There seems to be no respite for investors in insurance stocks at the Nigerian Stock Exchange (NSE) since the crash in the market in 2008.
Thousands of investors who ploughed hard earned funds into insurance shares during the boom days – preceded by industry recapitalisation, mergers and acquisitions – now pair their fingers in regret.
NSE Chief Executive Officer, Oscar Onyema
The insurance recapitalisation in 2007 and the rush to the capital market to raise funds attracted unprecedented patronage by investors who got carried away in the frenzy of initial public offers.
Even as the companies are not paying dividends, and the stocks barren of capital gains, shareholders are left at the mercy of hostile capitalists while regulators look the other way.
Shares reconstruction
Now companies use subtle means like shares reconstruction, buy out deal and hostile takeover, or outright delisting, to short change minority shareholders.
In shares reconstruction, a company changes the structure of its share capital by reducing the number of issued shares while increasing the par value of each share.
In a buy out deal, investors purchase entire issued share capital of a company with its liabilities to take over ownership without taking into consideration the interest of existing minority shareholders.
Shareholders regard this scenario as hostile takeover as in the case of FBN Insurance buy out deal to acquire Oasis Insurance. The process opened on Thursday, July 10 and will end on July 31, after which the underwriters will delist Oasis from the NSE.
FBN Insurance, jointly owned by Nigeria’s FBN Holdings and South Africa’s Sanlam, is offering 55 kobo per share to existing shareholders to buy out the remaining 1.87 billion shares that confer on the company the sole ownership of Oasis.
FBN had in February this year acquired 71.2 per cent stake in Oasis. The remaining 1.87 billion shares, representing about 28.8 per cent minority stake worth N1.03 billion, if finally sealed, will see the investors acquire the local underwriters.
Shareholders insist it is a hostile takeover as well as a reap off of existing shareholders who have never earned any returns on their investment in Oasis.
Under the watch of regulators, shareholders have been short changed, raising questions as to why regulators have assumed a mere undertaker’s role.
Investors, who now see equities investment as one huge gamble, perceive regulators as undertakers who dress dead entities for sale to unsuspecting investors then abandon the investors to their fate.
A spate of shares reconstructions between 2010 and 2013 have also wiped off huge chunks of investors’ wealth.
Counter productive effects
Experts say that in a bearish market, it is counter productive to embark on shares reconstructions because when the company reduces the volume of shares in issue, the price of reconstructed stock often relapses instead of appreciating.
For this reason, experts insist that companies adopt share buy back as preferred option for reducing the volume of issued share capital in a bearish market.
However, to avoid huge spending in the buy back of its shares, companies resort to shares reconstruction against the wish of minority shareholders.
For instance, International Energy Insurance (IEI) embarked on shares reconstruction in 2012, promising it would increase shareholder value and returns on investment.
With the approval of the Securities and Exchange Commission (SEC), a total 6,420,427,449 issued shares of 50 kobo each were consolidated into 1,284,085,489 ordinary shares of 50 kobo each by cancellation of 5,136,341,959 ordinary shares of 50 kobo each.
The restructured N1,284,085,489 ordinary shares of 50 kobo each were revalued and allotted to shareholders and were relisted on the NSE.
A total N2,568,170,979 – representing the surplus nominal value arising from the shares reconstruction – was said to be transferred to the Capital Reserve Account as part of the company’s shareholders funds.
Today, the share price of the stock is a little above 50 kobo per share, the price before reconstruction. The implication is that over N2.5 billion has been wiped off investors’ wealth.
Two months after another insurance company, Goldlink Insurance, concluded the reconstruction of its shares in November 2012, another insurance firm, Investment and Allied Assurance (IAA), also reduced the number of its paid up shares from 28 billion ordinary shares through reconstruction.
IAA was listed on May 9, 2008 and it used to be one of the highly traded. However, a lack of information on its financial performance and complaints by investors of non-receipt of share certificates depressed the share price from its listing value of N1.30 to 50 kobo.
Unity Bank’s shares reconstruction
In April, the SEC approved Unity Bank’s right issues of N19 billion and special placement of N20 billion, a total N39 billion in fresh capital.
Unity Bank got approval for a right issue of 38,446,689,710 ordinary shares of 50 kobo each (N19 billion), and special placement of 40,000,000,000 ordinary shares of 50 kobo each (N20 billion).
It also got majority shareholders to endorse the proposal for the reconstruction of the same shares being issued.
Thus, Unity Bank got approval that the 38.45 billion issued and fully paid ordinary shares of 50 kobo in the capital of the bank be reconstructed into 9.61 billion ordinary shares of 50 kobo.
Now shareholders are offloading their shares on the NSE at give away prices.
Delisting on the NSE
By 2012, IAA applied for shares reconstruction, and now it is among the 21 companies the NSE has pencilled down for delisting from its daily official list of Main Board and the ASeM Board segments for failure to comply with post listing requirements, including regular filing of quarterly and end of year financial reports.
From the Main Board, NSE plans to delist Pinnacle Point Group (a South African estate development company), Daar Communication (owners of AIT and Raypower FM), Starcoms, UTC, Big Treat, and several others.
Capital Oil, Rokana Industries and Adswitch will be delisted from the ASeM Board.
If the companies get delisted, the NSE market capitalisation, which measures value of equities traded, will shrink by over N76 billion. A huge chunk of this money constitutes minority shareholders’ investment in the companies affected.
Independent Shareholders Association of Nigeria (ISAN) Chairman, Sonny Nwosu, described the FBN Insurance buy out as ridiculous.
He told TheNiche that any price offer to existing shareholders lower than N2 per share is unacceptable, because in a buy out deal where new investors want to quit the NSE, the buy out price offer has to be high enough to compensate minority shareholders who are not prepared to exit the company yet.
Nwosu urged the National Insurance Corporation of Nigeria (NICON) to protect the interest of shareholders of Oasis.
SEC, NSE helpless to protect shareholders
In line with market free entry and exit rules, he added, the Securities and Exchange Commission (SEC) and the NSE are helpless to protect shareholders’ interest when it comes to delisting from the bourse.
A senior dealing member, who did not want his name in print, said as much as there is room for improvement on the exit price for existing shareholders, insurance stocks have been a pain in the neck of investors.
He advised shareholders to offload an otherwise bad investment.
He expressed displeasure that South African firms in Nigeria have not been fair to shareholders, saying they cheat minority investors and delist after a few years.
According to him, minority shareholders are always at the receiving end of companies quoted on the NSE, whether in cases of delisting of shares, shares reconstruction, or outright liquidation of a quoted company.