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Introduction
As you may be aware, the Securities and Exchange Commission (SEC)
is the apex regulatory body of the Nigerian Capital Market. It
is empowered by the Investments and Securities Act (ISA) No. 45
of 1999 to regulate and develop the market. One of such regulatory
activities of the Commission is the registration of Collective
Investment Schemes.
In
presenting this paper, I shall first define Collective Investment
Schemes and identify the various types of schemes that constitute
Collective Investments and how they differ from each other. This
will be followed by the process of mobilizing funds from the grassroot
through the schemes, and how such schemes can be of benefit to
you as an individual and your community as a whole.
Definition
of Collective Investment Schemes
Section 123(1) a – c of the Commission’s enabling
law, the Investments and Securities Act (ISA) No.45 of 1999 defines
Collective Investment schemes as “any arrangement in which
participants pool their contributions for the purpose of sharing
the profits or income arising from the management of their money
or property solely from the effort of a third party.”
In
other words, Collective Investment Schemes are schemes into which
members contribute their money into a pool and managed by professional
Fund Managers who generate and share the profits arising from
investing and managing such funds and property for the fund holders,
at a minimal fee
There
are several types of Collective Investment Schemes which include:
-Unit Trusts
-Specialized Funds
-Real Estate (Mortgage-Backed Securities)
-Community Savings
-Pension Funds
-Venture Capital
Unit
Trust – What is a Unit trust Scheme?
Unit Trust is a fund, into which sums of monies from individual
investors and even corporate entities are collected to form a
“pool” for the purpose of investing in stocks and
shares in the interest of the contributors called Unit holders
by professional Fund Managers. The Unit holders by investing in
Unit Trust Scheme enjoy the benefits of diversification and professional
management of their funds at low cost. Unit holders can apply
for the redemption of their units and the managers are bound to
pay the investor the net asset value of the outstanding units
unlike sale of shares. There is no Commission or fee charged on
the purchase or sale of units at the subsisting offer/bid price.
Unit
Trusts are so called because the total fund is divided into units
of exactly equal monetary value e.g. if one unit is N1.00, any
person investing N100 will get 100 units and if you invest N1,000
you will equally get 1000 units etc. Unit Trust may be looked
at as an advanced form of “Esusu”’ which is
popular among low-income earners both in the Public and Private
Sectors of the Nigerian economy.
The
fund when pooled together is invested in high rated quoted securities
on behalf of the subscribers by the management company. The fund
is constituted by a Trust Deed, which governs the operations of
the scheme. The essential characteristics of the Trust deed are
that it lays down the rights and responsibilities of all parties
the investment outlets and all other relevant information. A prospectus
is also put in place for the offer. This summarizes the terms
of the offer while disclosing material facts in the document,
to enable investors make informed decision on the offer. The manager
manages the funds in accordance with the provisions of the Trust
Deed, while the Trustees protect the interest of the unit holders,
subject to the Rules and Regulations of the Commission.
Duties
of the Fund Manager and Trustees
Briefly,
the functions of the Fund Managers and Trustees to the funds are
as follows:
The
Investment and Securities Act requires the Fund Manager to keep
proper books of account and prepare annual financial statements
which give a true and fair view of the state of affairs of the
Unit Trust Scheme during the year covered by the financial statements.
The
Fund Manager is responsible for keeping proper accounting records,
which disclose with reasonable accuracy, at any point in time,
the financial position of the Fund and enables the Fund Manager
to ensure that the financial statements comply with the Companies
and Allied Matters Act, CAP C20 LFN 2004, the Trustees Investment
Act, CAP T22 LFN 2004, The Investments and Securities Act CAP
I24 LFN 2004, the provisions of the Trust Deed, together with
the rules and regulations set out by the regulatory bodies established
pursuant to the legislation referred to within this paragraph.
The
Fund Manager is also responsible for the safeguarding of the assets
of the Fund and therefore for taking any reasonable steps for
the prevention and detection of fraud and other irregularities.
The
responsibilities of the Trustees as provided by Securities and
Exchange Commission’s rules made pursuant to the Investments
and Securities Act, are as stated below:
Monitoring of the activities of the Fund Manager on behalf of
and in the interest of unitholders.
Maintaining custody of the funds and the documents relating to
the investments by the scheme or fund.
