A Forced Drink of Water Compelling Private Companies To Go Public And List In Nigeria 1

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1 A Forced Drink of Water Compelling Private Companies To Go Public And List In Nigeria 1 Among the numerous Bills pending before the National Assembly (NASS, Nigeria s legislature), few can claim to have generated as much controversy as the Private Companies Conversion and Listing Bill Such controversy is not lessened by the fact the Bill itself, remarkably, spans only ten short sections. Yet if enacted, its consequences will be far reaching and the eventual outcome, uncertain. The Bill essentially rewrites the rules to the effect that private companies which reach certain thresholds are compelled by law to convert to public companies and have their shares listed on the Nigerian Stock Exchange. It prescribes what these thresholds are, the administration of the Bill, the sanctions for a breach of its provisions and fiscal incentives to companies. This is a first in this country and it upturns an established freedom which private companies had for long exercised. The freedom of private companies to be the sole judge of if and when they should go public has been enshrined in successive Nigerian company legislations starting with the Companies Ordinance of This piece joins a growing debate already preceded by those of other commentators who have rightly drawn attention to the implications of the Bill for companies and the wider economy. What the Bill says Any further discussion of the Bill must be preceded by a careful look at its provisions and being so sparse, I have taken the liberty of summarizing them as follows: Sections Summary of Provisions 1. Any private company whose: shareholders funds exceed N40 billion (about $235.3million) or annual turnover exceeds N80 billion (about $470.6million) or total assets exceeds N80 billion shall 2 convert to public liability company. 2. Any private company which meets any of these thresholds must do so within twelve months. 1 By Kunle Ajagbe, Partner, Perchstone & Graeys. The reference to a forced drink of water is a pun on a popular Nigerian proverb that you can force the horse to the river, but you cannot force it to drink water. That may soon no longer be the case if this Bill is enacted. For further information, kindly contact the author on kunleajagbe@perchstoneandgraeys.com 2 The word shall as used in this case indicates a matter of compulsion. Page 1 of 5

2 3. All private companies must adhere to certain record keeping/disclosure requirements and the Bill lists some documents which a company must furnish to the Securities and Exchange Commission (SEC) to this effect. 4. SEC is empowered to administer the Bill and among others, periodically review the thresholds requirements of the Bill 5. SEC is given inspectorate powers over companies and the obligations on companies to cooperate accordingly is elaborated 6. There are tax incentives for companies which comply with the Bill such that for a 5 year period subsequent to a company s listing; if it lists: - 40% of its issued share capital, it shall be eligible for a tax incentive of one-third of its applicable income tax; - 30% of its shares capital, it shall be eligible for a tax incentive of one-fourth of its applicable income tax; and, - 20% of its issued share capital, it shall be eligible for a tax incentive of one-eighth of its applicable income tax. 7. There are further fiscal incentives to compliant companies entitling it to tax deductible expenses on all expenditure it incurs for the purposes of listing; on Stamp Duty fees payable for increasing its share capital for the conversion and listing and on 60% of SEC related fees for listing. 8. It prescribes penal consequences for any infraction such as imprisonment for 2 years or more for anyone who contravenes the Bill. In the event of the offender being a corporate body, it shall be liable on conviction to a fine of 10% of its annual turnover for each year of default. Lastly, where the offence was with the knowledge, consent or connivance of a Director, Employee or Secretary or both, of the body corporate, all the Directors, employees and Secretary so involved shall be liable on conviction to a fine of N1million (about $5, 900) for each month of default or imprisonment for a period not below 2 years, or both. Page 2 of 5

3 9. This is the interpretation section of the Bill and of note is the extensive definition given to a private company which, for the first time, includes firms or partnerships 10. The formal citation of the Bill as the Private Companies Conversion and Listing Bill, 2013 The Sponsor s Motive Hon. Chris Azubogu, the deputy chairman of the House of Representatives 3 Committee on Capital Market is reported as the author of this Bill and the media credit his motive with being an initiative to: secure the availability of cheap funds at the capital market to further develop the companies and the Nigerian economy; it is in the best interest of Nigerians, the capital market and the country at large and accords with the provisions of the Nigerian Constitution 4 ; that the Bill will secure complete financial inclusion for those who were ordinarily excluded from the formal economy and assist with strengthening economic activities in the country. Other stated reasons for the Bill include that by being listed, companies will be properly regulated with the ultimate goal of promoting micro-economic growth. He cited examples with the telecommunications, power and oil sectors, where he said the companies in that sector were not well regulated. He cited the reduction of tax avoidance and enhancement of Nigeria s tax collection, reduction of capital flight and increase in Nigerian ownership/local content. A Pattern Awash with the sudden proceeds of the early 1970s oil boom, the then Federal Military Government of Nigeria promulgated the (since repealed) Nigerian Enterprises Promotion Decree 1973; widely known as the Indigenization Decree and as the word connotes, the aim of that Decree was to indigenize Nigerian ownership in economic sectors that were previously dominated exclusively by expatriates. It was not nationalization per se but it did mimic aspects of it. Yet this was at a time when it was accepted orthodoxy to have government play an unquestioned role in running the economy. By 1995, there had been a complete shift in received wisdom and this was amply reflected in the enactment of the Nigerian Investment Promotion (NIPC) Act. The NIPC Act was a markedly ideological reversal of the Indigenization Decree. The NIPC Act lifted most of the restrictions on 3 The Lower Chamber of Nigeria s bicameral legislature 4 How so, is not entirely clear. Page 3 of 5

