The Trouble in the Nigeria Exchange Group

By Victor Ogiemwonyi

A recent report on the NGX Group and it’s coming AGM,

in Nairametrics Business Newspaper,  has exposed the shenanigans going on 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 the 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 cost.

In 2021 for instance, NGX earned N6.8bn and spent N6.52bn running it. A cost to income of 96% vs FMDQ Securities Exchange, a competitor, cost to income for the same period, is 46%.

NGX group cost to income, for 2020, is 98.5% vs FMDQ Exchange,  cost to income of 34%.

How do you explain this?

The report also asked questions about spending N3.2bn to pay 269 employees. A further dig, will reveal that 50% of this salary and allowances go to the top 15 people in Executive management.  The Executive management compensation are 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 Excercise, where the same Executive management, was compensated with over 200m shares of NGX Group shares, valued at the time, at over N5.5bn

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

The non-Executive Board/Council, of 15 members, who approved these proposals, were themselves compensated with N126m.

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 N93.96m in 2021.  Nobody has told shareholders, the reason for this disastrous results, except that we have an Executive management that is over compensated and wasteful with the use of the resources available to it. NGX Group Net cash position, for instance, declined from N11.5b in 2019 to N7bn 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 share holder. They are a competitor and are very profitable.

For instance, in the year that NGX is reporting a N93.96m loss, FMDQ reported a profit of N12.99bn.

The report’s most serious question, was about the proposal to raise N35bn, supposedly to diversify the NGX group business.

First, why will 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 have 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 worse, 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 scares 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 takeover of the NGX by a yet to be identified group.

Now let’s look at the amount to be raised, N35bn, to do what? The current CBN capital requirement for a commercial Bank in Nigeria is N25bn, 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,  is 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 another two 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 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 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 localized, 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 been quarried . 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. Any One, 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 N35bn in new capital, should be put on hold for now, so shareholders can get answers for 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 N35bn 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 out maneuvered 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.

Victor Ogiemwonyi is a retired Investment Banker and writes from Ikoyi, Lagos.