Nigerian regulators are reviewing free-float requirements for listed companies to boost liquidity, deepen the equity market, and attract more investors.
Many of Nigeria’s largest listed firms are tightly held by controlling shareholders. This limits liquidity and increases the risk of sharp price swings.
Nigeria currently requires large companies to have a minimum public shareholding of 20% or at least 40 billion naira ($29 million) of shares available for trading.
Free float gained attention this year after MSCI Inc. tightened its definition of the measure. This led passive investors to sell stocks in countries like Indonesia, which has Asia’s smallest average proportion.
Nigeria will introduce rules to ensure more companies meet the requirement, said Temi Popoola, chief executive officer of the Nigerian Exchange Group.
The bourse is working with Nigeria’s Securities and Exchange Commission on “reviewing issues around free float and market liquidity,” Popoola said in an interview at his office in Lagos. “This includes assessing how we optimise existing free-float levels, ensuring the accuracy of free-float data captured by the exchange and evaluating whether current free-float requirements remain appropriate as the market evolves.”
Dangote Cement Plc has a free float of about 11%, while Bua Cement Plc, Nigeria’s second-largest company by market value, has less than 3% available for trading. The companies meet the requirement, though, because they have more than 40 billion naira of publicly traded shares.
Nigeria can learn from India, which faced a similar challenge in 2010. Authorities then moved to address concerns over dominant controlling shareholders and limited stock availability.
The South Asian nation mandated listed companies to maintain a minimum public shareholding of 25%. Firms below the threshold were compelled to raise free float by at least five percentage points a year, while newly listed companies were given three years to comply.
The measures helped the country attract $1.25 trillion of foreign inflows and build one of the world’s largest retail investor bases.
If Nigeria enforces the rule, it could lead to more foreign inflows into equities, according to Peter Omoregie, managing director of CardinalStone Securities Ltd. “An increase in free-float requirements will lead to increased liquidity in the market as managers of some closely held companies may have to find ways to release more shares to the public.”
Beyond revising public-shareholding rules, regulators may base equity and index weightings on shares outstanding rather than market capitalisation, Popoola said.
“We are considering whether elements of free float should play a greater role in how some of our indexes are structured, given that many indexes are currently based primarily on market capitalisation,” he said. “All of these efforts form part of our broader objective of deepening the market and ensuring that its structure continues to support growing investor participation.”
Benchmark providers like MSCI and FTSE Russell rely on the measure to gauge how easily investors can buy a stock. The more shares available for trading, the higher the potential weighting in an index.
