CHAPTER ONE
INTRODUCTION
- BACKGROUND TO THE STUDY
In the capital markets hundred investors make several deals a day. The screen-based trading makes these deals known to all in the capital markets. Thus, a large number of buyers and sellers interact in the capital markets. The demand and supply forces help in determining the prices. Since all information is publicly available, and since no single investor is large to influence the security prices, the capital markets provide a measure of fair price of security especially if the markets have efficient pricing mechanism.
Pricing of new issues is different from the method earlier mentioned. Companies in the Nigerian capital markets are allowed to freely price share issues, subject to Securities and Exchange Commission guidelines and approval. In the case of the listed companies the current market price provides a basis for pricing the new issue of securities. Companies generally fix the issue price 10 to 15 per cent below the current market price to account for the effect of the supply pressure; It is relatively difficult to price an IPO. Companies use the services of merchant or investment bankers, who act as issue managers, to determine the issue price and manage the issue of securities.
A company is required to issue a prospect when it issues a share to the public. The prospectus should disclose full information, including the risk factors in the issue, to the investors to be able to appraise the pricing and form a judgement. New companies should give the justification for the pricing to the prospective investors. Generally, the price of the issue is fixed well before the actual issue. The price is not changed at any stage of the offer. The price is generally kept on the lower side so that the issue is fully subscribed and there is no devolvement of underwriters. However, book building is an alternative to the fixed-pricing method. In the case of normal public issue, the price is fixed and known in advance. At the close of subscription, the company knows the number of shares applied for. In book building the issue price is not fixed. Book building is a process of offering securities at various bid prices from investors. The demand for the security is assessed and the price discovered based on bids made by investors. Price discovery, therefore, depends on the demand for shares at different prices.
An Initial Public Offering (IPO) is a company’s offering of equity to the public and it is a major source of raising capital for firms. There are at least three distinct mechanisms available for firm for issuing new securities which include initiation public offer, right issue, and private placement
In this study, we shall be examining the pricing of public offering in the Nigerian capital market with particular reference to the Nigerian banking sector.
- THE STATEMENT OF PROBLEM
One obvious problem that has faced the Nigeria Capital market is the case severe overpricing of IPO .This resulted as a result the desperate need of some companies to raise fund at cost by manipulating accounts record to get approval the Securities and Exchange Commission. Sometimes over pricing of share could be attributed to the activities of the stock- broker who engage in share price manipulation. Many companies have come to the market with factious prices for their shares without strong fundament in order to obtain funds from the public and soon thereafter the prices of these companies would crash. This has led to many investors to lose huge amount money as over pricing of IPO. This has made some investors who the technicalities of the market to shy away from the market .Another factor that equally contribute to over-pricing of shares is the inefficient market system.
Based on the above discussion a research problem therefore arises: Is the Initial Public Offerings, public offerings and right issues in the Nigerian capital markets appropriately priced? What are the methods used in security issue in Nigerian capital market.
1.3 THE OBJECTIVES OF STUDY
The followings are the main objectives of this study:
- To determine methods used in initial public offers or public offers in Nigeria.
- To confirm the methods from the use of published information by the banks involved.
- To examine ex-right price and compare with pre-offer price
- To make necessary recommendation based on our findings.
- RESEARCH QUESTIONS
The following questions are raised to elicit more information for the study;
- What are the methods used in offering securities in Nigerian capital market?
- Do companies follow the same method in offering securities?
- Does the price of the IPO affect the ex-right price?
- Is IPO’S appropriately price?
1.5 STATEMENT OF HYPOTHESIS
Considering the statement of the problem and the objective of the study, the following research hypotheses were formulated to guide the study:
Ho 1: Public offers in the Nigerian capital is over-priced
Ho 2: Offer for subscription and Right issue is not the most popular method of offer.
1.6 SCOPE OF THE STUDY
This research work is based on commercial banks in Nigeria. It examined the pricing of public offering in the Nigerian capital market. The research depended on primary data collected from six (6) banks in Nigeria that went for public offering between 2004-2007.They are: Zenith Bank Plc ,Guaranty Trust Bank plc, IBTC plc, Oceanic bank and Chattered Bank plc. The choices of the banks are based on the expert advice of the supervisor of this work. This study is limited to examining the pricing of public offering in the Nigerian capital market.
1.7 LIMITATIONS OF THE STUDY
This research work was carried out alongside with other academic work in the school. This study encountered some constraints as there were some initial difficulties in getting some the banks previous years’ annual reports and some other relevant information and materials. Time equally took its toll as there was a time limit for research to be completed. Notwithstanding the above constraints, the research study was successfully completed as scheduled and met all the required objectives and standards.
1.8 SIGNIFICANCE OF THE STUDY
This study has a lot of useful information which include:
(i) Investors on the capital market will be well guided on the share pricing system for initial public offering in Nigeria.
- Directors of firms in Nigeria will be guided on effective pricing system for initial public offering policies that will improve the values of their firms.
