SEC Building


Eromosele Abiodun writes that the on-going recapitalisation efforts by stockbroking firms will help them become more professional, better capitalised and ensure sanity in the capital market.

Following the successful conclusion of the Central Bank of Nigeria (CBN)-induced recapitalisation exercise in the banking industry in 2005, the National Insurance Commission (NAICOM) directed that all insurance companies in the country must recapitalise between N2billion and N5 billion (depending on the underwriting business they are doing) by the end of 2006.

Apparently following the trend in the financial service sector, former Minister of Finance, Mrs. Nenadi Usman, before leaving office approved the Securities and Exchange Commission’s (SEC’s) directive to operators in the capital market to shore up their capital on or before December 31, 2008.

However, the global financial crisis that set in to wreck markets across the world.  But SEC under former Director-General, Musa Al-Faki, had argued then that in line with the recapitalisation of financial institutions -banks, insurance, mortgage and microfinance banks, stockbrokers should undergo mergers and acquisitions to reduce their number without necessarily leading to the sack of traders.

The move was criticised by the stock market community, which argued after all they were mere intermediaries, despite claims by the commission that most of them  were over-geared and sometimes misusing funds belonging to their clients.

The following year, then the President Goodluck Jonathan who was then the Vice-President, at a meeting with SEC, market operators and the Nigerian Stock Exchange (NSE), suspended the process, as a measure to stop falling share prices in the market which was partly linked to the recapitalisation exercise.

Before the suspension of the exercise, only one stock broking firm had N500 million capitalisation, the closest was N200 million and N100 million while a very good number of the rest operates with just N30 million.

In an interactive session with the media on resumption of office, Director-General of the SEC, Ms. Arunma Oteh, in 2010 restated the need to drastically prune the number of stockbrokerage firms as part of efforts to ensure that they become more professional and better capitalised.

Oteh stressed that the ultimate aim was  to ensure sanity in the nation's equities' market, and in line with her avowed zero tolerance stance for market infraction of any kind.
According to Oteh, the determination to reduce the number of players followed a recent study of other developing markets like Malaysia and South Africa whose market capitalisation are far higher than Nigeria.

“While Nigeria's 250 stockbrokerage firms trade only 320 securities listed on the NSE, Malaysia has 35 registered firms and South Africa has 60,” she noted.

The SEC boss explained further that consolidation of operators would ensure improved and more efficient market regulation, helping to give birth to the much-talked about world-class exchange.

NSE’s Action
Last year, the NSE suspended 65 stockbroking firms because of their refusal to meet the minimum capital base of N70 million required by the Securities and Exchange Commission (SEC).
While 61 of the suspended dealing member firms were suspended for inadequate shareholders fund in their 2009 audited accounts, five others were sanctioned for inadequate shareholders fund in their 2010 audited accounts.

Effort to Recapitalise
Meanwhile, there are indications that some stockbroking firms are in merger talks following their inability to meet the new capital base, some market operators believe that the option of merger is not the solution.

While the identities of stockbrokerages planning merger yet to be known, THISDAY checks revealed that acquisitions plans were being derailed by lack of liquidity in the market.

Out of the suspended 65 stockbroking firms, reports had it that 11 dealing member firms have met the requirements.
Much worse, there are moves now to raise the minimum capital requirement to N1.5 billion, a move that many have in the past resisted, despite the argument by the regulators that most of the firms are over-geared and their capital seriously impaired by the effects of the global economic meltdown.

Some of the firms are said to be currently operating with negative capital, a situation described as dangerous for the market and the financial system.

But  Chief Executive Officer of Trust Yield Securities Limited, Rasheed Yussuff, whose firm was not affected by the sanction, said merger  and acquisition talk  was not an immediate solution for raising capital base.

Yussuff, who is the immediate past chairman of the Association of Stockbroking Houses of Nigeria (ASHON), said: "Merger or acquisition will come on its own. But if you have 70 companies that have negative capital, even if you merge them into one, the totality will still be one negative capital. So, merger is a business option that is available and will naturally come when the situation arises. But it is not an immediate solution now; unless you find one healthy firm with billions of naira in capitalisation that can take over others."

Dimeji Akintayo, an equity analyst at Resource Cap, a portfolio management firm, said there must be a compelling reason for a company to acquire or merge with another firm, apart from the issue of capitalisation.

Need to Recapitalise
However, stockbrokers who spoke to THISDAY noted that merger and acquisition is the way forward as the effort will enhance the global competitiveness of the industry.
A Stockbroker and Executive Director, ESS Investments and Trust Limited, Mr. Idowu Ogedengbe, said mergers would result in the emergence of stronger players in terms of capital adequacy and capacity to absorb risks.

According to him, “Market liquidity is expected to rise as banks will be more inclined to open credit lines or grant overdraft facilities to the more and better capitalised players. The task of supervising about 300 stockbrokerage houses by both the NSE and SEC will be reduced as the industry consolidates.

“This will obviously promote a more transparent and well-managed industry. While Nigeria's 250 stockbrokerage firms trade only 320 securities listed on the NSE, Malaysia has 35 registered firms and South Africa has 60.”

On his part, Managing Director and Chief Executive Officer, Strategy & Arbitrage,  Mr. Tony Anonyai,  said the exercise was in furtherance of the total restructuring of the financial sector.

“It started with the banks moving from where they were to N25 billion minimum capital requirements. Insurance companies were soon to follow and expectedly it got to the turn of capital market operators. Before now, stockbrokers and dealers were to have a minimum of N70 million. Today, the requirement is that a broker dealer will need to have N1 billion. Across the board of various capital market operators there have also been increases in minimum capital requirement.”

He said the challenges of today’s market necessarily required a review to align with current realities.

“I don’t have problem with the increase in capital base, it’s like it is very essential. Now, there is an argument from some people who said that a broker is not in the business of trading for itself and as such what does he need so much money for,” he said.

He noted that as a professional, the broker facilitated between those who wanted to sell and those who wanted to buy, so he did really need money.

“That is a valid argument. Some other have said that if brokers now have as much as a billion naira, why would they spend so much time to manage clients who do not have as much value to him? It is most likely they will earn much more money in managing their own investments than spending looking at clients who do not have so much. The challenge with that is that it would not support the market development objectives of even the regulatory authorities,” he said.