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Distinguished
Chairman and Members of the Senate Committee on Capital Market,
it is the pleasure of the Management of the Securities and Exchange
Commission to brief you on the issues of recapitalisation of capital
market operators and the transfer of Registers of public companies
to Registrars other than their own subsidiaries.
We
have carefully reviewed the content of the Committee’s letter
on the twin issues. We are also aware of a petition said to be
written by the Association of Operators of Stockbroking Houses
of Nigeria on the recapitalisation programme. This submission
will address the issues and conclude with a way forward.
A.
RECAPITALISATION EXERCISE
1. BACKGROUND TO THE INCREASE
The Federal Government in April 2007 approved new minimum capital
requirements for all categories of capital market operators for
the following reasons:
(i)
The need for all the sectors of the financial market to be strengthened
and repositioned to cope with the emerging local and global challenges.
The reforms have already been carried out in the banking, insurance
and pension sectors.
(ii)
Currently, there are too many fringe players in the market (especially
stockbrokers) and records over the years confirmed that the fringe
players are mainly responsible for various infractions that undermine
market discipline, efficiency and competitiveness. Currently there
are 246 registered brokerage firms dealing in just 213 equities
on the floor of the Nigerian Stock Exchange.
(iii)
Stockbrokers and market makers have been identified as high risk
participants as many of them are entrusted with large volume of
funds and control investment assets far in excess of their shareholders’
funds. Most of these firms are not well structured and lack good
corporate governance practices. This poses considerable risks
to the market.
Subsequent
to the approval, recapitalisation guidelines were promptly issued
by the Commission in August 2007 (copy attached as Annex ‘A’).
2.
PROGRESS MADE SO FAR
Since the issuance of the recapitalisation guidelines last year,
about 180 stockbroking firms have forwarded their respective recapitalisation
plans (see Annex ‘B’). While a good number of them
are still in the process of compliance, there are some that have
already exceeded the N1 billion mark. At the moment the Commission
has constituted an Implementation Task Force and intends to collaborate
with the Nigerian Stock Exchange in order to smoothen the process.
3.
THE IMPERATIVES FOR WELL-GOVERNED AND HIGHLY CAPITALISED BROKERAGE
FIRMS
Distinguished Senators, developments in the capital market since
the initiatives on new capital base have further reinforced the
arguments for a higher capital base, as clearly outlined below:
(i) When the minimum capital base for stockbroking houses was
N70 million, the total market capitalisation (as at 2004) was
N2.1 trillion, while the value of shares traded stood at N225.8
billion. By December 2007, the market capitalisation had increased
to N13.30 trillion while the value of shares traded stood at N2.08
trillion.
(ii)
The capital adequacy principles as laid down by the International
Organisation of Securities Commissions (IOSCO) require that capital
base must be sufficient to protect counter parties risks (including
market risk) as they are vital tools in reducing systemic risks.
Thus the new capital base was arrived at following a careful analysis
of the level of risks an average stockbroker carries as well as
certain weaknesses peculiar to stockbrokers in the market. Given
the present size of this market and where it is expected to be
in the near future, the prescribed minimum capital in our opinion
fairly meets the IOSCO capital adequacy requirement which must
reflect the liquidity, solvency and market settlement risks.
(iii)
Also the IMF/World Bank during the Financial Sector Assessment
Programme (FSAP) done on Nigeria in 2003 observed that the number
of stockbroking firms in the Nigerian capital market was far in
excess of what the market activities could justify, and further
raised the question as to whether the Commission was sure that
firms relied on legitimate market activities to survive as entities.
4.
OTHER ISSUES RAISED IN THE PETITION UNDER REFERENCE
Please find below, our position relating to the issues raised
in the petition by the Association of Operators of Stockbroking
Houses of Nigeria.
(i)
It is not correct as the brokerage firms asserted in the petition
that they are just intermediaries between buyers and sellers,
and therefore have no liabilities to warrant the need for huge
capital outlay.
