NGX’s Recent Technical Suspensions: The Issues, The Companies and The Call for Action
The Nigerian Exchange Limited (NGX) announced today, July 08, 2024, the technical suspension of trading in shares of eight entities, including a Tier 3 Bank, the only one listed on the bourse – Unity Bank Plc (UNITYBNK). The Exchange affirmed that trading in the the firm’s shares were suspended because it had yet to submit its audited financial statements for the year ended December 31, 2023, ninety (90) days (three months) after the statutory deadline for submission of returns and 180 days after the year-end.
This action presents the NGX as being market-sensitive and devoted to ensuring that price discovery in the market is premised on the listing-mandated provisions for quoted entities on the bourse. The governance-laden move has generally been welcomed.
In the release published on the NGX trading suspension announcement today, eight entities were listed, viz:
- Unity Bank Plc (UNITYBNK).
- C & I Leasing PLC. (CILEASING)
- Guinea Insurance PLC. (GUINEAINS)
- Lasaco Assurance PLC.( LASACO)
- Mutual Benefits Assurance PLC. (MBENEFIT)
- NPF Microfinance Bank PLC. (NPFMCRFBK)
- Regency Alliance Insurance PLC. (REGALINS)
- Secure Electronic Technology PLC. (NSLTECH)
The market advocated for this as a critical component of building market confidence in the bourse, and indeed, all bourses in the Nigerian Capital Market are subject to best regulatory governance practices.
That said, it would appear, after a review of the NGX’s X-Compliance Report dated July 05, 2024, that not all companies that fell afoul of the compliance rule were so acted upon, suggesting that there might exist a different set of metrics not known to the market in making this all-important decision. Indeed, further scrutiny revealed that a company, Oando, had since submitted its returns for 2022 and also shared its quarterly return for the 2022, year under reference which was unfortunately listed as still outstanding. This is an error we believe is an administrative error that will be corrected.
Truth be told, this has shadowed the governance of the regulatory interventions expected from the NGX — from expected compliance with free float rules to actions arising from the all-important X-compliance reports. This time, we were left wondering what the basis for the actions was based on the table below (see Table 1 below).
From the table above, it is clear that the central questions raised from this action relate to the following matters that require further scrutiny:
- The decision model remains unclear on what constitutes the basis for suspension;
- The criteria for classification do not consider real procedural issues arising from multiple regulatory jurisdictions from entities such as CBN, NAICOM, etc; and
- The room for force majeure and exceptional circumstances; and the related disclosure requirement to the market.
Not lost in this must be the consideration of minority shareholders’ interests and how such should be managed openly and transparently, allowing investors to know why regulatory approvals have been held back.
We recall that in our June 11, 2024 market governance report titled: ‘Oando Plc: Of Minority Interests and Market Rules’, we brought out how the Johannesburg Stock Exchange (JSE), took a similar step when Oando Plc delayed submitting its audited annual report to the Jo’ burg regulator. Under that circumstance, Oando was placed on technical suspension on March 27, 2024, to be later lifted on June 5, 2024, when the Nigerian oil company submitted its audited 2021 and 2022 accounts and forwarded its quarterly accounts between Q1 and Q4 2023. Interestingly and conversely, Oando was still trading freely on the NGX over this period despite the absence of these audited financial statements (see Chart 1 below).
Chart 1:
The Unity Bank Example as a Case Study in Regulatory Compliance
Proshare’s market intelligence reports, further to the analysis of Table 1 above, indicate that the CBN’s non-approval of the accounts of Unity Bank’s audited financials was the reason for the non-submission, despite its many notices to the bourse.
The inability of a quoted entity’s principal regulator to give approval would now seem to be a limiting factor and a decision criterion for suspending shareholder interest. We are trying to see how this makes sense, especially where the disclosure requirement from both the quoted entity regulator and the bourse falls short of meeting the minimum information requirement for the investor, whom all this regulation seeks to protect.
No one in the market knows why the CBN has yet to approve the audited 2023 accounts, making it impossible for the bank to forward them to the Exchange within the statutory period. A few other banks had similar problems and had to request an extension of the submission period in the last two years. So, what happened here that makes this extraordinary? Is there something in the sequence of actions that should be understood, as Table 1 suggests?
The Unintended Downside for a DMB Under Suspension
This scenario must have been thought through, but unfortunately, Unity Bank may be in the crosshairs of regulatory incoherence or, at an extreme, a clear pathway for an imminent action as the claim of non-submission of accounts sounds hollow.
We can evidently see that the consequences of regulatory delay in approving the accounts will have a detrimental cost for the bank’s recapitalization or merger plans if it does not, in fact, provide the fodder for some other action we have written about in previous analyst notes. This script is written from the classical principles of organized warfare, with minimized casualties.
From our review, the bank saw a flat share price movement between the beginning of Q1 2023 and the middle of 2023, when there were expectations that the bank would merge with Providus Bank, a move tentatively approved by the Emefiele-led CBN, but has rightly fallen under a more thorough review by the Cardoso-led CBN; who has put same on ice without as much as ruffling of feathers in the information space.
Speculation of a new potential merger arrangement caused the bank to see a bullish spike in Q4 2023. Since the beginning of 2024, Unity Bank has seen its share price dip steadily, and its recent technical suspension has the potential to hurt minority investors even more (see Chart 2 below).
Chart 2:
When Should a Company be Technically Suspended?
The NGX’s Ex-Compliance Rules are clear, and the Exchange’s recent policy actions are within Rule 8 of its Rule Book. However, analysts are slightly concerned about the uneven treatment of companies slammed with technical suspensions. For example, twenty-eight companies are in violation of the Exchange’s compliance codes for infractions ranging from breaching its rules towards submission of their audited annual accounts and missing regulatory filing (MRF), but a few of the companies have complained that they were awaiting regulatory approval (AWR). Indeed, analysts have observed that some companies have been in violation of the reporting approval guidelines since 2014 (DN Tyres & Rubbers Plc, Union Homes Savings and Loans Plc ETC).
The Other Side of Lateness
While the late filing of audited annual financial statements is cause for worry, the flip side is the early filing of account statements. Companies like Geregu Power Plc, Infinity Trust Mortgage Bank, United Capital Plc, and Airtel Africa have been acknowledged by NGX RegCo as early filers of interim quarterly accounts, Bridlinks Africa Plc and Geregu Power Plc have been recognised for the early filing of their audited annual accounts, a soft proxy for best practice financial reporting performance. This is highly commendable, and such entities should be encouraged.
Closing Thoughts
When deciding on companies’ technical suspensions, the regulator must establish uniform action triggers to avoid accusations of bias, policy randomness, or both.
Furthermore, the NGX may need to establish a stronger consultative framework with other market regulators, such as the Central Bank of Nigeria (CBN), the National Insurance Commission (NAICOM), and the National Pension Commission (PENCOM), to provide investors with guidance on the reasons for the delay in the approvals of audited annual reports. The information is sufficiently important to guide investors on the material conditions of listed companies.
The NGX has acted professionally and responsibly in placing technical suspensions on the trading activities of listed companies on its Exchange for late audited annual report filings. However, Proshare analysts would be remiss not to point out the need for uniformity in the treatment of all listed companies on the Exchange, and rather than punish companies and their minority shareholders for the tardiness of principal industry regulators; the Exchange could have some sort of working relationship with other regulatory agencies to guide the decisions on technical suspension of companies that require industry regulatory approvals
