Wednesday, 27 December 2017

HOW LISTED FIRMS DEFRAUD SHAREHOLDERS WITH SHARE RECONSTRUCTION

Apparently dissatisfied with level at which investors are short-changed in share reconstruction exercises, stock market investors have stressed the need for listed firms to stick to the initial policy of share buyback to enable shareholders to get value for their investment.

Indeed, the shareholders, who opted for a ‘share buyback’, argued that post share reconstruction, the stock price of many listed firms are often adjusted downward below the initial price, thereby short changing investors.

A share reconstruction is a process whereby a company reduces the total number of outstanding shares it has by cancelling out shares it does not need while share buyback is the re-acquisition by a company of its own stock. It represents a more flexible way (relative to dividends) of returning money to shareholders.

The shareholders therefore suggested that the regulatory authorities should insist on the process of share buyback and ensure that companies implement share reconstruction properly, noting that investors are being cheated if these strategies are not correctly implemented.

According to them, with the little signs of recovery and capital appreciation witnessed in the market in recent time, there was need for the whole gamut of the market, including listed firms to be cautious and avoid any action and decision that could erode investors’ confidence in the market.

Specifically, the Publicity Secretary of the Independence Shareholders Association of Nigeria, Moses Igrude, in an interview, explained that the law stipulates that listed firms’ should opt for share buyback whenever there is need to reconstruct their shares.

He said: “Share reconstruction is not the best; there is nowhere the law said firms should do share reconstruction by fiat. When you want to reconstruct your shares, you need to buy it back and give the market a notice on the percentage you want to buy either 20 or 25 per cent and you buy it over time. That is how it is supposed to be done.

“But now, the board will just come up, go to the regulators and said we are reducing by 20 per cent, 30 per cent or 40 per cent at the end of the day, shareholders will be left with nothing and the argument is that they will raise the price and when they raise the price, it will balance up with what they have reduced.

“Reducing the price is not the issue; it is only management performance that can drive your price in the market so to us, it is not the best, it is a way of cheating the shareholders. The regulators should look at it critically, it is not the best, and we have been saying it that they are not the best, regulators should insist that they should follow the law.

“The law says that if someone has paid for, you must pay back the money to shareholder or you must buy back from the market. They are now saying they should do fiat and that is not the best. Union bank did it, Cadbury did it, Standard Alliance followed and the latest is C&I Leasing.”

The President, Constance Shareholders Association, Mallam Shehu Mikail, noted that retail shareholders are robbed of their portfolio in the process of share reconstruction because the number of shares prior to the exercise is reduced significantly post reconstruction.

According to him, in most countries, instead of embarking on share reconstruction, a corporation can repurchase its own stock as a ‘buy back’ by distributing cash to existing shareholders in exchange for a fraction of the company’s outstanding equity; that is, cash is exchanged for a reduction in the number of shares outstanding. He noted that the company either retires the repurchased shares or keeps them as treasury stock, available for re-issuance. “Why can’t we go for this option, this is the only way we can attract more retail shareholders and increase market confidence,” he asked

The President, Proactive Shareholders of Nigeria, Taiwo Oderinde, explained that some companies embark on a scheme of share reconstruction when they think their share price is stagnant. (GUARDIAN)