Between
January 2000 and December 2007, the Administrative Proceedings
Committee of the Commission handled cases involving thirty (30)
stockbroking firms for unauthorised/illegal sale of investors’
shares. The following cases require special mention because of
the huge amounts of money involved.
(a)
Chief Tony Ezenna and 8 ors vs Thomas Kingsley Securities Ltd
– N800 million. The CEO of the company is in prison and
his company and personal assets had to be sold to settle the petitioner,
Chief Ezenna.
(b) SEC vs Bonkolans Inv. Ltd. – N1 billion. Some of the
people involved here have escaped to foreign countries.
(c) Administrators of the Estate of Ajanaku vs Nigbel Securities
and ors – N800 million. It is also the same situation here,
the brokers have fled the country.
The
list of complaints standing against 46 stockbroking houses for
unauthorised/unlawful sale of client shares, including another
26 houses referred to the EFCC are hereby attached as Annex ‘C’.
All these infractions were perpetrated by fringe players. None
of the major Houses was involved.
It
is imperative also to consider the uniqueness of our environment
which warrants taking measures that will adequately protect our
market. While in other emerging market jurisdictions in South
America, Middle and Far East, incidences of malpractices and fraudulent
activities by brokers are minimal in view of the weight attached
to personal honour and integrity, the situation in our market
is different. This conclusion is supported by the content of Annex
C which is self explanatory.
(ii)
The new capital base approved by government affects all categories
of market operators including Issuing Houses, Trustees, Fund/Portfolio
Managers, Registrars etc. It is noteworthy that it is only some
stockbrokers that are complaining against it mainly because most
of these firms are not properly structured and lack good corporate
governance.
Consolidating
these firms into bigger entities will reduce incidences of abuse
and market misconduct as merging companies will ensure that proper
checks are put in place. The companies would also easily pool
together resources to provide the right technology and personnel
that the business requires to become internationally competitive.
The
present low level of capacity in the brokerage firms is largely
responsible for the lopsidedness towards transactions in equities
only. Despite efforts of the regulatory authorities, it has become
challenging over the years for new products such as derivatives
e.g. futures and options to be introduced in our market. A case
to further illustrate this point is the fact that for the past
14 years, the Commission could not succeed (despite several waivers
and incentives) to get the stockbrokers to establish an over-the-counter
market (OTC) for trading in unlisted securities. This is mainly
due to low level of capacity on their part. Well established and
capitalised firms will go extra mile into research and other aspects
of market development.
(iii)
An important and highly disturbing discovery was made by the Commission
following an analysis conducted on the 30 most active firms in
the secondary market for the period ended 30th September 2007.
It was revealed that most of the 30 firms had gearing ratios ranging
from 913% to 6,698%. This is an indication of their level of indebtedness
in comparison to their net capital. Most of these debts were provided
by banks. When the levels of the firms’ indebtedness are
compared with their respective shareholders’ funds, it is
evident that these brokerage firms have no asset cover for their
huge liabilities. The most disturbing finding of this analysis
is the fact that the firms who had gearing ratios between 1,220%
to 6,698% are also the most active in the secondary market. (By
the way none of them presently has a paid up capital of N500 million).
This
high gearing ratios negate Rule 176 of the SEC Rules and Regulations
which requires that “no broker or dealer shall permit his
aggregate indebtedness to exceed 200% of his net capital”.
This, among other reasons earlier given, informed the decision
to raise the minimum capital base from N70 million to N1 billion.
To further address the problem of high gearing, the Commission
is working on Rules on Margin Trading. It is believed that a combination
of the two will solve this problem. This also further defeats
the argument that stockbrokers are mere intermediaries and carry
no risk at all.
To
conclude this part of our submission, let me state Distinguished
Senators, that the essence of the recapitalisation exercise in
the capital market is to further strengthen the Nigerian financial
market in line with President Umar Yar’Adua’s vision
of making this economy one of the world top 20 by the year 2020.
