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Sourcing Funds From The Capital Market:A SURVEY OF THE ELIGIBILITY OF NNDC NON-QUOTED PROJECTS
Abstract
No business entity can survive without finance. Considered as the live wire, finance is required as working capital and for the acquisition of fixed assets. In both cases, right combination or finance mix is essential. With the deregulation of the Nigerian financial system, the cost of borrowing funds from the banks became increasingly expensive. This therefore made it more and more difficult for businesses to finance their working capital requirements talk-less of expansion and modernisation of operations. Consequently, a lot of them went under due to dearth of finance. Among such business entities are some that are associated with the New Nig eria Development Company (NNDC) Ltd, Kaduna. The NNDC is a Development Finance Company with investments in more than 100 companies majority of which are private and fall within the medium category. In the light of the ever-increasing cost of bank borrowing, this study looked at the Nigerian Stock Market as a viable option for companies with potentials to raise their much-needed finances. The stock market, like banks, is an important element in the Nigerian Capital market. It came into being in 1960 and it is the most important operational institution in the Capital Market. The Stock Market supports the development as well as growth of small and medium enterprises. By 30th September 1996 a total of 184 companies were listed on the Stock Exchange and the equity market capitalisation was N252.96 billion. The Stock Market provides a safer, surer and more permanent type of capital that can be sourced either in form of debt (debenture and bond), preferred stock or equity. Each of these sources has features, merits and demerits. Debenture and bond represent a promise to pay interest at specified dates and to repay the principal loan at maturity. Preference stock combines the features of common stock and bonds. The word “preferred” refers to the priority of claims over the common stock. Equity (or common stock) is the riskiest form of financing, even though it is regarded as the best alternative means for raising long-term finance. The study recognised the various classifications of the Capital Market. For instance, there are organised (or formal) Capital Markets and informal ones. Whereas organised capital markets have physical facilities, governing boards and membership regulations and requirements, the informal capital markets lack almost all of these qualities. Another important classification is based on whether or not the stock to be traded is coming to the market for the first time. If it is a new issue, the segment of the market that handles such is the Primary Capital Market. However, for old stocks, their purchase and sale is conducted at the secondary segment of the Capital Market. Several important institutions make up the Capital Market. Each plays a specialised role in the entire capital mobilisation process. Notable of such institutions are: Issuing Houses, Stock broking Firms, Commercial and Merchant Banks, Registrars, Companies, Investors, Securities and Exchange Commission and Stock Exchange. Another important aspect that the study looked into is the theory of efficient markets. Relevant information about stocks has been found to be critical and the degree of available information determines the form of efficiency the market has. There are three forms viz: the Weak form, the Semi-strong form and the Strong form. The price behaviour of equity was also studied. There are three schools of thought in this regard and they are: Technical Analysis School, Fundamental Analysis School and Efficient (or Random Walk) Market School. Each of these schools advanced arguments on how the price of a security is determined. A generalised review of the performance of the Nigerian Stock Exchange was made. It was discovered that the performance of the 34 companies, which the Federal Government divested from between 1989 and 1993, recorded significant improvement after listing on the Nigerian Stock Exchange. The International Finance Corporation (IFC) adjudged the Nigerian Stock Market as at July 1997 the second highest in the World in terms of total returns that accommodates capital appreciation and accrued dividend paid by quoted stocks. This study looked at eight NNDC associate companies whose performances dwarfed owing to financial problem. Previous efforts by their respective Boards to recapitalise through Rights Issues were met with varying degrees of low responses. Neither could the companies successfully raise funds from the bank because of relative poor performance and the attendant exorbitant cost of borrowing. The study therefore found out that when adequately encouraged such companies could definitely find a safer, surer and more permanent source of raising funds from the Stock Market for their working capital requirements and modernisation/expansion programmes. It is for the above reason that this study is recommending as follows: i) Those NNDC associate companies with good future prospects should be encouraged to go public; ii) Certain fundamental problems such as inefficient management that bedevil the companies should first be addressed prior to their going public; iii) The companies should get listed into the Second-Tier Market because the listing requirements there are softer than those in the First-Tier; iv) Owing to the numerous advantages of equity financing such as the absence of obligatory payments to equity holders, the companies should raise additional funds only through the issuance of common stock (equity). It is hoped that the ailing NNDC associate companies, which are spread all over, the North will have a new lease of life once they are quoted on the Stock Exchange. The Stock Market promotes corporate financial discipline, accountability, transparency, solvency, efficiency and competitiveness. All these are expected to reverse the erstwhile poor performances of the companies, which will in turn improve the socio-economic well being of the North.
TABLE OF CONTENT
Title page- – – – – – – – – i
Approval page – – – – – – – -ii
Dedication – – – – – – – – -iii
Acknowledgement – – – – – – – -iv
Abstract – – – – – – – – – -v
Table of content – – – – – – – -vi
CHAPTER ONE
INTRODUCTION – – – – – – – -1
1.0 Background of the study – – – – -1
1.1 Statement of the problem – – – – -5
1.2 Purpose of the study – – – – – -6
1.3 Significance of the study – – – – -8
1.4 Research questions – – – – – -9
1.5 Scope of the study – – – – – – -10
CHAPTER TWO
LITERATURE REVIEW – – – – – – -11
CHAPTER THREE
Research methodology – – – – – – -39
Design of study – – – – – – – -40
CHAPTER FOUR
Presentation, analysis and interpretation of data – -48
CHAPTER FIVE
Summary of findings – – – – – – -60
Conclusion – – – – – – – – -61
Recommendations – – – – – – – -62
Suggestions for further research – – – – -64
References – – – – – – – – -65
Appendix I – – – – — – – – -68
Questionnaire. – – – – – – – -69
