Sourcing Funds From The Capital Market:A SURVEY OF THE ELIGIBILITY OF NNDC NON-QUOTED PROJECTS
Sourcing Funds From The Capital Market:A SURVEY OF THE ELIGIBILITY OF NNDC NON-QUOTED PROJECTS
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Date
1997-06
Authors
AHMED, MAHMUD
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Abstract
No business entity can survive without finance. Considered as the live wire, finance
is required as working capital and for the acquisition of fixed assets. In both cases,
right combination or finance mix is essential.
With the deregulation of the Nigerian financial system, the cost of borrowing funds
from the banks became increasingly expensive. This therefore made it more and
more difficult for businesses to finance their working capital requirements talk-less of
expansion and modernisation of operations. Consequently, a lot of them went under
due to dearth of finance. Among such business entities are some that are associated
with the New Nig eria Development Company (NNDC) Ltd, Kaduna. The NNDC is a
Development Finance Company with investments in more than 100 companies
majority of which are private and fall within the medium category.
In the light of the ever-increasing cost of bank borrowing, this study looked at the
Nigerian Stock Market as a viable option for companies with potentials to raise their
much-needed finances. The stock market, like banks, is an important element in the
Nigerian Capital market. It came into being in 1960 and it is the most important
operational institution in the Capital Market. The Stock Market supports the
development as well as growth of small and medium enterprises. By 30th September
1996 a total of 184 companies were listed on the Stock Exchange and the equity
market capitalisation was N252.96 billion. The Stock Market provides a safer, surer
and more permanent type of capital that can be sourced either in form of debt
(debenture and bond), preferred stock or equity. Each of these sources has features,
merits and demerits.
Debenture and bond represent a promise to pay interest at specified dates and to repay
the principal loan at maturity. Preference stock combines the features of common
stock and bonds. The word "preferred" refers to the priority of claims over the
common stock. Equity (or common stock) is the riskiest form of financing, even
though it is regarded as the best alternative means for raising long-term finance.
The study recognised the various classifications of the Capital Market. For instance,
there are organised (or formal) Capital Markets and informal ones. Whereas
organised capital markets have physical facilities, governing boards and membership
regulations and requirements, the informal capital markets lack almost all of these
qualities. Another important classification is based on whether or not the stock to be
traded is coming to the market for the first time. If it is a new issue, the segment of
the market that handles such is the Primary Capital Market. However, for old stocks,
their purchase and sale is conducted at the secondary segment of the Capital Market.
Several important institutions make up the Capital Market. Each plays a specialised
role in the entire capital mobilisation process. Notable of such institutions are:
Issuing Houses, Stock broking Firms, Commercial and Merchant Banks, Registrars,
Companies, Investors, Securities and Exchange Commission and Stock Exchange.
Another important aspect that the study looked into is the theory of efficient markets.
Relevant information about stocks has been found to be critical and the degree of
available information determines the form of efficiency the market has. There are
three forms viz: the Weak form, the Semi-strong form and the Strong form.
The price behaviour of equity was also studied. There are three schools of thought in
this regard and they are: Technical Analysis School, Fundamental Analysis School
and Efficient (or Random Walk) Market School. Each of these schools advanced
arguments on how the price of a security is determined.
A generalised review of the performance of the Nigerian Stock Exchange was made.
It was discovered that the performance of the 34 companies, which the Federal
Government divested from between 1989 and 1993, recorded significant
improvement after listing on the Nigerian Stock Exchange. The International Finance
Corporation (IFC) adjudged the Nigerian Stock Market as at July 1997 the second
highest in the World in terms of total returns that accommodates capital appreciation
and accrued dividend paid by quoted stocks.
This study looked at eight NNDC associate companies whose performances dwarfed
owing to financial problem. Previous efforts by their respective Boards to recapitalise
through Rights Issues were met with varying degrees of low responses.
Neither could the companies successfully raise funds from the bank because of
relative poor performance and the attendant exorbitant cost of borrowing. The study
therefore found out that when adequately encouraged such companies could definitely
find a safer, surer and more permanent source of raising funds from the Stock Market
for their working capital requirements and modernisation/expansion programmes.
It is for the above reason that this study is recommending as follows:
i) Those NNDC associate companies with good future prospects should be
encouraged to go public;
ii) Certain fundamental problems such as inefficient management that bedevil
the companies should first be addressed prior to their going public;
iii) The companies should get listed into the Second-Tier Market because the
listing requirements there are softer than those in the First-Tier;
iv) Owing to the numerous advantages of equity financing such as the
absence of obligatory payments to equity holders, the companies should
raise additional funds only through the issuance of common stock (equity).
It is hoped that the ailing NNDC associate companies, which are spread all over,
the North will have a new lease of life once they are quoted on the Stock
Exchange. The Stock Market promotes corporate financial discipline,
accountability, transparency, solvency, efficiency and competitiveness. All these
are expected to reverse the erstwhile poor performances of the companies, which
will in turn improve the socio-economic well being of the North.
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Keywords
Sourcing,, Funds,, Capital,, Market,, SURVEY,, ELIGIBILITY,, NNDC,, NON-QUOTED,, PROJECTS,