If you have noticed, a lot of the companies coming to the market issue so many shares. I for one believe that it is a gimmick and tactic to raise more money. Here is a wonderful article from Proshare NG on the disadvantages:

Shun Companies with Overblown Issued Capital

It is now time for investors to begin to look at companies in relation with their share capital. This is very necessary because if investors really want to make capital appreciation, the quantum of the shares issued by the company is very important. Most of the companies that have low share capital have high value. For example oil companies like Mobil, Chevron, and one or two others in that sub-sector have very high prices because they have very small issued capital. None of these companies have more than 500 million shares in issue. The beauty of this is that whatever earnings they make; they will be in position to give good return. They can give N5, 00, N10.000 and therefore their prices are very high, some of them more than $2 dollars per share.

So, what do you do with a company that has high share capital? If the share is too large, managing it will be a problem and it makes share appreciation so difficult. Recently, one of the insurance companies listed 28 billion ordinary shares on the Nigerian Stock Exchange (NSE).This is too large and in fact, the largest in the history of NSE. The implication of this is that if the company wants to pay 10 kobo dividend, the company will have to pay N2.8 billion. The question is what will be its gross earnings, what is its earnings per share and what will be the dividend declared? Definitely, such companies with large issued share capital may find it difficult to do well in rewarding investors.

How do they go about it? They have to manage that share. How do they manage that share? One of the traditional ways of managing it which is allowed by the law is share reconstruction, and that is why the market witnessed many of it after banking consolidation. Share reconstruction is very important because for the share to make sense for the shares to have value, for investors to make capital appreciation, a company must have low share capital.

Look at the cases of Bank PHB, Access Bank. At a time their share capital was so large and by the time they reconstructed, for instance Access Bank which was less than N3.00 and the moment it reconstructed at 2 to 1 today we are talking of N18.00. So, you see it makes over 200 per cent gains as they reconstructed it to N6.00. If they left it at N3.00, it would take long time to be able to reach N10.00. Therefore, it is good for companies with over blown issued share capital to go into share reconstruction.

The issued of share reconstruction is a troubled one because there is no proper enlightenment about it. Most Nigerian investors are always interested in the volume that is why you see that any time a company declares bonus they go for it even if the price is over blown they will go for it because they believe in volume. But share reconstruction can reduce the investors holding though investors will not like this. It makes sense not to want to reduce their holdings because they believe over a long period when the company is performing well they will make share appreciation.

What we are telling investors is that by reducing the volume of shares through reconstruction does not mean reducing the value. Take for instance all the companies that went through share reconstruction, today they are happy. Take the case of Bank PHB, they reconstructed their shares at three to one and moved from less than N3.00 to around N16.00. Today, we are talking of over N20.00. If you take three, at N3.00 it will give you N9.00 today it is over N20.00. Investors have made more than 100 per cent. Investors have not lost the value but the quantity.

The way we handle share reconstruction is what bothers the market. If it is handled in matured manner, nobody will be worried about it. You have the shares in the system and the next day, you reduce the value and you take your share in the system, there would be no problem. International Energy Insurance handled it well and investors were happy, because the next day you stated to trade your holdings.

But in the situation whereby a company goes through share reconstruction and now decided to withdraw your holding that is already in the system only to issue a share certificate which you may not see in the next three to six months, even some up till now you have not got in the case of the Sterling Bank. This is not encouraging. That is why shareholders see it as rubbing them of their immediate benefit. Why should I have my shares dematerialized only to be told that I have to wait for my share certificate for long time. That is not good for the market. What we are encouraging is that companies should go for share reconstruction but it should be allowed as it was before. If your shares are in the system it should remain in the system, by doing this the share is liquid and investors will reap immediate benefit.

There is another way to it that is allowed in the developed markets but our law does not really encourage it and that is share buyback. This is another way of doing share reconstruction. Instead of reducing shareholders’ holding, a company can buyback its share. In the developed market, you see that Coca-cola does that a lot, and today it enhanced its value by over 200 percent. Go to the New York Stock Exchange you will see the price of Coca-cola going so high.

This is a very good idea that has worked in the developed market why can’t it work here with us. One of the shareholders body, Independent Shareholders Association of Nigeria (Isan) organized an international conference on it last week in Abuja and it is very good. It is very friendly with investors as they are not losing their value. Secondly, it helps the market instead for the market value to keep crashing to below the market value share buy-back can prevent that. I hope the legislature will give it all the necessary support to make it work.