SEC’s Unending Quest to Recapitalise Stock Market Operators

12 Jun 2013

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 Trading session in NSE

Eromosele Abiodun writes that the plan by the Securities and Exchange Commission (SEC) to introduce a new minimum capital base for operators in the  capital market may not materialise as every effort to do so since 2004 has not yielded fruits

In December 1999, the whole world woke up to the news that by the end of that year, the computer would no longer recognise figures below 2000. Meaning that computers had to be Y2K compliant or face system crash.

Government, institutions and business the world over spent billions of dollars to avoid “the millennium bug”, the rest is now history.
A situation akin to that happened in Nigeria five years after, when the then Central Bank of Nigeria (CBN), Prof. Chukwuma Soludo, announced at a meeting with chief executive officers (CEOs) of banks that by the end of December 1995, banks must raise their capital base to N25 billion or would no longer be allowed to operate in Nigeria. At the end of the exercise, the number of banks in the country reduced from 89 to 25 and about N500 billion was raised from the capital market.

Following the successful conclusion of the regulatory induced recapitalisation exercise in the banking industry, the National Insurance Commission (NAICOM), directed that all insurance companies in Nigeria must recapitalise to the tune of N5 billion and N2 billion (depending on the underwriting business they do), by the end of 2006.

Apparently following the trend in the financial service sector, then Minister of Finance, Mrs. Nenadi Usman, before leaving office, approved the Securities and Exchange Commission (SEC) directive that all operators in the capital market must shore up their capital on or before December 31, 2008. It was not meant to be as the global financial crisis shook economies around the world and exchange the world over crashed. In a bid to find a solution to the free fall of stock prices in the Nigerian equities market, the then Vice President, Goodluck Jonathan at a meeting with SEC, market operators and the Nigerian Stock Exchange (NSE), suspended the process, as a measure to stop falling share prices. Other measures included circuit breaker on the movement of share prices, share buy-back, among others.

Mission Impossible
While the circuit breaker has been removed and other measures suspended, nothing was done about the recapitalisation process.
As at today, it is not clear how many stockbroking firms were complying with the SEC directive before it was suspended. But if the NSE ‘Fact Book’ is anything to go by, only one stock broking firm have N500 million, the closest is N200 million and N100 million while a very good number of others operates with as little as N30 million.

But THISDAY gathered that broking firms were making effort through merger talks, private placement while some were talking with foreign investors. Conversely, others were busy lobbying members of Senate and House of Representatives committees on capital market.

The chairman senate committee on capital market was said to be rooting for category one and two stockbroking firms with N500 million and N1 billion respectively. 

A New Directive
Meanwhile, the SEC is set to revive the recapitalisation plan by announcing recently that it was working out a new capital base for market operators. THISDAY had exclusively reported last week that the SEC was planning to introduce a new capital base for operators in the nation’s capital market. It was gathered that given the transformation in the capital market with increased volume of transactions, new financial products, increase in number of retail investors, and the changing  nature of securities  business  and technology, SEC  has decided to raise the capital requirements for operators.

A source, who is privy to the plan told THISDAY: “The commission is trying to be proactive by preparing for unforeseen circumstance because market volatility is still a constant feature in the market. This is why SEC is planning the enhancement of market operators. Operators in the market face regulatory risk, operational risk, credit risk, infrastructural/technological risk among others. And the current capital base, which has been in operation for over 10 years will not be adequate to cover these risks.”

Hence, SEC has proposed three different categories of risk-based capitalisation that would applied in the market. They include: regulatory capital, economic capital and risk capital.

Already, SEC has last month written to operators for their assessment of the need for a new minimum capital requirement across board-the letter was signed by the Executive Commissioner, Operations, Mounir Gwarzo.

“I can confirm to you that a letter was really sent to us (market operators) and we are treating it. It is a good development that SEC has continued to engage stakeholders before introducing new rules and regulations in the market. This will lead to a harmony and assist in sustaining the increasing investor confidence and market recovery,” a senior stockbroker said.

Explaining the three different categories of capital, the broker said SEC described regulatory capital as the mandatory capital the regulators require to be maintained.

He added that risk capital, which is primarily determined by the volume of transactions, represented an amount of capital based on an assessment of risks that a company should hold to protect customers against adverse developments.

“On the other hand, economic capital is the amount of risk capital assessed on a realistic basis, which a firm requires to cover the risk that it is running or collecting as going concern such as market risk, credit risk and operational risk. This capital also covers governance, technology and infrastructure requirement of a firm. Better put, it is the amount of money, which is needed to secure survival in a worst case scenario,” the broker said.

Brokers and FSS 2020
While justifying the need for market operators to recapitalise, former Director-General of SEC, Mr. Musa Al-Faki, said the decision was in line with the commitment of the federal government at ensuring that Nigeria becomes an investment destination of choice by the year 2020, as encapsulated in the Financial System Strategy (FSS) 2020.

This, he said, has led to the formulation and implementation of a series of reform programmes, which are expected to constitute the platform upon which the FSS 2020 will be launched.

“Some of the programmes have been carried out in the banking and insurance sectors, and are currently ongoing in the capital market. As will be expected, this new drive poses new challenges not only to the regulators, but to all stakeholders including the stockbrokers. We at SEC consider the institute and its members worthy partners in the task of developing the market and in the collective efforts at achieving the economic objectives of the present administration,” he said.

He added that the first step in ensuring a seamless transition to the FSS framework would be to undertake a restructuring exercise that would not only internationalise the local market, but would further empower the regulators and strengthen the operators with a competitive advantage on the global capital market.

