20 October 2014, Lagos – The proposed ‘Private Companies Conversion and Listing Bill’ may lead to loss of tax revenue for Nigeria, an expert has warned. A Partner and Head of Tax and Corporate Advisory at PricewaterhouseCoopers (PwC) Nigeria, Mr. Taiwo Oyedele who stated this in an article, pointed out that based on the 2013 tax revenue profile, oil and gas companies in Nigeria (all private) and non-oil private companies paid over N3 trillion in income taxes to the Federal Inland Revenue Service.
According to him, if these companies list at least 40 per cent of their shares and hence enjoy a reduction of one-third of their income tax rates, Nigeria would lose at least N1 trillion annually for five years.
The thresholds for the mandatory conversion are: shareholders fund in excess of N40 billion, turnover or total assets of N80 billion. A private company that meets any of the thresholds must be converted to a public company and be listed on the NSE within 12 months.
As stated in the Bill, the conversion is aimed at promoting growth for both the company and the Nigerian capital market. However, Oyedele added: “On face value, the Bill looks like a good initiative but a careful analysis suggests otherwise. Nigeria with a Gross Domestic Product (GDP) of $510 billion is the largest economy in Africa but the country’s capital market with a total capitalisation of about $80 billion is dwarfed by the Johannesburg Stock Exchange with market capitalisation of over $1 trillion as at the end of 2013.
“South Africa did not achieve this by forcing private companies to list but rather through impeccable regulatory enforcement. The country is ranked first in the world in terms of regulation of securities exchanges in the World Economic Forum’s Global Competitiveness Survey for 2013-2014.”
He also noted that compelling private companies to list their securities contradicts extant laws such as Section 25 of the Nigerian Investment Promotion Commission Act, which states unequivocally that “no person who owns, whether wholly or in part, the capital of any enterprise shall be compelled by law to surrender his interest in the capital to any other person.”
Oyedele further argued: “Another issue is whether the NSE has the absorptive capacity to cope with such a large scale listing. “Here is a market that struggles to absorb just five per cent of Dangote Cement at the time of listing in 2010. How much free cash flow do we have in the economy or that foreign investors will be willing to inject? “Due to the frenzy of a new listing, existing shareholders of listed entities will seek to sell off their stocks to buy the new shares.
“This in turn will depress the market given its relatively small size. Institutional investors like pension funds, banks, insurance and investment funds all have paucity of equity investable cash given the various legal restrictions and attractiveness of the money market that offers high returns and a much lower risk.”
*Numeekeghe – Thisday