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Sunday,
February 02, 2020 / 05:17PM
/ By The Analyst & Proshare
Markets / Header Image Credit: riskpro.in
The
events that occurred in January 2020 in the Nigerian Capital market space over
the compliance with extant laws and disclosure of insider related transaction
offered up an example of where precepts can overshadow possibilities and
propsects. More instructive was the public response; which revealed that the
psyche and roots from the financial crisis era continues to run deep and
established trust deficits in the market remains. That said, it was also one
that offered up an opportunity to learn more about the principle of incremental
regulation - its development, exposure, execution, compliance, the feedback
loop for continuous improvement; and the ecosystem linkages the regulators must
harness to rebuild market trust. In this report, our senior team and external
contributors took time to look into the background, the events, the reporting
and responses; to extract the key lessons for market development. This article
presents the thoughts that led to the take-away that this was one of our
defining regulatory-market practice linkage moments rather than as a conduct
risk.
Related Link: NSE
Proposes Amendments to Rules on Related Parties, Closed Periods and KYC
Executive Summary:
Beyond Optics - Appreciating Unique Learning Moments
"If
companies tell us more, insider trading would be worthless." - James
Surowiecki
Herbert Wigwe, Managing Director, Access Bank Plc, recently stirred the hornets' nest as he sold off 15.5m units (6.97% of his shareholding in Access Bank Plc) at a price of N10.45 for the first 13.8m units and N10.78 per share for a further 1.7m units. The problem was not the fact that Access Bank's CEO sold shares in his bank but that the shares pawned at a time the bank had declared a closed period for trading in the bank's shares on December 30, 2019, when the bank's share price closed at N9.75. Wigwe's transactions, therefore, threw up issues of legality and best corporate governance practice. "The problem wasn't about the CEO selling his shares in the bank," said one large equity trader, who requested anonymity, "but it was about; why in heavens name was he selling such large volumes at the beginning of a new year before the release of the banks 2019 audited financial statements. Was it an insider signal for smaller investors to jump ship? Or was it simply animal spirits and a case of the wealthy chap needing further personal liquidity?", the questions remain unanswered.
The
sale of these shares raises a few important issues that could serve as learning
moments for the investment community in general and the stock market in
particular; a teachable opportunity.
It
did not matter what the quantum sold was, and it shouldn't matter really. In the
main, the principle of disclosure was the game changer. The public / media
response was based on memory, high conduct risk environment and the quantum of information
available to it.
The
optics of a CEO quickly selling-off equity and ostensibly taking advantage of
insider knowledge of the performance of his company appears enticing and gets
everyone excited and on their toes. In this instance, it was not business as
usual.
Something
fundamental had changed in the disclosure field and the public was left to
figure out what transpired.
It
is therefore imperative, if not pertinent that we address the issues of policy,
practice and process around what we believe was a well-intentioned
follow-through of a new market rule.
What
was lost in all the episode was the focus, awareness and understanding of the existence
of two sets of governance rules at play - the minimum set by the NSE and the
higher standards, self-imposed by the listed entity; which ordinarily ought to
offer an exemplary benchmark for managing regulation; yet has somehow shown the
absence of guidelines on resolving actions taken where such governance
guidelines overlap or become an issue.
Something
significant is occurring in the Nigerian capital market and nay the Nigerian
corporate governance space.
This trend started gaining traction after the dual listings of Seplat and Airtel
on the bourse as well as the London Stock Exchange (LSE); in part furtherance
of the five-year dual listing agreements in place. A close observer of these
two entities would have noticed its increasing disclosure compliance and this
did not go unnoticed by other entities whom at different fora organised by
the Nigeran Stock Exchange on improving market data integrity, operational
transparency and "market-appropriate' disclosure requirements for dealing in
issuers' shares vis-a-vis the rulebook of The Exchange, 2015 and best practice;
decided to embrace an incremental regulatory approach and start off with some
changes in the level, quality, and relevance of disclosures in the market.
One
of such moves, which we hope to be the first of many to come, was the January
15, 2020 circular requiring listed entities to file details of all transactions
by Directors and other Insiders (see below).
This
circular came in days after the suspension of closure period date set by the
bank (30days) but before the closure period set by the NSE (15days); and days
after two transactions had taken place. Compliance with this rule going forward
was embraced by the bank, to the delight of the bourse (and keen watchers of
market governance); who needed to see a change from an era where such
transactions occur regularly without disclosure. This was an exception. This
was the signaling point of the change sought in the market.
