Trouble in the Nigeria Exchange Group “NGX”

Victor Ogiemwonyi, a retired investment banker, sent in this contribution from Ikoyi, Lagos. He can be reached via comment@businessamlive.com

 Executive Management, Board running on empty

A recent report on the Nigerian Exchange (NGX) Group and its upcoming annual general meeting (AGM), in Nairametrics, the online newspaper, has exposed the untowards happenings at this public Exchange for the Nigerian capital market.

The report drew attention to some important issues,

asking several questions, particularly, how an institution that is supposed to have the highest standard of corporate governance, has now fallen into its current morass.

The report not only focused on the inefficiency of the executive management, it questioned why it spends almost everything it earns, as running costs. In 2021 for instance, NGX earned N6.8 billion and spent N6.52 billion running it. A cost to income of 96 percent vs. FMDQ Securities Exchange, a competitor, whose cost to income for the same period is 46 percent.

NGX Group’s cost to income for 2020 is 98.5 percent vs. FMDQ Exchange’s  cost to income of 34 percent.

How do you explain this?

The report also raised questions about spending N3.2 billion to pay 269 employees. A further dig would reveal that 50 percent of this salary and allowances go to the top 15 people in executive management. The executive management compensation is unreasonable. They argue that they should be compensated like the executive management in the Big Banks, but they have failed to make money like the Big Banks, and are unable to pay dividends like the Big Banks. Who is benefiting from their management? Investors are not happy, Operators are not; and Shareholders are not. Since they want to compare themselves to the Big Banks, why is the 10 year CEO exit rule not applicable to them?

The report also brought to fore the allotment of shares of NGX Group in the recent demutualization exercise, where the same executive management was compensated with over 200 million shares of NGX Group shares valued, at the time, at over N5.5 billion

This is to a group that has spent less than 10 years as employees of the company.

The non-Executive Board/Council, of 15 members, who approved these proposals, were themselves compensated with N126 million. It is even more bizarre that this management and its compliant Board/Council, has delivered little or nothing to deserve this compensation.

This can be seen from the poor results, since demutualization. It reported a loss of N93.96 million in 2021. Nobody has told shareholders the reason for this disastrous result, except that we have an executive management that is over compensated and wasteful with the use of the resources available to it. NGX Group’s net cash position, for instance, declined from N11.5 billion in 2019 to N7 billion in 2021 — a cash burn, no one can explain.

It is ironic that the Central Securities Clearing System (CSCS) whose business derives from the business of the NGX business is profitable and, in fact, responsible for a large portion of the dividends received by the NGX Group as revenues. They also receive a large chunk of dividends from the FMDQ  Exchange as a shareholder. They are a competitor and are very profitable. For instance, in the year that NGX is reporting a N93.96 million loss, FMDQ reported a profit of N12.99 billion.

The report’s most serious question was about the proposal to raise N35 billion, supposedly to diversify the NGX group business. First, why would a loss making entity be attractive to investors? I thought only profitable companies come to the market to raise money. If this was an exceptional case, you would expect that this fund raising effort would start with a rights issue to the existing shareholders, after an explanation has been rendered as to why this was necessary. An explanation is required for this large capital raise at a time the Nigerian economy is at its worst, where most of its current shareholders will be unable to subscribe. If they are aiming it at foreign investors (they say they will prefer people invest in dollars, at a time dollars are scarce in Nigeria) who is that foreign investor who will be investing in Nigeria at a time of crisis and uncertainty? This looks prearranged, where the agenda might be to dilute existing shareholders and a take over of the NGX by a yet to be identified group.

Now, let’s look at the amount to be raised; N35 billion, to do what? The current Central Bank of Nigeria (CBN) capital requirement for a commercial bank in Nigeria is N25 billion, so what exactly are they going to do with this large capital raise? Are they buying a bank? What on earth are they diversifying to? There are already signs of trouble, NGX Group shares, listed at N27.90 in 2021, are currently trading at N19.50; a sure sign investors are not happy with what is going on.

Listed companies are unhappy with their listing on the NGX because they don’t see any value creation. Delistings are accelerating and the NGX has not been able to attract new listings in the last several years of this executive management. There is already talk that  two other large listed companies are getting ready to delist. What all this says is that the market is no longer attractive to companies who want to list. There is no deep liquidity in the market, and very few  investors now see the NGX as a place to make money.

The reasons for these are not far fetched, the NGX has now become a place for borrowed ideas. Those running it have no experience and they are not listening. They know it all. They will tell you that is what they are doing in the New York Stock Exchange. When you argue with them, as I did when I was on the Board/ Council, they become petty and make it a personal quarrel and hold grudges. They should be told that before using a good idea, it should first be localised,  before application, to get its benefits. There is a reason, they still drive on the right hand side of the road in the UK and Japan.

