Eromosele Abiodun writes that there is need to expand the Nigerian capital market offerings to include fixed income securities, hedging instruments and other derivatives
The gradual recovery of the Nigerian stock market after the massive decline recorded in 2008 and 2009 is restoring hope in the market. For the financial services industry in general, this development is particularly heartwarming because a full recovery of the stock market holds the key to regaining lost gains and opening the door to economic growth and development for the country.
To establish the desired linkage for development of the larger economy, especially in building an entrepreneurial base, experts say the capital market must be in a position to provide the long-term capital required for sustainable development unlike the current situation where the money market is dominant and can only provide short-term capital.
As a crucial intermediary in capital formation, the capital market provides a large pool of investible funds from which entrepreneurs and investors can access long-term capital with which to execute development projects and lay the foundation for economic growth and diversification.
State of the Stock Market
However, as currently structured, the Nigerian capital market is predominantly equity driven, a situation that limits the number of asset classes in the market. This is what makes diversification fundamental by expanding the market offerings to include fixed income securities, hedging instruments, collective investment schemes and other derivatives.
Since her appointment as the Director General of the Securities and Exchange Commission (SEC), Ms. Arunma Oteh, has adopted a number of measures aimed at rescuing the capital market and sustain the gradual recovery.
In a chat with newsmen in Lagos recently, the SEC boss equated economic development with the growth of the capital market stressing that no effort will be spared in enhancing the depth, breadth and sophistication of the Nigerian capital market.
A world-class market, she stated, is one backed by strong investor confidence, and is characterised by adequate product offerings and well-organised processes, market integrity, sound regulatory regime, transparent disclosure and accountability, good corporate governance and a fair and efficient marketplace.
“Others are the existence of infrastructure of securities exchanges; demutualisation of the exchange, development of alternative trading markets and investor-education,” she said.
To ensure this, the SEC had in April last year unveiled a new regime comprising 23 new rules and eight amendments, which it said will help instill transparency and efficiency in the Nigerian capital market.
Speaking at the occasion, Oteh said the move had become imperative to effectively respond to the challenges emanating from capital market dynamism, which is defined by greater efficiency and international competiveness.
Part of the rules allows the commission to approve the appointment of executive directors of market operators to ensure that only “fit and proper persons run the affairs of market institutions.”
Also the validity of accounts submitted to SEC required that it should not be more than nine months for corporate bodies and not more than 12 months for government and supranational bodies, while the underwriting of issues in the market would no longer be mandatory, and where an issue was underwritten, the underwriting commitment by a single underwriter would not be more than three times its shareholders’ fund for equity offering and not more than four times for fixed income securities.
Another rule for listing of shares after allotment also stipulated that, “issuers are now required to list their securities not more than 30 days after allotment.”
“Investor confidence remains the most pivotal element in capital market vibrancy as the investible funds needed for productive investment are derived from the savings of investors. For this reason, SEC will assiduously pursue the protection of investors and the sustenance of confidence.
“Closely tied to confidence is market diversification, a quest that SEC is undertaking with single minded determination in order to create the desired economic linkage,” Oteh said.
The SEC director-general, further stated that both the second tier market and alternative investment market have been operationalised as part of initiatives to foster entrepreneurship through capital market financing. The window, she added, is also open for introduction of other products.
Market Operators Effort
Taking a cue from SEC’s admonition, some players in the sector have picked up the gauntlet and launched numerous initiatives to support the market’s rebound and to enhance its depth.
A most recent example was the recent workshop organised in Lagos by Stanbic IBTC Stockbrokers Limited, a member of the Stanbic IBTC Group, in collaboration with Bloomberg.
With more than 50 selected local institutional investors in attendance, Stanbic IBTC Stockbrokers Limited announced the formal introduction of the Standard Bank Africa Equity Access Products into Nigeria, a new investment window that will help the market leverage new unfolding investment opportunities in the marketplace.
Former Chief Executive Officer of Stanbic IBTC Bank Plc, Mr. Chris Newson, had while speaking at the event said that Stanbic IBTC will continue to spearhead efforts aimed at establishing world class capital market in Nigeria, and leverage the Standard Bank Group’s in-depth knowledge of emerging markets and understanding of investor behaviour to provide corporate clients with equity offerings customised to each client’s unique requirements.
“A key offshoot of this goal is to put in the public domain initiatives and strategies that could help all stakeholders, especially investors, to be better informed about developments in both the local and global economies, which will help them in making wise decisions,” he stated.
He added: “As part of Africa’s biggest banking group, the emphasis of these sessions is such that they provide useful insights on how to diversify investment portfolios amongst different asset classes, and move away gradually from the narrow focus on plain vanilla equities and fixed income investments.
“Access products are instruments that provide access to investment opportunities on equity markets in the form of exchange traded funds, stock baskets, certificates, warrants and other instruments. They have essentially evolved in response to the growing demand for highly sophisticated equity derivatives and financial productstailored to meet the specific financing needs of corporate, institutional and hedge fund investors, keen to access new markets, leverage opportunities and maximise their returns.
“They provide real-time market data from trading in instruments on equities, equity rights, bonus subscriptions, interim shares, convertibles, warrants and mutual funds, among others.”
The products, he said, were designed to provide the same economic value as an investment in the underlying equities, in an easy-to-trade package.
The underlying investment, Newson said, could be an index, stock or a basket, which is traded in United States Dollars or any other internally convertible currency.
“In essence, access products are vehicles through which the investor can transfer the economic benefit of holding the underlying securities (single stock or index) to clients, without the clients actually holding the physical underlying securities themselves. Access products also help to avoid the complexities and associated costs of dealing in many emerging markets directly. The target investors in access products are institutional clients like the pension funds, asset management companies and banks.
“Overall, they help investors to predict the future price direction of a security looking at its past patterns. Proper analyses of the indicators help traders to gain knowledge of the equities from which future development could be forecast,” he said.
NSE’s Diversification Plan
In a chat with THISDAY, an official of the Nigerian Stock Exchange (NSE) who do not want his name mentioned, observed that the seeming dearth of suitable investment products and other deficiencies prompted the exchange to conduct research on other jurisdictions as well as meetings with both international and domestic investors to determine what type of products would be suitable in Nigeria, and then set out trying to create the appropriate environment for the introduction of such products in the country.
He said: “Part of the outcomes were a collaboration with the SEC to create new market frameworks, including rules and regulations for the Real Estate Investment Trusts, mutual funds, new NSE Indices, Exchange Traded Funds (ETFs), fixed income products, and other derivatives.”
The exchange, he added, had since re-launched an alternative platform christened Alternative Securities Market (ASeM), which replaced the comatose secondary market adding that by so doing, the exchange had provided a real alternative to the equity dominated main board of the NSE.
He said the key objective of the ASeM market was to create a platform, which was more balanced in its regulatory specifications and provided easier accessibility to raising capital to both large as well as medium sized enterprises.