Thus
the knowledge of Wigwe's sale of his equity interest in the bank over a two-weeks
period was not as a result of some investigative reporting or a rumour later
confirmed, but rather; was derived from the new public disclosure requirement on
the floor of the NSE ( for all and every action including volumes with the potential
to influence market price). Wigwe, in upholding the higher standards subscribed to by his company and as the CEO of a Premium Board company listed on the
Exchange had a choice to make - to either take the moral high ground or stay
within the existing norm. He must have weighed the positives of being an exemplar
institution and approved compliance including back-disclosures of 2020 trades
that occurred before the circular was issued.
As lofty as the idealism goes, Access Bank/Wigwe's weak response to the selling orders and the difficult-to-establish suspicion that the suspended earlier closed period was to allow him to sell off part of his holdings in the bank gained credence when the bank at the close of business on Friday, January 24, 2020, announced a new close period between January 25, 2020, and a date the bank would announce. The new announcement meant that Wigwe would not be selling any further shares soon. According to Access Bank's notice:
"This is
to inform the Nigerian Stock Exchange that a meeting of the Board of Directors
of Access Bank Plc ('the Company') has been scheduled for Monday, February 10,
2020."
"The meeting will consider and approve the Group's Audited Financial Statements for the Financial Year Ended December 31, 2019 for submission to the Central Bank of Nigeria for approval and subsequent release to the Nigerian Stock Exchange"
The notice continued, "The Company has in compliance with Rule 17.2 of the Amendment to the
Listing Rules of the Nigerian Stock Exchange declared a Closed Period in
respect of transactions on its securities from January 25, 2020 to such date as
will be subsequently announced (both days inclusive)."
"Accordingly, no director, employee, person discharging managerial responsibility, and adviser of the Company as well as their connected persons may directly or indirectly, deal in the shares of the Company in any manner during the Closed Period"
What was immediately clear was that a few things would need to be reviewed in the rule making process (to improve and build on what transpired), and the communication management imperative inherent; stating minimum requirements.
That said, some of the
useful takeaways from the concerns distilled from the public response around
the Access Bank share sell-off compliance would include, but are not limited
to, the following:
Related Links for further Reading:
1.
Reforming Stock Exchange Governance
Understanding Insider Trading
Insider trading is not illegal. Contrary to popular belief, a stakeholder in a company, even if he or she is a director of the company, can sell his or her shares at any time they wish. The trading of shares by a company insider becomes illegal when such a person trades on confidential information that has not been made public and is not available to all other shareholders. Was this the case with Access Bank's Wigwe? Perhaps not. Access Bank's CEO has, in the last two weeks, sold a total of 115.5m shares at a nominal value of N1.23bn before adjustments for statutory fees and commissions. However, these transactions were done within the rules as no closed period was in force at the time of the traded business. Two similar cases of CEOs selling off their stocks and greeted by a storm of publicity (invariably negative) were Patrick Byrne, CEO of Overstock.com and Adam Neumann, Co-founder of WeWork.
Both
men sold down their equity positions in their companies and got greeted by a chorus
of investor disapproval. The reasons for investor anger differed for each
gentleman.
Byrne
sold off stocks to improve his cash position as his official salary was
US$100,000 and he had not sold a single share in 20 years, he argued that he
needed cash to meet other business and personal obligations. Neumann's
situation was less flattering. The Co-owner of WeWorks sold his personal stock
and borrowed funds that collectively came to US$700m. The news of Neumann's
transactions came as the company was preparing for an Initial Public Offer
(IPO). The company value was US$47bn at
the time. Did the executives have the right to sell their shares at the time?
Yes, they did. Could the transactions be considered "illegal" insider trading?
No, they could not, as the executives did not trade on information that was not
equally available to the general investing public. In Neumann's case, was there
a "moral burden" in respect of his transactions? Some would argue, "yes," but no criminality was confirmed.
Related Links for further Reading
1. Can a CEO sell their shares at any
time? - Quora
2. What Investors Can Learn From Insider Trading -
Investopedia
The Closed Date Controversy - The Art of The Deal
On December 30th, 2019, Access Bank Plc announced the closed date for trading of its shares on the Nigerian Stock Exchange (NSE) and the holding of its Board meeting to consider its 2019 statement of accounts and financial position (see official notice below). Normally the closed date as prescribed by NSE rules is 15 days before the Board meeting to consider audited annual accounts.Access Bank's governance standard imposes a stricter rule of 30 days, which explains why at the end of December 2019, it disclosed a closed period from January 01, 2020, to January 31, 2020. The stricter standard was consistent with the higher duty of care in corporate governance expected from a premium board member of the NSE.
