The Nigerian Stock Exchange (NSE) recently issued directives stating that "any company seeking to be listed by introduction on the NSE shall make 10% of its outstanding shares available on the day of listing for market making". This was to prevent the undue price appreciation and manipulation. They also directed that "the quantum of shares to be transacted before prices could be moved in either direction shall be 100,000 units".

In lieu of this development, UBA Capital Market conducted a research on the effect of this rule studying 17 stocks that had been listed on the NSE over the last year. Here is an excerpt of their report and findings.

On Wednesday, April 23, 2008, the Nigerian Stock Exchange (NSE) directed that any company seeking to be listed by introduction on the NSE shall make 10 percent of its outstanding shares available on the day of listing for market making. The need to ensure liquidity and prevent undue price appreciation arising from trading interference was cited as the primary consideration for the directive. Meanwhile, the NSE had earlier directed that the quantum of shares to be transacted before prices could be moved in either direction shall be 100,000 units.

We believe the NSE’s position was informed by the prevalence of rampant and substantial capital gains recorded by newly listed equities within a short period of listing on the exchange. According to the NSE, the prices of such stocks soared regardless of their fundamentals – and liquidity – which gives a general impression that the stock prices are being manipulated.

In our assessment of the new rules, we considered 17 stocks that were listed on the NSE over the last 52 weeks. On the whole, the basket of stocks increased by 104.19 percent within a month of listing on a cumulative daily volume of 2.8mn units.

Effectively, 65 percent of these stocks doubled within a month of listing while 82 percent recorded capital gains in excess of 50 percent within the same period. The foregoing underscores the fact that when companies are listed by introduction, the shares are not readily available to the public but held in the hands of a relatively few number of individuals and corporates, especially for companies that have done private placements. Therefore, the subsequent scarcity of the shares upon listing drives up the price regardless of the company’s fundamentals.

Here is the report: [Download not found]