Nigeria’s Securities and Exchange Commission (SEC) intends to build a world-class capital market that will drive transformation and growth. The director general Arunma Oteh explains the commission's strategy and the gains so far.
How is the SEC restoring investor confidence in the capital market?
The Commission considers investor confidence and market integrity absolute imperatives in the DNA of a world-class market. When regulation is weak, limited, obsolete or static, abuse is inevitable and market integrity will diminish.
We have taken a firm position to decisively address any form of impropriety, which could potentially undermine the market, irrespective of whose ox is goad. Following the Central Bank of Nigeria (CBN)-led banks audit in 2009, the Commission had launched investigations into possible cases of market abuse that were associated with the capital-raising exercises of banks. This has resulted in the Commission instituting legal proceedings against some 260 individuals and entities at the Investments and Securities Tribunal (IST).
The Commission is alleging that these individuals and entities were involved in market abuse, including insider dealing and share price manipulation. Our campaign against impropriety through enforcement actions are without fear or favour, and we are working to ensure that profits generated illegally are disgorged by erring institutions, while restitution is made to investors. Consequently, we have observed improved compliance with the securities law and our rules. Additionally, our migration to a risk-based supervision model positions us for a pre-emptive and not reactive approach to regulation. In line with the principles of 40 + 9 recommendations of the Financial Action Task Force (FATF) and Money Laundering Prohibition Act of 2004, the Commission drew up a framework and guidelines, which capital market operators are required to adopt to minimise, or indeed eliminate money laundering risks in the securities market.
What strategies has the Commission put in place to fast track Nigeria's transition to a world-class capital market?
The reform agenda of the Commission has also focused on the following areas:
Enhancing market rules and regulations: New rules have been introduced, while some existing rules were amended and others completely expunged to ensure alignment with international best practice. Some of the new rules were introduced to encourage the emergence of new products, strengthen the protection of customer assets, improve financial reporting and enhance governance of public companies. One such example is the margin guidelines. Previously absent, the margin guidelines are designed to curb excessive risk taking by operators.
Promoting Collective Investment Schemes: We are encouraging a more institutional market with retail participation, principally through Collective Investment Schemes. In view of increased interest in mutual funds, the Commission has intensified its examination and monitoring of fund managers and trustees of such schemes, and recently encouraged the establishment of an industry trade group for mutual fund managers.
Encouraging detailed disclosure: We revised the subsisting code of corporate governance in order to address weaknesses in the previous practices. The new Corporate Governance Code, which became effective in April 2011, is widely acclaimed to be comparable to internationally acceptable codes. It is designed to encourage transparency and also to promote a culture of good corporate governance.
Stakeholder Management: We are also overhauling the complaint management system in the market for better efficiency and alignment with international best practice. It is hoped that the new system will become effective by the beginning of 2012 and strengthen investor confidence as complaints are more speedily resolved. Currently, the bulk of complaints are handled by the Commission, which puts a lot of strain on our resources. As part of the reform of the market, the self-regulatory organisations (SRO) are expected to assume a frontline role in the resolution of investor complaints in the market. The Nigerian Stock Exchange (NSE) had on 28th March 2011 formally commissioned its Customer Service Contact Centre in response to this mandate.
What has the Commission done to strengthen the SROs, particularly the demutualisation of exchanges?
A stock exchange is a visible symbol of the capital market and must not only exhibit but be perceived by the investing public to exhibit the highest level of good governance, transparency, fairness and accountability. Investors obviously will not want to participate in a market, which lacks these attributes, nor would issuers.
Routine audits and investigations into the affairs of the NSE in 2010 revealed problems that could potentially derail the overall market transformation agenda. The Commission, in early August 2010 intervened in the NSE, replacing the leadership with an Interim Administration. After a rigorous selection process supported by the SEC, the new leadership team at the NSE has outlined a credible plan to build a stock market with US$1-trillion market capitalisation by 2016.
We are glad that the new leadership of the NSE has initiated steps to replace the trading platform with a more efficient and robust system that will position it to respond to future growth in the Nigerian capital markets.
Additionally, the Commission has been working assiduously to fast-track demutualisation of the exchange. Available data attests to the fact that the value of listed stock on an exchange appreciate significantly upon demutualisation. Amongst other things, demutualisation allows for more flexible governance structures; encourages greater investor participation in the management of the exchange, promotes operational efficiency, lends itself to increased resources for capital investments and most importantly, it permits access to global markets.
It is our opinion that demutualisation will position the NSE to be more competitive in the global landscape. Indeed, the board of the Commission on 22nd September 2011 inaugurated a technical committee to review the current structure and ownership of the NSE and make recommendations on the demutualisation exercise.
What progress has been made with developing other segments of the market that investors have continued to express interest in?
It is still our belief that the key measures by which the Nigerian capital market will be benchmarked against other world-class capital markets include market breadth and depth, liquidity, sector concentration, transaction and issuing costs, regulation, the speed and efficiency of clearing and settlement.
We have taken active steps to grow our product offering and to diversify financial products on offer in our market, which is otherwise dominated by equities. The areas of focus include Fixed Income Securitisation, Islamic Finance and Collective Investment Schemes as well as the promotion of a second-tier market to enable small and medium enterprises to raise finance.
In Nigeria, our fixed-income securities still have a much smaller share of the market than in many advanced economies. But our expectation is that it will be a much larger market than the equities market, because of the huge financing needs of the public sector in the areas of power and transportation infrastructure (rail, road and ports).
A resident advisor supported by the International Finance Corporation and some other donor agencies are helping us with the upgrading of our regulatory framework. Given the importance of the Fixed-Income market to both infrastructural and industrial development, and also as a key asset class for institutional investors such as insurance companies and pension funds, which now have funds in excess of $12-billion under management, the Commission is working assiduously with various stakeholders to develop a strong and virile bond market. The Commission is enhancing the framework for bond issuance and has introduced rules on book building and shelf registration. We have simplified disclosure rules for fixed income which are sold to institutional investors and high net worth individuals. These rules have shortened the average issuance timeline in the market and improved the price discovery process for securities. These and other measures have increased the appetite for bonds, and will complement the first class sovereign bond market that the federal government has nurtured over the last seven years. We expect more fixed income securities will be issued by corporate organisations and state governments in view of a recent revision in the tax regime. The adjustments in the taxation system have eliminated tax discrimination against state, municipal and corporate bonds.
Article provided by Financial Nigeria.