Image
1 Letter Annoucing Access
Banks Board Meeting and Closed Period 2020
Source: Nigerian
Stock Exchange (NSE)
On
January 08, 2020, however, Access Bank announced the suspension of the earlier
announced closed date and said that shareholders and investors would
receive a new date for the bank's Board meeting and revised close date. Two
days after this announcement (January 10, 2020), the bank's CEO started to sell
chunks of his shares in the bank held indirectly through Capital and Trust
Limited, beginning with the sale of 3.6m units at N10.80. On January 17, 2020,
the bank again notified the NSE of the sale of another set of 13.8m shares
owned by its CEO. By the 20th January 2020, Wigwe sold a further
1.7m units bringing the total number of units sold as of the 20th
January 2020 to 100m units. Wigwe's short position continued in the week as an
additional 4.67m units sold on January 21, 2020, bringing total sale of
Wigwe's shares to 104.67m units (taking into account the 20.14m units
sold on January 13, 2020, 9.24m units sold on January 14, 2020, and 22.63m
units sold on January 15, 2020).
The
selling spree did not stop until January 23, 2020 (the last but one trading
day of the week). Access Bank's CEO continued to sell and parted with an
additional 13.83m units bringing the total units sold up until and including
January 23, 2020, to 118.5m units or 8.22% of his total shareholding in the
bank. Over the period, a total of 452.20m units of Access Bank shares were
available for purchase with Wigwe's share sales of 118.5m units accounting for +26.21% of traded volume. The bank's share price,
however, closed the week down by 70kobo, suggesting that the CEO's short
position had a mild but noticeable impact on the bank's market value, with the share
price sliding by -5.09% from its earlier value
on January 10, 2020 (see chart 1 below).
Chart
1 Timeline and Price
Movement of Herbert Wigwe's Access Bank Share Sales in 2020
Source: Nigeria Stock
Exchange, Proshare research
Analysts
note that base rate perception error pulled the market price down
as traders and their clients tried to figure out the reason behind the sale of
Access Bank stock by its CEO. The absence of clarity resulted in traders shorting
the bank's stock as a strategy to avoid
downward price reversal and potential portfolio loss. We will monitor the
share price trend over the quarter to gauge the impact and further lessons.
Illustration
1 Herbert Wigwe Access Bank
Share Sales Journey
To
provide clarity on insider dealings and who an insider is; and when such
insider's transaction could be considered legitimate the NSE released a
circular on January 15, 2020 where it defined insiders in line with Section
315 of the Investment and Securities Act (ISA), No. 29, 2007 and Rule
400 (3) of the SEC Consolidated Rules, 2013.
According
to the circular signed by Godstime Iwenekhai, Head, Listing Regulation
Department:
DISCLOSURE
REQUIREMENTS FOR DEALINGS IN ISSUER's
SHARES:
1. Rule 17.15(c): Disclosure
of Dealings in Issuers' Shares, Rulebook of The Exchange, 2015 (Issuers' Rules)
provides that all directors, persons discharging managerial responsibility and
persons closely connected to them as well as all insiders of the Issuer shall
notify the Issuer in writing through the Company Secretary of the occurrence of
all transactions conducted on their own account in the shares of the Issuer on
the day on which the transaction occurred and the Issuer shall maintain a
record of such transactions which shall be provided to The Exchange within two
(2) business days of The Exchange making a request in that regard.
In respect of insider actions in 2020, the NSE circular noted
that companies needed to do the following:
This
information is required to be filed no later than Friday, 17 January 2020 through
the Corporate Action Channel of the Issuers' Portal.
2. Effective from the date of
this Circular, i.e., 15 January 2020, all Issuers are required to file
information on Insider transactions subsequent to 15 January 2020 with The
Exchange in the format prescribed in Appendix A to this Circular within two (2)
business days of such transactions through the Corporate Action Channel of the
Issuers' Portal. For the sake of
clarity and by way of example, please note that if an Insider transaction
occurs on a Monday, the Issuer is required to file the requisite information no
later than Wednesday of the same week.
If the Insider transaction occurs on a Friday, the Issuer is required to
file the requisite information no later than Tuesday of the following week. If
the Insider transaction occurs on a Friday and the Monday is a public holiday,
the Issuer is required to file the requisite information no later than
Wednesday of the following week (see details of Access Bank's CEO's equity sales
transaction in illustration 2 below).
