NGX urged to close free float loophole trapping liquidity
A regulatory workaround allowing Nigeria’s largest companies to list with minimal public shareholding is stifling market liquidity and prompting calls for a strict 20% free float mandate.
The Nigerian Exchange Group is facing pressure to abolish a rule that allows companies to bypass minimum public shareholding requirements, a practice that has severely constrained liquidity in some of the nation's most valuable stocks.
Current regulations mandate that Main Board and Premium Board listings maintain either a 20% free float distributed among at least 300 shareholders, or a free float valued at a minimum of N20 billion and N40 billion, respectively. This dual-option system has enabled industrial giants like Dangote Cement, with a free float below 10%, BUA Foods, at roughly 5%, and BUA Cement to remain compliant despite having negligible shares available for public trading.
For portfolio managers and institutional investors, this value-based workaround creates significant operational bottlenecks. When a company boasts a market capitalization exceeding N10 trillion but only a fraction of its shares are tradable, executing orders becomes difficult without severely distorting the price. This illiquidity transforms ostensibly cheap stocks into value traps, leaving investors unable to exit positions during market corrections without incurring heavy losses.
The concentration of tradable shares also depresses overall market turnover and undermines corporate governance. Highly concentrated ownership insulates management from the accountability pressures typically applied by a dispersed shareholder base. Consequently, the NGX struggles to attract the foreign and domestic institutional capital that requires robust market depth to deploy effectively, lagging behind peers like the Johannesburg Stock Exchange and the Egyptian Exchange.
Market participants are advocating for the removal of the naira-value alternative in favor of a strict, non-negotiable 20% free float requirement. Aligning with the 20% to 25% minimums standard in most developed and emerging markets would force a broader distribution of shares. While critics may raise concerns about dilution, companies could achieve compliance through secondary offerings, gradual promoter sell-downs, or strategic buybacks.
Implementing a rigid free float threshold would directly address price manipulation, improve price discovery, and broaden daily trading volumes. For an exchange that remains disproportionately small relative to the size of Nigeria's economy, mandating meaningful public shareholding represents one of the most efficient mechanisms to expand market depth.