The Exchange business is a near monopoly business. So, what business will be better than this, especially as already highlighted above? FMDQ, the competitor, only seven years old, is profitable, and CSCS that derives its revenues from the NGX business, is also profitable.

The fact that they say they are diversifying is proof they have run out of ideas.

By the way, what have they done with the other subsidiaries that made them a group company? The subsidiary property business, for instance, has always been there, called Naira properties. It owns the building housing the NGX Group. So, if they have not been able to grow the current subsidiaries, why do they need other new businesses?

So far, NGX reaction  to this report has been to flood the media with some Dividend Policy gibberish, attempting to explain dividend policy to shareholders, as if that is what is being queried. What shareholders are asking is about profits. Why is a normally profitable business now suddenly making losses? Why is the cost of earning income so high? Why are those running the NGX not accountable to its shareholders? These are what shareholders want explained. Not the use of their highly paid and powerful media to confuse people.

Why is the apex regulator, the Securities and Exchange Commission, quiet? The least they should do is ask that the proposed AGM be done in person; many publicly listed companies are doing so now. Besides, the Covid- 19 protocols have been lifted. NGX shareholders are few. I bet, not more than 100 people will attend. They should give shareholders who can attend the opportunity to ask some of these questions. Maybe, even ask other questions, like, why is the current executive management still there after 10 years?

There should be new blood injected into the Board and Executive Management with new ideas. Anyone looking at what is happening at FMDQ Exchange that is only seven years old, will know that it is all about new ideas. Shareholders need to shine their eyes as they say in the Nigerian “broken English” parlance.

The proposal to raise N35 billion in new capital should be put on hold for now; so that shareholders can get answers to the questions raised.  Or even look at other alternatives to rescue the NGX Group, like proposing a merger with the FMDQ Exchange? This will deepen liquidity and ensure a more vibrant capital market. After all, the same reasons that made the American Stock Exchange irrelevant, and necessitated its merger with the New York Stock  Exchange, are present now in NGX. It may just be what they need. Allowing this N35 billion capital raise, may just present a way to cover up losses we are yet to see.

The proposed virtual AGM is already rigged, unless it is opened up and questions are asked and doubts cleared up, the meeting will be a sham and all the proposals will pass, to the detriment of stakeholders who have unwittingly outmanoeuvred themselves, by agreeing to the demutualization of the Nigeria Stock Exchange.

As the Nairametrics report concluded, the current Board and Executive management is self-serving, and are running on empty — Empty on value creation, empty on their ability to lead, empty on discipline, empty on empathy and compassion for their shareholders, empty on trust, empty on corporate governance.

Rebuttal to NGX statement of 20th September, 2022

This is another of NGX’s statements that does not say anything.

1. CORPORATE GOVERNANCE

Corporate governance is not what you say, but what you do. If they insist, they have done the right thing, then let them agree to a forensic Audit to dig into why they spent N6.52 billion running the NGX in 2021, out of the N6.8 billion they earned in that year. One thing is clear from the desperate need  to raise this money at this time. Something is being covered up.

Any experienced auditor will tell you that when numbers like these – N6.8 billion (revenue) Vs.  N6.52 billion (expenses) – are so close to the edge, there are deferred expenses and liabilities that are hidden in those accounts. If they must raise money at all, let it be in 2025, to let these numbers rest properly.

Saying that they got approvals for all they are doing and obeyed corporate governance codes is self-serving, just like their self praise in the reports they sent to shareholders, until a closer look, beyond the surface, to see the rubbish beneath the hood.

2. VALUE OF SHARES AT LISTING

They are forgetting that market practitioners know and follow the market closely.

By the way, saying that the NGX shares were listed at N16.15 is to deny that the shares traded for N27.90 before it was delisted from NASD Securities Exchange, and re-listed  on the NGX – so what was put on the offer document at demutualization has become irrelevant.

3. PROPOSED CAPITAL RAISE

Their reply has said nothing about why the N35 billion fund raise is necessary. Their statement said they are raising the huge fund for business expansion – to deepen investments into existing portfolio companies to ensure high and steady returns.

The only profitable company in their portfolio is CSCS – are they saying they need to take more money from shareholders to invest in CSCS, a company already owned by shareholders, to ensure high and steady returns?

These guys definitely have something up their sleeves, that they are not telling us.

They are saying that they are raising such a large amount to invest in CSCS –  is this their “curated strategy” to guarantee returns to shareholders. Who told them shareholders want to invest in CSCS through them? Note, CSCS earns money from doing business with the NGX.

The larger question is why are they diversifying from the Exchange Business? Exchange Businesses are mostly profitable all over the world. Even our young FMDQ, their only competitor, is profitable. Are they saying they have run out of ideas? It seems so, because since the only experienced person in that executive management left, everything seems to have left with him.

He was responsible for putting the top technology we now have in the NGX in place. Since he left with his transformation term, the NGX has not been the same.