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Consequence upon the approval of the Securities and Exchange Commission (SEC), the Nigerian Stock Exchange (NSE) kicked off the implement of the new rules on par value and share pricing methodology on Monday, 29th of January, 2018.
The Par Value rule states that “notwithstanding its par value, the price of every share listed on the Exchange shall be determined by the market, save that no share shall trade below a price floor of one Kobo per unit (N0.01)”.
By implication, share prices shall be allowed to trade as low as a floor price of one kobo (1kobo), effectively removing the rule which places minimum allowable price to trade for any stock at its nominal value of fifty kobo (50kobo), irrespective of the market forces.
Par value is the nominal value of a share as stated in the Memorandum of Association of the company while price floor means the amount below which the price of one unit of a share shall not be permitted to trade and in effect, the minimum amount payable for a unit of the shares of any listed company, in the event of a fall in the share price to this level.
On the other hand, the amendments to the Pricing Methodology Rule specifies the minimum pricing increments (tick size) and minimum quantity traded which will change the published price of equity securities listed on the Exchange. The tick size – the minimum price movement by which the price of a trading instrument can change, will also be lowered to as low as one kobo, although all quoted companies shall continue to trade within the current pricing band of 10 percent maximum allowable change per day. Here, stocks will be categorized into 3 groups – A, B and C.
Group A: Shares that trade at N100 and above for a minimum of 4 out of 6 most recent months. These stocks will require a minimum of 10,000 units to move the share price and the minimum price movement will be 10kobo.
Group B: Shares that trade at N5 and above but less than N100 for a minimum of 4 out of 6 most recent months. These stocks will require a minimum of 50,000 units to move the share price and the minimum price movement will be 5kobo.
Group C: Shares that trade below N5 but not less than N0.01 for a minimum of 4 out of 6 most recent months. These stocks will require a minimum of 100,000 units to move the share price and the minimum price movement will be 1kobo.
The amended rules according to NSE are intended to enhance market liquidity, narrow spread, transparency, and efficiency. Also, with market forces expected to determine the prices of traded shares to as low as one kobo, the new minimum, the market will witness material price improvement.
In our opinion, this new rule will lead to a considerable level of share price depreciation on some listed stocks (especially, insurance counters), below fifty kobo as investors seek to unlock their tied-up fund/investment in that sector.
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Additionally, this will also throw-up opportunities such as mergers and acquisitions, price discoveries and corporate governance effectiveness.
Please, find in this link detail information on the New Pricing Methodology.