Ascertaining the profitability rationale for the investment decision
making of the Fund Manager.
Ascertaining that the monthly and other periodic returns/reports
relating to the Scheme or Fund are sent by the Fund Manager to
the Commission.
There are two broad types of Unit Trust Schemes viz;
i. Open-ended: This is a continuous offering of new issues and
redemption after the initial public offerings, at a price arrived
at on the existing Net Asset.
ii.
Close-ended: The total amount and units of the Fund established
is of fixed capitalization. There is no additional issue or redemption.
The Fund may however, be listed on the Stock Exchange or Over
the Counter Market for trading and its price will be determined
by the market forces of supply and demand.
iii.
Specialized funds are so called because they are targeted at specific
sectors of the economy, e.g. Energy Sector, Agricultural Sector,
etc.
iv.
Real Estate Investment Trusts
Real Estate Investment Trust (REITs) is a real estate company
that offers common shares to the public. REITs can be structured
as a trust or a company and may be listed on the Stock Exchange.
The primary business of a REITs is managing a group of income
generating properties e.g. shopping malls, residential or commercial
houses, business centres, hotels etc and must distribute most
of its profit as dividend, hence the – pass through feature.
Pension
Fund
Simply defined, a Pension Scheme is a planned programme, which
enables corporate organizations to acquire and set aside Funds
to cater for the well being of their staff after retirement from
active service. In other words, it is a retirement fund pooled
from both employers and employees to cater for retired staff.
As
you may be aware, a new Pensions Reform Act 2004 came into effect
on 25th June 2004. The Act, among other things, established a
contributory Pension Scheme for employees in the Public and Private
Sectors. The Act also established a body to be known as the National
Pensions Commission with powers to regulate supervise and ensure
the effective administration of Pension matters in Nigeria.
Community
Savings Scheme
This is a fund contributed by a group of people within a community.
The funds are pooled together by a Collector or Manager from different
contributors to the scheme on a regular basis. The Collector or
Manager returns the collections to the participants at the end
of an agreed period after charging his fees and paying interest
to the participants. Summarily therefore, Community Savings Scheme
is an aspect of Collective Investment, though local and informal
but certainly an economic venture of trading on funds.
Community
Saving Schemes have different names in various parts of this country.
They go by such names as “Esusu”, “Adashe”,
Ajo, Bam etc. Savings were and are still mobilized in most rural
and urban communities through these investment business activities
which also include Cooperatives, Community Development Associations
and Welfare Unions. The common feature of these schemes is that
they arise from contributions and are managed by a third party.
These
activities have led to the pooling of capital and the conversion
of such capital into investments thus encouraging economic and
social activities as well as other forms of infra-structural development.
Community
Savings Scheme are usually open-ended which means there is free
entry and exit throughout the life span of the scheme, which may
or may not be fixed. If the life span of the scheme is fixed,
at maturity, the total sum contributed (pooled funds), net of
fees charged is returned to the contributors. In addition, profits
or income generated net of management expenses are shared in cash
or kind, based on the level of one’s contributions.
It is also important to mention that there are typically two major
types of Community Savings Schemes in our country.
Corporate Community Savings Schemes
These types of Community Savings Schemes are incorporated companies
and registered with the Corporate Affairs Commission..
Local/Community
Savings Schemes
These types of schemes are not incorporated, but in most cases
are recognized by either their Local Government Councils, Village
or Ward Head.
However,
what qualifies both of these schemes to be Community Saving Schemes
is the fact that the funds are pooled through regular periodic
contributions by members.
In
line with the provision of ISA, the Commission does not charge
fees for the registration of Community Savings Schemes; but collects
and collates the data solely for statistical purpose. As far back
as the economic and social life of man can be traced, this sector
of the economy has existed and without statistics and regulation
by Government.
The
primary goal of any Community Savings is the establishment of
any of the following existence- dependent businesses such as Transport
(acquisition of taxis, buses etc) services, Corner store/shop,
street side food, Beauty Salon, Tailoring, Farming (inputs and
tools), Construction, Carpentry, Trading, etc.
Benefits
Benefits
as a Collector
Enhances government recognition of your business
Offers free investment and financial advice
The scheme can participate in Capital Market Operations in Nigeria
Based on the above, it helps to boost the confidence people have
on your business.