- The study will be a reference material for further study on the pricing system for initial public offering by academics and professional researchers.
- The study will also be a reading companion to company directors and capital market operators on the pricing system for initial public offering.
- The public policy makers and government will be well informed on the pricing system for initial public offering in Nigeria.
1.9 HISTORY OF THE FIRMS UNDER STUDY
ZENITH BANK
Zenith Bank Plc is one of the biggest and most profitable banks in Nigeria. The bank was established in May 1990 and started operations in July same year as a commercial bank. It became a public limited company on June 17, 2004 and was listed on the Nigerian Stock Exchange on October 21, 2004 following a highly successful Initial Public Offering (IPO). The bank presently has a shareholder base of over one million, an indication of the strength of the Zenith brand.
Its head office is located at 87, Ajose Adeogun Street, Victoria Island, Lagos, Nigeria. With over four hundred (400) branches and business offices nationwide Zenith Bank has presence in all the state capitals, the Federal Capital Territory (FCT) and major towns and metropolitan centres in Nigeria. The bank’s expansion is not limited to Nigeria as Zenith became the first Nigerian bank in 25 years to be licensed by the Financial Services Authority (FSA) in the UK for the commencement of banking operations by Zenith Bank (UK) Limited in April, 2007. This is in addition to its presence in Ghana, Zenith Bank (Ghana) Limited, Sierra Leone, Zenith Bank (Sierra Leone) Limited and a representative office in Johannesburg, South Africa.
GURANTY TRUST BANK
The Bank was incorporated as a private limited liability company on 20 July 1990. It obtained a license to operate as a commercial bank on 1 August 1990, and commenced business on 11 February 1991. It became a public limited company on 2 April 1996, and its shares were listed on the Nigerian Stock Exchange on 9 September 1996. The Bank was issued a universal banking license by the Central Bank of Nigeria on 5 February 2001.
In July 2007, the Bank issued 73,588,313 units of Global Depository Receipts (GDR) to both foreign and local investors. The GDR was issued at $11.2 per GDR and 1 GDR is equivalent to 50 units of the Bank’s ordinary shares. Foreign investors subscribed to a total of 46,248,313 units of GDR, while local investors subscribed to a total 27,340,000 units of the GDR. The net proceeds of N99,524,345,547 was received by the Bank and has been accounted for in the share capital account.
The Bank’s principal activity continues to be the provision of commercial banking services to its customers. Such services include retail banking, granting of loans and advances, equipment leasing, corporate finance, money market activities and related services, as well as foreign exchange operations.
The Bank has four non-bank subsidiaries, Guaranty Trust Assurance Plc which is engaged in the provision of insurance services, GTB Registrars Limited which act as registrars to public companies, GTB Finance B.V Netherlands, a special purpose entity to raise its $350 million Eurobond Guarantee Notes and GT Home Limited, a licenses Primary Mortgage Institution which is engaged in mortgage activities.
The Bank has five overseas subsidiaries namely Guaranty Trust BANK (Gambia) Limited, Guaranty Trust Bank (Sierra Leone) Limited, Guaranty Trust Bank (Ghana) Limited, Guaranty Trust Bank (UK) Limited and GTB Finance B.V. Netherlands.
GURANTY TRUST BANK
The Bank was incorporated as a private limited liability company on 20 July 1990. It obtained a license to operate as a commercial bank on 1 August 1990, and commenced business on 11 February 1991. it became a public limited company on 2 April 1996, and its shares were listed on the Nigerian Stock Exchange on 9 September 1996. The Bank was issued a universal banking license by the Central Bank of Nigeria on 5 February 2001.
In July 2007, the Bank issued 73,588,313 units of Global Depository Receipts (GDR) to both foreign and local investors. The GDR was issued at $11.2 per GDR and 1 GDR is equivalent to 50 units of the Bank’s ordinary shares. Foreign investors subscribed to a total of 46,248,313 units of GDR, while local investors subscribed to a total 27,340,000 units of the GDR. The net proceeds of N99, 524,345,547 were received by the Bank and have been accounted for in the share capital account.
The Bank’s principal activity continues to be the provision of commercial banking services to its customers. Such services include retail banking, granting of loans and advances, equipment leasing, corporate finance, money market activities and related services, as well as foreign exchange operations.
The Bank has four non-bank subsidiaries, Guaranty Trust Assurance Plc which is engaged in the provision of insurance services, GTB Registrars Limited which act as registrars to public companies, GTB Finance B.V Netherlands, a special purpose entity to raise its $350 million Eurobond Guarantee Notes and GT Home Limited, a licenses Primary Mortgage Institution which is engaged in mortgage activities.
The Bank has five overseas subsidiaries namely Guaranty Trust BANK (Gambia) Limited, Guaranty Trust Bank (Sierra Leone) Limited, Guaranty Trust Bank (Ghana) Limited, Guaranty Trust Bank (UK) Limited and GTB Finance B.V. Netherlands.