Following the proposed and ongoing capital restructuring and the subsequent suspension of trading on the shares of C&I Leasing Plc, I received a couple of emails from concerned shareholders asking me how the restructuring will affect them as shareholders. My simple answer to them and through this medium, to other shareholders, is that it has no impactful effect on your current investment in the company. Though they call it a restructuring, it is nothing more than a reverse split. A reverse split is a corporate action where a company reduces or decreases the number of its issued share capital.

In most cases, the reason for such corporate action is to shore up the price of the shares, especially where the stock price is so low that the issuer risks being either delisted or classified as “penny stock”. But according to the SEC filing, the reason for this corporate action, as noted by the company, is not to shore up the price, even though it will, but to create some leverage for the company to be able to issue additional shares in the future. If that is actually the true reason, the company could, however, have been able to achieve that result by passing a resolution to increase its Authorised share capital rather than going through a reverse split. It is most unlikely that the reason for the reverse split is to shore up the price. Be that as it may, below are what happens with a reverse split and how the shareholders are affected.

With a reverse split, quantity of shares outstanding decreases, Price increases and Market capitalization remains the same. What this means is that if you have 200 shares priced at N8 per share worth N1600 prior to this corporate action, you will now have 50 shares, priced at N32 per share with a market value of N1600. You can see that what you seem to have lost in terms of number of shares, you gained in terms of price increase, and you are home and dry, with the value of your investment intact.

Bua group

Cost Basis Adjustment

However, there are a few areas that are usually affected whenever there is a stock split or reverse split. One area is the cost basis of your investment. Although the total cost basis of your investment does not change, the cost basis par share will. So, you will need to adjust your cost basis to reflect the reduced number of shares you are now holding. Assume that you had bought 200 shares that you bought at a price of N4 per share before the reverse stock split, now that you hold only 50 shares as a result of the split, your cost basis will now be N16 per share. The essence of cost basis is that it is the basis on which your realized and unrealized gain or loses are calculated.

Fractional Shares

Fractional shares often times result from splits when shareholders are having shares in multiples that are not quite divisible by the ratio on which the split is based. In such a case, you will be forced, as it were, to sell the fractional shares assuming you are not allowed to hold fractional shares in your portfolio. The way it works is that the company, through its registrar or whoever the elected for that purpose, will pool together all the fractional shares, sell them and distribute the proceeds to the affected shareholders in what is called “cash in lieu of fractional shares”. In that case, you will record a sell of the fractions for the cash distribution received.

Public Perception

Reactions to the announcement about the reverse split has really been negative judging from the trend in the stock price since the announcement, as can be seen below. It does look like investors or shareholders or the public interpreted or are interpreting the reduction in the number of shares as reduction in the market value of their investment. That is a wrong interpretation.

This interpretation underscores the urgent need for investor education in Nigeria. Investors need to be educated on the ways some of the corporate actions work and how they affect them, among other things. As it stands, it is not the corporate action of a reverse split that is hurting the shareholders of C&I Leasing now, but the wrong signal and wrong interpretation that the announcement is sending and receiving among the Nigerian investment environment which is causing the price to fall. Maybe, other companies hoping to undertake such corporate actions should find time to explain the effects to their shareholders during the approval stages of the shareholder meetings so as to reduce the incidence of misinterpretation. Stock split and reverse split are very common corporate actions and shareholders should get used to them because they are coming.

3 COMMENTS

  1. The company at its EGM stated that the exercise would result in savings of approxmately N150m versus simply increasing its authorised capital.

    It should be noted that the increase in authorized capital adds no value to the shareholders as it is no guarantee that the shares will actually be issued successfully, given prevailing market conditions.

    So, i think this option is the best for the company.

  2. While all your analysis is cogent, but the reality with some of the other companies that have done a share reconstruction exercise is that in the medium term, there is an erosion of value.
    This happens because with the new shares can still fall to the nominal value of 50k/share. A case in point is the Unity Bank shares and shares of a number of insurance companies that are languishing at a nominal price of 50k/share.

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