Benefits
as a Saver
Your savings will be secured
You will be assisted in locating your collector should the operator
run away or abscond
You will be exposed to more collectors
Savings culture/habit will be developed
Venture
Capital – What is Venture Capital?
The Investment and Securities Act (ISA) No. 45 of 1999, on the
other hand, provided “for registration and regulation of
Venture Capital Funds” to finance venture projects and mandate
SEC to register and regulate the funds and the activities of Venture
Capital Companies.
Venture Capital Fund is a form of collective Investment Scheme.
It has as many definitions as there are writers on it, but according
to Ross, Westerfield and Jaffe, (4th Edition Corporate Finance),
it is “an early-stage financing of new and young Companies
seeking to grow rapidly”. Specifically, Venture Capital
is that money contributed by individuals, groups, organizations,
corporate bodies, etc with the intention that it would ultimately
be invested in new and young companies in form of equities or
long-term loans in order to nurture them to become big and profitable
companies. Thereafter, the financiers exit the companies through
an agreed method which could be an Initial Public Offering (IPO),
Management Buy Out (MBO), private placement, etc.
For
a Venture Capital company to exist there must be;
i) Risk-Takers, who are prepared to take up shares in Venture
Capital Companies and wait for long-term gains rather than short-term
profits.
ii)
There must be a Venture Capital Company to collect this money
from the Risk-Takers and offer them shares in return with a promise
for high returns in future.
iii) There must be viable Business Venture whether new or young
into which the Venture Capital Company could invest part of its
equity;
iv) There must be an Entrepreneur with good business acumen and
expertise and a viable business undertaking, yearning for commercial
development.
Capital
Trade Point (CTP)
A Capital Trade Point is defined in section 264 of the ISA 1999
as an Exchange registered by Commission pursuant to the Act, which
constitutes, maintains or provides facilities (market place) that
brings together purchases and sellers of Securities.
In
other words, it is a mini stock exchange, which is expected to
foster capital formation and also provide secondary facilities
for trading in medium to long-term financial instruments. In essence,
it is a market place where capital may be raised and financial
instruments traded.
One
of the major CTP’s intention is to attract grass-root companies
to utilize the capital market to raise capital at relatively low
cost and through a more simplified process.
It
is also expected to provide entrepreneurs in their localities
with start-up or expansion capital and build up investment culture
at the grass-root level. At the moment, no Capital Trade Point
has been established in Nigeria.
Why
SEC Regulates Collective Investment Schemes
Sections 8 (g) (q) and 29 (4) of the Investments and Securities
Act specifically empowered the Commission to regulate the workings
of Venture Capital and Collective Investment Schemes including
Mutual Funds. Investors’ protection remains the primary
focus of market regulation.
Pursuant
to this mandate and in order to foster the development of Collective
Investment business in Nigeria, the Commission has since played
a very important role in this regard, by putting in place a set
of rules and guidelines for Collective Investment Schemes, among
others. The registration requirements for these schemes are listed
in the SEC Rules and Regulations.
Regulation
of Collective Investment Schemes is necessary to provide protection
for owners/beneficiaries of the fund as well as to ensure the
safety and soundness of the market. Registration is considered
the most potent instrument of investor protection as it provides
the regulatory authority with extensive information to assess
critically the fitness and propriety of all institutions and persons
proposing to engage in any aspect of capital market activities.
In
addition to registration requirement, the market is also regulated
through the following means:
Inspection – Onsite and Offsite
Investigation
Enforcement
Continuous Monitoring of the Schemes
Although
no legal framework and regulatory system can provide full proof
mechanism against fraudulent practices, it is the duty of the
regulatory authorities to be vigilant in monitoring the conduct
of all parties managing public funds so as to promptly detect
practices which are capable of jeopardizing the stability of the
market.
Process
of Mobilizing Funds from the Grassroot
The objective of Collective Investment Schemes is to provide a
means of pooling investible funds together from small savers at
the grassroot in the society and the general public. In other
words, participation in Collective Investment Scheme is open to
both small and large savers.
When
a Unit Trust Scheme is authorized and approved by the Commission,
the Fund Manager then offers the units to the public. Most first
generation Unit Trust Schemes target the grassroot investors i.e.
the small and medium investors who lack the quantum of savings
to invest substantially in equities, but are ready to take the
opportunity to channel their savings into unified common pool
by subscribing to the Unit Trust Schemes. This trend however changed
as high networth individuals and even corporate entities now subscribe
to such schemes.