“This conviction informed the recent review of the investments and Securities Act (ISA) No. 45 of 1999, and the current recapitalisation exercise in the capital market. Other steps currently being taken by the commission in this regard include the promotion of e-transaction introduction of new products in the market, and the convergence of the local GAAP with International Financial Reporting Standards (IFRS). I am happy to announce that the ISA Bill has been assented to by the President and is currently in the process of being gazetted. It is also our determination to ensure that the recapitalisation exercise is implemented as approved by the federal government. For the avoidance of doubt, market participants still have up till December 2008 to comply. Let me at this juncture commend you for your continued contributions and also note that the commission counts on your support in these initiatives aimed at growing the capital market,” he said.

Foreign Investible Funds
The commission, he stressed, would not relent in its resolve to promote local investments, enhance the inflow of the much desired foreign investible funds and boost the international competitiveness of our market.

“Given the increased turnover in the market, we shall continue to seek ways to further bring down transaction costs and continuously work towards ensuring an investor friendly tax regime in the capital market. In the midst of all these however, we shall spare no effort to maintain the zero tolerance stance on unwholesome practices in the market.

The role of the stockbroker in the capital market by the year 2020 need not be substantially different from what it is today. The stockbroker will continue to owe a duty in his intermediately activities, to uphold the ethics of transparency and compliance with all relevant laws, rules and regulations, at all times. It is indisputable that the market has grown tremendously over the last few years, and would have by the year 2020, grown in multiples of what currently obtains. However, it is imperative that professional ethics and values do not fall in the face of a growing and expanding market,” he stressed.

He added: “In fact, the resultant increased depth and competition should rather call for a more standardised and transparent market. It is my hope that as the market gets bigger and more sophisticated, the stockbroker will continue to be guided by the established standards and ethics of the profession. Let me observe however that as a body of professionals, you have already made your mark on these values. I therefore urge you to continue.”

Al-Faki stated that besides upholding the ethics of the profession, the relevance of a stockbroker by the year 2020 will be judged among others, on the basis of the level of capacity, both in terms of financial strength and the professional knowhow that must have been built as may be required by the size, depth and sophistication of the unfolding market.

“The common, as you are aware, has always been at the vanguard of collaborating with other stakeholders in our resolve to provide the market with the requisite capacity and more importantly, to address this imminent challenge. I therefore call on the leadership of the institute to come up with relevant topical issues on which the common will be ready to collaborate in building the necessary capacity. In the area of financial and structural capacity, the current trend among others, in developed markets is through direct fund injection or by way of mergers, takeovers and acquisitions.

These forms of re-engineering will crystallise into better managed institutions with better prospects, and continuously strengthen the stockbroker to acquire the necessary resources to offer efficient and reliable services even beyond the year 2020. It will also enable the stockbroker to acquire requisite infrastructure maintain quality human resources, fund research and training, and explore creative initiatives in product development and services,” said Al-Faki.

Brokers Reaction
Meanwhile, stockbrokers, who spoke to THISDAY on condition of anonymity were unanimous in their resolve that recapitalisation was a distraction.
Some stockbrokers told THISDAY that they (stockbrokers) as middlemen did not require so much capital to operate..
But a frontline stockbroker and Managing Director and Chief Executive Officer, Strategy & Arbitrage, a fellow of both Institute of Chartered Accountants and Chartered Institute of Taxation of Nigeria, Tony Anonyai, shared a contrary view.

According to him, capital market operators’ recapitalisation is 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.

“To me, the challenges of today market necessarily require adjustments from where we were to an upward review. I don’t have problem with the likely increase in capital base, 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 why does he need so much money.

“As a professional, the broker facilitates the transaction  between those who want to sell and those who want to buy, so he does really need money. That is a valid argument. Some other have said that if brokers now have as much as N1 billion, 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 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.

He added: “But a counter-argument is that the increase in capital base would enable brokers improve on our infrastructure that we need to manage your clients. If you take information technology (IT) infrastructure for example, so much money is needed to fund it in order to be adequately positioned for the kind of business we are seeing in this market. So even if you are a broker, it is not likely that you can sufficiently address the challenges of IT infrastructure, maintaining good personnel and all of the overheads that are required.”

Brokers, he explained, do not just manage clients’ accounts, most of them do some dealing transactions.
He said: “A dealer needs very well over N1 billion to deal. Now the other side of it is that, if you are a dealer, you have opportunities that you can readily take advantage of so you don’t need to fund yourself fully, you can access credit from banks and increase your capacity as market opportunities present themselves.  But overall for me, I am in support of the need for an upward review. I think for those who are dealers, the minimum of N1 billion  is the minimum to really consider. I don’t think anything below that would support your daily functions considering the risks that are inherent in the dealings.”

He stressed that brokers as well as dealers need to increase the quality of services they render to their clients stressing that service delivery could not be done without the supporting IT infrastructure and good personnel.
Anonyai stated that stockbroking firms that were very well-managed would no doubt be able to raise their capital to N1 billion.

One-man Business Brokers
“Those that are currently being run as one-man businesses might have some challenges. The challenge would be on the part of the owner-manager to make up his mind for a change of attitude and the way he runs the business.  He has to understand that it is not going to continue to be a one-man business anymore. He has to invite investors who would bring value over and above their capital contributions, to improve on the quality of business corporate governance, improve on the client network that would generate more businesses.

“The value that would readily accrue from merger proposition would not just be in terms of meeting the naira value of the minimum capital requirement; it will also cover the human capital because in this sector human capital remains a critical challenge. I see two, three or four firms coming together, bring together their competencies as overriding consideration rather than just the need to meet minimum capital requirement. So, on those that would make it in terms of number, I can’t speculate now in terms of how many would survive on individual basis but I imagine that definitely there would be some merger propositions along the line,” he added.

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