The attention of NGX Regulation Limited (NGX RegCo) has been drawn to a misconception regarding the role of NGX RegCo in determining the listing price of prospective listed companies (Issuers) seeking to list on Nigerian Exchange Limited (NGX). Recently, several commentators have raised concerns over the listing of some Issuers’ equity securities at prices considered too high. To these investors, NGX RegCo’s due diligence during the listing application review process should have uncovered that the listing prices of such securities were unreasonably high and intervened accordingly.
NGX RegCo wishes to provide clarifications to the public on its function with respect to listing applications, particularly as it relates to the determination of an Issuer’s listing price.
An Issuer seeking to list its equity securities on NGX (where the equity securities of the Issuer have not already been listed on NGX) is required to indicate the proposed listing price of the equity securities in its application to list. The Issuer is also required to submit a pricing memorandum, which is a document that details methodologies and assumptions adopted by the Issuer and its advisers in arriving at the proposed listing price, among other documents.
In reviewing the listing application, NGX RegCo does not intervene in the proposed listing price, as obtains in some other jurisdictions. However, NGX RegCo reviews the pricing memorandum to understand the basis of arriving at the listing price and to evaluate whether the pricing methodologies and assumptions are based on generally accepted valuation principles. It is the responsibility of the Issuer and its advisers to determine the listing price using a generally accepted pricing methodology. The listing requirements of NGX do not require NGX RegCo to determine a fair price of equity securities or to fix the listing price for an Issuer.
As it is well known, one of the functions of an efficient securities market is to determine fair prices of securities through the operation of market forces. Following listing, where the listing price of an Issuer is perceived to be too high or too low, the market price is expected to be appropriately corrected by the market forces of demand and supply to arrive at a fair price as trading commences. As such, the power is in the hands of investors and their advisers, when transacting in the market, to assess share prices (or other securities) of Issuers of interest, and to determine whether the securities are overvalued, undervalued or fairly valued in order to take appropriate positions on the securities. In other words, it is not unusual for investors to view the listing price of an Issuer either with respect or with scepticism, identifying mispricing when it exists and acting accordingly. This corrective action is a hallmark of any free and fair market.
At NGX RegCo, we remain committed to promoting the integrity, transparency and efficiency of our market, ensuring that the standards set are effective in maintaining a fair and orderly market where investors are adequately protected.