The
role of an efficient and strong financial market in this journey
cannot be overemphasised. Already the banking, pensions and insurance
sectors have gone through this process. The positive impact of
these reforms is beginning to manifest. It is therefore logical
that the capital market which harbours most of the assets generated
by the successful banking, pension and insurance reforms is not
left as a weak link. The stock market must therefore remain efficient
and protected from systemic risks through well capitalised and
highly professional securities firms.
It
is also noteworthy that the petition does not represent the position
of the majority, as the Commission has received recapitalisation
plans from over 180 stockbroking firms. There are also indications
that some firms have already met the new minimum capital base
(33 as at December 2007) while many others have done private placements
aimed at shoring up their respective capital base.
Furthermore,
foreign firms have recently commenced entry into the market to
compete with the locals. It is therefore important that the recapitalisation
exercise should be implemented as approved by the Federal Government
since at the end of the exercise the nation’s economy will
be the greatest beneficiary.
B.
TRANSFER OF REGISTERS
It will be recalled that the Commission in the early 1990s had
allowed in-house Registrars to operate in the Nigerian capital
market. However consequent upon findings that in-house Registrars
were being used to perpetrate market abuses, the Commission issued
a directive that all in-house Registrars must be independent entities
and must be duly incorporated at the Corporate Affairs Commission
(CAC).
Unpleasant
developments in the market of recent have compelled the Commission
to conduct another examination of Registrars. This led to the
issuance of a circular in February 2008 directing all the “Registrars
who are subsidiaries or holding companies to public companies
not to manage the registers of their parent or subsidiary companies”.
This was informed by the following reasons:
1.
Incidents recently investigated have revealed that the Registrars
are being used as instruments of price manipulation by their parent
companies. As subsidiary to their parent companies and maintaining
their registers, the Registrars have easily succumbed to parent
company directive towards perpetration of price manipulation and
insider abuses. These usually happen through delays in the verification
of share certificates presented for transfer purposes by stockbrokers
on behalf of their clients, as well as the late release of certificates
after the conclusion of public offers. Also Bonus certificates
are deliberately delayed for most investors while some get theirs
in time and take advantage of the market price.
2.
Another problem identified was piece-meal despatch of dividend
warrants to investors after same has been declared. Dividends
are supposed to be sent to Registrars with adequate cash backing.
This however does not happen where some companies, especially
those with weak governance practices release these dividends piece
meal. The Registrars themselves admit such unwholesome practice
by the client companies (which also include parent companies)
and further confessed their helplessness in dealing with the situation.
The Commission had intervened in cases reported to it but had
refrained from taking drastic action because of the spill-over
effect on innocent investors and also the possible panic this
could cause in the system.
3.
Rule 193(2) states that “a Registrar which is a wholly owned
subsidiary of an issuer (in case of public offers) shall not act
as Registrar to the holding company’s public issue”.
The directive to transfer parent company Register will give effect
to this rule.
4. There is also the need to establish the independence of the
Registrars as corporate entities in terms of their operations
and finances. Most of these Registrars as subsidiary companies,
receive subventions from their parent companies. This erodes their
independence thus making them vulnerable to abnormal requests
of their parent companies.
5.
The abolition of the in-house Registrar could improve efficiency
and professionalism in service delivery among Registrars as there
will be healthy competition among them.
6.
The increasing quantum of activities and transactions in the capital
market requires professionally competent personnel that have independent
mind and capacity to bring into effect proactive and innovative
skills, which could minimize incidences of frauds in the discharge
of their responsibilities.
7.
Registrars are key in the sustenance of market efficiency, transparency
and liquidity. Therefore making them independent of their parent
companies could enable them carry out their responsibilities,
particularly, facilitating efficient transactions in the secondary
arm of the market more effectively.
8.