At the end of the offer, the units are allotted and certificates
issued to unit holders according to their level of commitment.
The Fund Manager thereafter invests the pooled funds in highly
rated investments that guarantee good returns on investment and
assure minimum risks. At the end of the year, the income generated
by the fund is distributed as dividend to unitholders after deducting
operational expenses.
In
the case of Venture Capital, a venture capital company can grant
long term loans or equity to new or young SMEs seeking to grow
rapidly. The company will be nurtured to become big and profitable,
after which the venture capital company may exit by selling its
shares in the company and benefiting from the capital gains.
The
nurtured company could decide to be listed on the Capital Trade
Point and will issue shares to the locality. The shares will be
bought by the residents in the area thereby becoming co-owners
of the Company. The benefits to the grassroot investors will be
in the form of dividends and to the community, increased employment
opportunities and more disposable income which will be used to
purchase goods and services and thereafter contribute to the economic
growth in the area.
Generally,
Unit Trusts, Community Savings and Investment Trusts serve as
sources of funds to public companies whilst at the same time affords
smaller investors the opportunity to participate and benefit from
the Capital Market, thus promoting development of the Capital
Market at the grassroot.
In
the case of Pension Funds, the fund is contributed by either the
workers or their employers or both, on a regular basis for the
purpose of making regular payments to retired officials. The pooled
funds are then invested for maximum returns thereby guaranteeing
income to employees upon retirement.
There
is no gain-saying that Collective Investment Funds holds substantial
investible capital that are pooled from a large number of investors.
A good proportion of the funds so held are usually invested in
capital market instruments such as debt and equity. Investors
through such schemes participate in and indeed foster the growth
and development of the capital market. By investing in capital
market instruments, particularly new issues of corporate entities
and government bonds, Collective Investment funds would have helped
in promoting capital formation and fostering economic development.
The
following challenges are presently affecting the development of
Collective Investment Schemes:
i.
Low level of awareness
We have discovered that there is need to further educate the populace
on the operations and benefits of investing in Collective Investment
Schemes and the existence of market facilities for purchase and
sale of equities and debts because not much is known in these
areas, particularly at the grassroot level. Even the clear role
of SEC in regulating Collective Investment Schemes are not well
understood by the operators.
ii.
Lack of understanding of the Operations of the Unit Trust/Venture
Capital
The Central Bank of Nigeria’s guidelines stated that 10%
of bank’s profit before tax should be set aside to finance
Small and Medium Scale Enterprises in the form of equity or loan,
many banks have been reluctant to form subsidiaries with full
authority to operate as Venture Capital Managers.
iii. Lack of Incentives
In the developed countries like United States of America, various
types of tax incentives have been introduced to effectively attract
Venture Capital Companies into operation. It is my view that in
a developing country like Nigeria where Venture Capital is just
evolving, the government should create conducive environment for
Venture Capital development. It would interest you to know that
the mini, personal and apple computers and some multinational
companies of today were all promoted by Venture Capital Managers
and their sources of fund were from Pension Funds, insurance companies,
banks and high networth individuals.
Prospects
of Collective Investment Schemes
The first Unit Trust Scheme was registered in 1991 and as at date,
34 Unit Trust Schemes, including one Real Estate Investment Trust
have been registered and authorized by the Commission with total
Net Asset value of 59.5 billion.
Conclusion
Ladies and Gentlemen, the Commission is a partner in progress
in the development of the Capital Market while it seeks to provide
protection for investors.
From
our discussions so far, it is clear that Collective Investment
Schemes are supposed to boost the Capital Market by injecting
liquidity into the market. It also ensures more efficient mobilization
of savings to fund corporate growth and economic expansion. It
is pertinent to state here that the schemes have been utilized
globally to foster economic growth and development and Nigeria
should not be different.
The
efforts to promote the industry must come from all quarters. A
supportive operating environment provided by the regulatory authorities
is critical to the success of the schemes and the Commission is
committed to its regulatory and developmental roles in this regard.
There
is no doubt that the Investors, Capital Market and economy stands
to benefit if Collective Investment Schemes are well nurtured
and supported in the country.
S.
O. Braimah
Assistant Director, SEC
October,
2007 |
