent with best practices?

The Judiciary - in exercising powers of Judicial review over issues/decisions from the capital market - can it really be asserted with confidence that precedents in this regard are consistent with the real essence of capital market laws?

Meaning of Share Buy-Back

The Head, Investment Banking, Sub-Saharan Africa & Financial Institutions-Africa for Merrill Lynch, Mr. Michael Larbie, defined share buy-back as the purchase by a company of its own shares in the market. The bought shares are either cancelled or retained as treasury shares in order to be able to re-sell them, or allocate them to fulfill stock options or to otherwise avoid issuing new shares.

Reasons for Share Buy-Back

The various experts that spoke at the forum gave various reasons why companies embark on share buy-back. For instance, Larbie said "Companies use share buy-back to return excess cash to shareholders on a more favourable tax basis than dividends. He added that companies are also likely to buy back shares when good investments are hard to find. They also do it when their stocks' float is adequate; when pressured by major shareholders to do so. Other identified reasons are to signal management confidence that the price of the stock is undervalued; to increase earnings per share; to invest excess cash at management's disposal at a higher rate of return on equity; to reduce the cost of capital," Larbie said.

The Vice-President, Financial Markets International Incorporated, United States, Mr. Peter Levine, said that share repurchase can be used to increase financial leverage in particular by underleveraged companies.

He added that companies buy back their shares to: eliminate an undesirable major shareholder; to defend against an actual or threatened take-over proposal; inhibit potential corporate raiders from accumulating shares in the open market; remove market overhang and increase the percentage of ownership of the remaining shareholders.

It was a consensus among the experts that share repurchase by companies gives shareholders more flexibility than a dividend as it allows shareholders to choose when, and if, to sell and realise their cash.

Share Buy-Back Methods

Larbie cited four methods of share buy-back used in the US. They include, Open Market programme, Private Transaction, Self Tender, Exchange Offer. According to him, Open Market option is very prominent as it accounted for 90 per cent of the almost 30,000 announcements made in the period from 1986 through 2007 in the US. "The implementation of Open Market buy-backs is subject to various rules and regulations, including SEC Rule 10b-18, which limits the time, price, volume and number of brokers on a daily basis," he said.

He added that majority of Open Market programmes are open ended, having one, two or three years time limitations to be implemented. The longest, he said, was 10 years announced by Coca-Cola in 1996 and then in 2006.

He explained that under Private Transaction method, the company buys back shares directly from a particular shareholder away from the Open Market at a negotiated fixed or formula price. This method, he said, represented about five per cent of the total announcements. However, he disclosed that an abuse of this method occurred during the 1980's when a corporate predator took a position in a company and threatened to take it over or otherwise put it into play.

On the other hand, the Self-Tender offer is done with either fixed price or Dutch auction. "This method represents less than four per cent of the announced buy-backs. In a Self-Tender, a company specifies a number of shares it is prepared to buy back and specifies either a fixed price or a range of prices in a Dutch auction that it is prepared to pay for the shares," he explained. Larbie added that the offer must remain open for at least 20 business days.

The fourth method - Exchange Offer, he explained, is executed under the tender offer rules.

"Company A offers shares it owns in another public company or offers another class of its own securities in exchange for common shares of Company A. This method," he said, "represented less than one per cent of the total announcements in the US."

He added that the appropriate trading method for a company to adopt to buy its own shares is based on its objectives, the size of the programme, its financial ability and market circumstances.

The trend in other countries

Share repurchase started in the US. It then spread to the United Kingdom and is now becoming more prevalent in Europe. Some of the companies that adopted the strategies in the UK are Reuters Plc (1993); British Petroleum Plc and Amoco (2000) and Vodafone Plc (2003).

Larbie said that companies in the US have been embracing the practice of buying back their shares over the years. According to him, an average 2,150 announcements per year were made between 1996 and 2000 and 1,500 announcements per year in 2004 and 2007. He disclosed that $381 billion, $472 billion, $703 billion and $887 billion were spent by companies in share buy-backs in 2004, 2005, 2006 and 2007 respectively.

"In the past three years, share buy-backs have surpassed dividends as a method of distributing excess cash flow to shareholders in the USA, reversing historic trends," he said.

In his part, Levine said investors in the US preferred share repurchases to dividends for certain reasons. With buy-backs, shareholders have a choice to retain rather than sell if deferring tax is a priority. Also share buy-back allows investors to make the decision to either buy or not. But in dividends, the company decides whether to pay or not. Investors who sell stocks/holdings pay tax on difference between selling price and cost but dividends are taxed at full value," he said.

Mr. Jagvir Singh, an Indian corporate lawyer, said that companies in their country started the spree of frequent buy-back in 2000.

Practicability in Nigeria

Despite its perceived benefits to stakeholders, share buy-back has not been embraced in Nigeria. Prof. Tunde Ogowewo, a member of the Faculty of Law, Kings College, London and NYU Law School, New York, said this development partly stemmed from the misconceptions that Nigerian laws prohibit the practice. Ogowewo who is also a member of the Nigerian Bar, explained that Nigerian law allows share buy-back. He said the Company and Allied Matters Act (1990) provides companies with the opportunity to repurchase their own shares.

