In this concluding part to last Thursday's article, the Chief Executive Officer, Trust Yields Securities Limited, Alhaji Ola Yussuff, tells SIMON EJEMBI how the prices of shares are determined and how funds can be raised through bonds.
How long it takes for a company to get listed
That is a function of how ready the company is. It involves aggregating all the information I talked about earlier. If you are a company that has been running properly and you have already gotten your financial account in place, your accounts have been audited, you have your board of directors and management, you have all the information about your market, sales, and margin and all that any investor will need, then all it takes for the stockbroker and the issuing house to put all of the information together with a lawyer making sure that it is put in the legal jargon that is required by the market. That can be done within a short period; anything from one month to three months. But if the needed information is not ready, then it will take a longer period. For example, if you have been operating and selling your product and you don't have proper market research report, and the ability to convince potential investors that this thing that you are producing, is not being sold today out of luck, but that it will be there and people will continue buying it for the next 10 years, then you need a special report for that. How long that takes to prepare will affect the time it would take to get your company listed.
If you are not ready, you've and a new auditor has been appointed and that auditor has to put everything in a way it should be, of course that would make the process longer. For example, if you want to come into the capital market, a lawyer will insist that the land titles and the likes should be perfected; it should be in the name of the company and not necessarily in the name of the shareholder. Again that will take time for the land registry to do. So, those are the type of thing that might delay the process but in terms of putting everything together it is a matter of weeks if not months. It shouldn't take too long depending on how ready you are.
Determining the price of shares
Well, it is very easy. It is the function of the broker, the accountant and the issuing house. The accountant will look at all that we have been saying; the land where you put you factory, how much it cost you to put your factory, then the amount you invested originally. If everything you have put in is N1m – and they are all there now – and you say, "I want to go to the market", all the auditor will do is to note that the net value of this asset today is N1m and this N1m has been provided by this (one) shareholder. Whether you now want to say that N1m is now one share or whether you now want to divide it into one million shares of N1 each, it is again the function of what the Auditor and the lawyer will advise you. But it is up to you, you can say, "Look since I put in N1m, I want each of my shares to be N1m. You can say that, but usually you will be advised that maybe 50kobo per share or so is better. That is to divide the shares into so many so that you will be able to sell. Now because you have spent N1m to build the factory, and you have now created maybe one million shares of N1 each, you can say, "All the shares belongs to me; it is my money so I'm holding all the one million share. But because I want to raise additional funds, I'm going to invite others and therefore instead of raising N1m, I'm going to create two million shares. One million shares will be for me for the N1m I invested and I will invite others to also bring N1m for the other one million shares."
It means you will now have N2mn and the company will become worth N2m and you because you put your original N1m it means you now have 50 per cent of the shares and the others that put the other N1m have 50per cent. It is as simple as that. I don't want to go into the details of goodwill, prospects. You might have made profit and your goods may be accepted by the public, etc. All those are things the auditor will look at. That is roughly how the evaluation of the shares is made. The accountant, the issuing house and the broker, all of them will sit down and do that for you, those are technical areas that you do not need to bother yourself with.
Raising funds through bonds
Understand what we mean by bond; when it comes to equity, you are saying to people, "Even though I have started my business, and I am the shareholder, I want some other people to join me." In the example I gave above, you will now become 50 per cent owner and others will own the other 50 per cent. On the other hand you can say, "I have put N1m down and I have started a company. The company is now worth N1m that I have down. I don't want to other people to own part of it, I want to remain the owner 100 per cent but I still need to raise money." In that wise you are raising loan; you are not raising equity capital, you are raising what we call debenture bonds or debenture loans, and that is what we call bonds. A bond is like a loan. You raising a corporate bond because if a company is raising bond, we call it corporate bond, but if a government is raising it, it is called government bond. Those are the distinctions.
If you buy corporate bond you are lending to that corporate body, it does not make you a shareholder, you are now a lender. In shareholding, nobody is promising you that he or she is going to pay you anything at the end of the year. All they are promising is that if they make profit they will pay you part of the profit. They do not even promise you that they will pay you 10 per cent of the profit; they just say we will share the profit. How they share the profit depends on what they make.
In a bond, the difference is that because the lender is not a share holder he or she is not taking the risk that shareholders are taking. As shareholders you are taking the risk that 'okay if things work out and the company makes money that money will belong to us but on the other hand if it doesn't make profit we lose.'
When you raise money through corporate bond, you are saying, whether I make profit or I don't make profit, if you put your money, maybe N1m, with me I will pay you 10 per cent every year. They have a fixed contractual obligation to pay the person that put that money down and buys the bond.
The process
It is roughly the same as raising money through shares or equity because you need to go to your broker, your broker still needs to prepare the prospectus which will still contain all the things that I have talked about; information about the company, the market research, and some of the things you want to do because anybody that is going to lend you money in terms of bond will still want to know, can you really pay me back? So, the information will be more or less the same. It is just that the end product will be different. And then, of course, since it is a loan then there will be some other technicalities because you are then saying things like, 'because I'm not an equity risk holder in your company, you can make money now and start telling me you are not making money. So, when it is a loan, you have to appoint a separate trustee who will hold the money and give it to the company in line with the projection the company would have made. It is the trustee who will make sure that the company pays you when it makes money.