4 foreign participation and ownership of equity in Nigerian companies. It allowed the free and unconditional repatriation of profits, dividends and capital out of Nigeria. While it did not prohibit expropriation, it provided limited grounds for its exercise and the compensation to be paid thereof. Understandably, this and several other laws, regulations and official policies since then seek to enhance the attractiveness of Nigeria as a viable investment destination. When Nigeria s GSM telephone licenses was auctioned in 2001, for instance, the terms did not oblige the successful bidders to eventually go public and list. There is no similar requirement in any other economic sector. Why change the rules midway? The pattern that emerges therefore is that business and investment laws in Nigeria have generally kept faith with the spirit of global economic thinking. This being so, it therefore begs the question, has there has been an overarching change in global economic thinking as to support the kind of leap and a leap it is being contemplated by this Bill. Under The Looking Glass Contrary to media reports, the Bill does not confine itself to regulating private companies in particular sectors. Rather, its gaze is universal, affecting all sectors of the economy. It is hard to see any of the reasons so far adduced as justification for this Bill, standing up to serious scrutiny. If anything, these reasons appear vague, wishful and speculative. The history of the capital market in Nigeria does not lend itself to the suggestion that going public and getting listed is cheap. While there may be multiple layers of regulation with being public and getting listed, it is hard to see how that, by itself, equates better corporate governance and or official regulation. The most spectacular corporate failures in Nigeria have, quite painfully, been public companies, including banks. The International Organization of Securities Commissions (IOSCO) is a global association of organizations which regulate the world s securities markets in over a hundred countries. Nigeria s SEC is a member of IOSCO and the available information is to the effect that no notable IOSCO jurisdiction has an extant law resembling this Bill. So, whose template or best practice is proving alluringly persuasive as to justify this Bill? Does the totality of the issues warrant Nigeria to be an exception on this subject 5? There maybe those who believe that, there is some inherent benefit to the country, but so far this is yet to be demonstrated. In all likelihood, Nigeria s ranking in the World Bank s Ease of Doing Business 6 stands to be compounded by the enactment of this Bill into law. It compromises the choices before companies and what is more, it encroaches into the space of private companies whose strategy and even strength remains in being a private entity. The 5 There is, of course, a lesson in the fact that the decision to go public and list some of the companies under the Dangote Group (owned by Africa s richest man, Nigeria s Aliko Dangote) were purely business decisions. Farther afield, the biggest IPO in US history was by the Chinese retailer, Alibaba. Both of these offer useful lessons. 6 Out of 189 countries surveyed for 2014, Nigeria was ranked a lowly 174 on the list Page 4 of 5

5 argument that this Bill will open the ownership of these otherwise private companies to the Nigerian public is tenuous. In reality, the cost of acquiring the shares in such companies is, sadly, not likely to be what the average Nigerian can afford. In any case, it is also arguable whether the general investing public has since overcome the sour experience from the Stock Market meltdown in 2008 as to find this new set of companies attractive. Interestingly, a commentator has even questioned that it is counterintuitive to give tax waivers when the reality is that much more tax revenue stands to be lost by that fact. It is quite possible that companies who wish to remain private (for purely commercial and business strategy considerations) may fiddle with their books to ensure that they permanently remain below the statutory threshold. Others may simply find the new statutory environment incompatible and may relocate to neighboring countries. There will naturally be those who will find this unacceptable, from the onset and on that account, may refuse to even invest in Nigeria at all. Either way, the outlook for the Bill on being enacted scarcely leaves anything to be confident or cheerful about. Brewing Consensus To be sure, little can be said against strengthening the regulatory capacity of both SEC and the Corporate Affairs Commission (CAC 7 ) to better discharge their responsibilities. No economy can thrive without these two bodies being infused with regulatory best practices. But this is far removed from what this Bill seeks to achieve. The good news however is that, the private sector, through their various organizations is discernibly waking up to the disturbing implications of this Bill. A consensus is brewing that the decision to go public and be listed must remain within the province of what a company continues to decide exclusively and not one compelled by law. If the Bill is enacted, a judicial challenge cannot be foreclosed and some of its current provisions do invite a court to pronounce on them. As of now, there is, no public hearing organized for this Bill and the hope is that, the deep and rigorous questions which should have preceded a consideration of the Bill s necessity, in the first place, may still be afforded all stakeholders. 7 CAC is Nigeria s principal Company Registry and regulator. The views expressed here are the author s and does not necessarily represent those of Perchstone & Graeys. Neither do these views constitute legal advice and should not be construed as such. Page 5 of 5