"On the question of whether it is prohibited by law, the starting point, he said, is contained in section 160 (1) of CAMA. "But this prohibition applies to set the background for a minor gateway in the section.

Just as a similar prohibition happily co-existed in the British Companies Act 1985 likewise here, we see an absolute prohibition (section 161 decrees that "Notwithstanding any provision in the articles, a company shall not purchase any of its own shares") co-existing with a major (albeit regulated) gateway in the Nigerian statute. Section 161 provides this gateway in the form of an exception to the prohibition in section 160. It does so in the following terms: "except on compliance with the following conditions, that is - (a) shares shall only be purchased out of profits of the company which would otherwise be available for dividend of a fresh issue of shares made for the purpose of the purchase."He said that Section 161 is the principal provision.

He said, "It states that regardless of whatever shareholders may have stipulated in the companies' article, "a company shall not purchase any of its own shares." The section, he explained, provides a gateway to ensure that creditors' interests are not prejudiced.

The Nigerian capital market until recently, was very vibrant and a source of wealth creation.

Last year witnessed quite a number of 'big ticket' public offerings. Funds were raised in the primary market window of the stock market through Rights Issues, Initial Public Offerings, Offers for Subscription, Private Placements and GDRs. Notable amongst these were Rights Issues and Offers for Subscription of banks such as First Bank (N100 billion), Afribank (N100 billion), Bank PHB (N85billion), Access Bank (N70.4billion) FCMB (N63 billion), Oceanic Bank (N55.4 billion), UBA (N53.8 billion), Fidelity Bank (N50 billion).

Other non-bank Offers during year 2007, were Dangote Flour Mills (N18.75 billion) IPO, NAHCo (N2.2 billion) hybrid Offer, BAGCO (N7.27 billion) IPO, Costain (N8.03 billion) hybrid Offer and (N44 billion) Convertible loan stock, Transnational Corporation Plc (N60 billion) IPO, Cement Company of Northern Nigeria (N1.56 billion) Rights Issue, Thomas Wyatt (N2.5 million) Rights Issue, Eterna Gas (N1.49 billion) Rights Issue, International Breweries (N1.2 billion) Public Offer, Fan Milk (N699.8 million) Rights Issue, Guinea Insurance (N2.81 billion), University Press (N269.6 million) Rights Issue, Acen Insurance (N2.1 billion) Public Offer, Oasis Insurance (N702.1 million),Value card (NN1.04 billion), DEAP Capital Management Trust Plc (N1billion)and Livestock Feeds (N299.6 million) Rights Issue and Private Placement.

Some companies also accessed funds in the primary market via an entirely different vehicle in the form of Private Placement. Some of these are Cornerstone Insurance (N3.33 billion), Livestock Feeds (N346.79 million), Aso Savings & Loans Plc (N2 billion) and Thomas Wyatt Nigeria Plc (N14.56 million). While most banks adopted a combination of Rights Issue and Public Offers, about 27.78 per cent of firms that raised funds in the market solely opted for Rights Issue. These include companies like University Press Plc (N269.6 million), Fan Milk Plc-an unquoted company (N699.8 million), Guinea Insurance (N2.81 billion), Eterna Oil (N1.49 billion) and Cement Company of Northern Nigeria -CCNN (N1.56 billion). Also, some offerings in the year came in special forms other than the usual Over-the-Counter (OTC) medium of issuing foreign currency denominated instruments, two (2) banks-GTBank and Diamond Bank listed Dollar-denominated Global Depository Receipts (GDRs ) on the floor of the Nigerian Stock Exchange (NSE). GTBank offered for subscription a total sum of US$750 million in GDR for local and foreign investors. The foreign component of the investment was US$500 million (about N64billion) while US$250(about N32billion) was for local investors.

Similarly, Diamond Bank Plc was listed for a foreign direct investment by Actis Capital, a private equity firm. The fund was a total of US$500 million comprised of US$400 million (about N52 billion) for foreign investors and US$100 million (about N13 billion) for local investors. Also, Livestock Feeds issued a Private Placement to raise N346.8 million which opened for only two days (August 1 - 2, 2007). Summarily, a classification of Public Offerings for the year reveals a total of, 22 Offer for subscription, 7-Hybrid Offer, 14-Private Placements, 20-Rights Issues, 5-IPOs, 2-GDRs, Convertible Loan stock 1, Bond 1. Over N1.361 trillion was raised from the Primary market by companies in 2007, compared to N344.0 billion raised in 2006.

A sector-by-sector analysis of the Nigerian Stock Market shows that out of the total of 30 sectors that recorded substantial activities during the year, about 18, representing 60 per cent, outperformed relative to market returns at the full year end 2007. The Engineering Technology sector recorded the best performance as it closed the year with a capital appreciation of 620.5 per cent deviating from market returns by a whopping 545.6 percentage points. The sector's weight in the overall market portfolio stood at 0.03 per cent at the end of the year. In that sector, Niwicable recorded the highest year-end capital appreciation of 725.02 per cent. Among the category of sectors that outperformed the market, the Road Transport sector performed least with 80.2 per cent capital appreciation.

A total of 12 sectors underperformed the market while the best performance in this category of sectors was recorded by Agriculture driven by activities in the shares of Grommac which closed the year with a capital appreciation of about 900 per cent.