The Commission also feels that the current dispensation makes
the activities of Registrars to be concentrated in the Lagos area,
where only those investors in the area enjoy their services at
minimal cost. Investors that are living outside the Lagos area
are experiencing difficulties in verifying and transferring their
holdings. This has the implication of reducing the confidence
of investors.
Distinguished
Chairman and members of the Senate Committee on Capital Market,
the above measures were among many recently taken by the Commission
to enhance the efficiency of the Registrars’ functions in
the capital market. Others include:
-
Unclaimed dividends and certificates
- the e-dividend, e-bonus and e-allotment would effectively reduce
the current incidence of unclaimed dividends and certificates.
It will also effectively reduce fraudulent conversion of such
investors benefits
- e-allotment would eliminate delays associated with receipts
of certificates and enable faster conclusion of public offerings,
improve liquidity and quicken profit taking.
- the Commission is considering mandatory decentralization of
registrars offices. Through moral suasion, some of the major registrars
have already decentralized their operations
-
Huge
subscription levels stretching registrars infrastructure
- an industry committee on upgrading registrars infrastructure
to meet current and expected challenges was recently set-up
- deadline of December 2008 for the full automation of all processes
of registrars and full compatibility of their systems both among
themselves and with the CSCS. Most registrars are already well
automated.
- now mandatory for all receiving agents to make returns to registrars/issuing
houses in electronic and physical copies. This is to facilitate
the allotment process.
- Registrars/Issuers to henceforth periodically place advertisement
in newspapers to alert investors with unclaimed certificates and
how to claim them
- reputable courier companies to be engaged for dispatch of certificates
where physical addresses are used by investors
The
foregoing notwithstanding distinguished Senators, the Commission
had following strong appeals from Registrars and some public companies,
expanded the mandate of the industry Committee earlier inaugurated,
to examine in addition, the issues which led to the directive
and make necessary recommendations. This development puts in abeyance
the earlier deadline of April 1, 2008 for compliance. We therefore
await the report of the Committee on the way forward on the issue.
C. CONCLUSION
Distinguished Chairman and members, these recent steps taken by
the Securities and Exchange Commission are all aimed at being
proactive in stemming any risk associated with market volatility,
which if allowed could reverse the modest gains already made.
Our decisions are informed by findings following painstaking investigations
into the activities of stockbrokers and Registrars. These two
categories of operators are the soul of the secondary market.
They could make or mar any secondary market. Activities of some
of them have not only undermined market efficiency and transparency,
but also have the most disturbing tendency to cause systemic crisis.
The market capitalisation which is now over N14 trillion harbours
assets from banking, insurance and the pension sectors. Therefore
any problem in the stock market could also spread to the entire
financial market. This is what the Commission as the apex regulator
of the Nigerian capital market is all out to prevent. We earnestly
seek the encouragement and support of the Senate to enable the
Commission carry out its functions as enshrined in the Investments
and Securities Act.
It
is imperative to have a strong Regulator in line with IOSCO principles
and we urge the Senate to always intervene on the side of the
Regulator as we are ultimately held responsible for happenings
in the capital market. Nigeria is already an appendix A signatory.
One of the cardinal principles of IOSCO is that the Regulator
must be independent and free from interference in market regulation.
This is why it is mandated that the law setting the Commission
of every country should state that “it is the apex regulator”.
We know that our action may hurt or create difficulties to some
people but we strongly believe that Nigeria’s national interests
will be better served.
Furthermore,
if no action is taken to tackle these potentially frightening
emerging trends regarding insider activities in our market, as
a result of Registrars not being sufficiently independent, regrettable
occurrences may very soon be witnessed. The Commission wishes
to put this on record.
It
is therefore our sincere expectation that this Distinguished Committee
will look at these issues in larger public and Nigeria’s
national interest.
I
thank you for your attention.
Musa Al-Faki
Director-General
March 18, 2008
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