The SEC, the N0.01kobo rule and the likely implication



Friday, June 05, 2015 5:14 PM / Taiwo Ologbon-Ori

The Securities and Exchange Commission (SEC) recently approved the Par Value Rule, which would see every price of the listed equities on exchange being determined by the market forces while all stocks would trade as low as N0.01kobo. Technically, this indicates no more nominal value.

This further indicates that face value of every listed share would be N0.01kobo as against the previous N0.50kobo. And this would cut across every sector, indicating that market would hence forth determine the true value of every listed equity without fixed baseline.

This in our opinion would contribute to market efficiency in reflecting the true value of some dormant stocks, trading at nominal value on the bourse- this is in-line with standard practice. On the other hand, this also would help to reduce liability from the quoted firms to the shareholders since face value is now N0.01kobo-

It is important to know that the par value has little or no direct relation/influence on the market price-  a stock with no or low par value can still trade northwards as high as possible, depending on how strong the fundamentals are and how efficient the market is to reflect the fair value. This is to say that the actual value of stock is based on the market value of the business and whatever the market priced it to be.

Nevertheless, when this new law is implemented, there is likely to be a negative impact in the short term, depleting the market net worth significantly, as most stocks that are trading at N0.50kobo may plunge to N0.01kobo, translating to 98% plunge in the market value of some of these stocks- this will only happen if NSE does not automatically readjust nominal value without affecting investors worth adversely.

In this regard, the insurance sub-sector is likely to be grossly affected, if NSE goes the way of the above thought. In our opinion, it would be of great value and importance if NSE or the company takes a proactive measures before the huge sell-offs begin to deplete the total market net worth.

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