Illustration
2 Details of Herbert Wigwe
Access Bank Share Sales
Reviewing Corporate Fundamentals
The best view of Access Bank's books is a look at its Q3 statement of financial position and profit and loss account. The bank's books, even after its merger with Diamond Bank, remain strong. The bank's Q3 2019 gross earnings were +36.89% higher than the figure for the contemporary period of Q3 2018. Access Bank's profit before tax between Q3 2018 and Q3 2019 rose from N70.27bn in Q3 2018 to N103.10 in Q3 2019, a rise of +46.73%. Bottom-line earnings over the period rose from N62.91bn in Q3 2018 to N90.74bn in Q3 2019, a surge of +44.24%. Access Bank's strong Profit and Loss Account between 2018 and 2019 indicates that the year-end numbers between 2018 and 2019 are likely to look equally solid. The bank's statement of financial position between Q3 2018 and Q3 2019 was no less impressive. Fixed assets grew from N103.67bn in Q3 2018 to N196.41bn in Q3 2019, an advance in fixed assets of +89.46%. The bank's net asset grew equally strongly with net assets growing from N490.51bn in Q3 2018 to N614.84bn in Q3 2019 a growth of +25.35%.
With
the bank's potential earnings from its Q4 2019 operations likely to be superior
to its year-end 2019 numbers, the bank's CEO is unlikely to have short the
bank's equity because of a potential slide in performance. The typical
insider actions related to rogue trading is not borne out by the circumstances
of Access Bank's contemporary financial outlook. That puts those concerns to
bed.
Optical Illusions
Why
did Herbert Wigwe go on a selling binge in January 2020? Nobody but Wigwe
himself can explain. Speculation has ranged from the sublime to the ridiculous.
Among the subtle is the fact that over time Wigwe's shares in Access Bank Plc had exceeded that of his equal
partner in United Alliance Company Limited, and this needed to be recalibrated.
With the bank making new acquisition(s) in the continent and other areas of
growth, the equity interest differences needed to be reconciled.
A
twist to this version is that with the authorities in Nigeria (CBN) giving a "no objection" approval to the bank acquisition in Kenya, owners of Access Bank
needed to work quickly to pay for the new Kenya acquisition, to do this, a
sell-off of a slice of his Nigerian interest to contribute to the payment for
the East African bank was a prudent move. This explains, according to purveyors
of this argument, the end of equity sales that occurred on Friday, January 24,
2020 and the release of a notification by the bank of a closed date commencing
from Saturday, January 25, 2020 and a board meeting slated for Monday, February
10, 2020. Observers have noted that the bank neither conducted itself
unprofessionally nor did its CEO behave illegally.
Another
argument (albeit farfetched) has been that Wigwe's sales relate to a poorer
than expected performance of the bank in Q4 2019 and the likely drop in its
share price on the release of it's audited full-year report. If this were true, Wigwe
would have clearly benefited from insider information not known to the general
public (asymmetric information leading to adverse selection) and
would have benefitted from such knowledge in a manner that is illegal. This was
not the case.
While
we do not place any premium on plausible and until the reasons are adduced by
the party involved; we are of the view that Access Banks Q4 2019 performance is
likely to be strong with both gross earnings and bottom-line earnings showing a marked improvement over the results in 2018. The argument that Wigwe sold
shares to benefit from a major downward future price adjustment would therefore
be untenable and a loose talk. Why would a CEO sell shares that would offer
both dividend yields and capital gains opportunity in a few months ahead? The
argument is the weakest offered for the CEO's actions. Perhaps Wigwe needed
cash for other personal reasons? Perhaps, but this could have been better
handled in a way that did not involve suspension of an already publicly
declared closed period.
Going
forward, the NSE may need to design new rules that cover the suspension of
already publicly declared closed periods to avoid a situation of or appearance
of conflicts or potential insider advantage of a review of the designated date
to meet personal rather than corporate objectives. Beyond, this, and as part of
the incremental regulatory growth process the NSE should tackle grey
areas concerning insider transactions and support greater market transparency.
Indeed,
they should use this test case as an opportunity to accelerate the pace of
change needed and ensure that legality and optics are incongruence.
For
further information: contact research@proshareng.com and content@proshareng.com
Visit Access Bank
Plc IR Page in Proshare MARKETS
Chart 1 One Year Share Price Movement
Table 1 Unaudited Q3 2019 Results
Source: NSE
Proshare's Memos To The Market and Market Updates
Related News - Share Transfers (Related Transactions)
1.
ACCESS
Notifies of Dealing In 13.83m Volume of Shares By An Insider
2.
ACCESS
Notifies of Dealing In 4.67m Volume of Shares By An Insider
3.
ACCESS Notifies of Dealing In 15.53m Volume of Shares
By An Insider
4.
ACCESS Notifies of Dealing In 28.86m Volume of Shares
By An Insider
5.
ACCESS Notifies of Dealing In 55.6m Volume of Shares
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Access Bank Announces Commencement of Closed
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16.
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