NSE and Investors Protection


Goddy Egene writes on efforts by the Nigerian Stock Exchange to protect investors and make the nation’s capital market more attractive

One of the major reasons investors patronisethe stock market is the protection of their investments. Once investors feel that their investments are safe, they remain in the market and also increase their participation.

The current low patronage of the Nigerian stock market is partly attributed to the losses they suffered during the 2008 and 2009 market downturn. Many of them believe the protection they got from regulators in the past was not enough and are therefore reluctant to return to the market.

However, current market regulators have intensified efforts to protect investors in order to increase their participation in the market.

MoU with EFFC
For instance, the Nigerian Stock Exchange (NSE) signed a Memorandum of Understanding (MoU) in 2013 with the Economic and Financial Crimes Commission (EFCC). This MoU was aimed at tackling market infractions and curbing market abuses because of its zero-tolerance stance on infractions by dealing member firms and listed companies. This partnership has successfully opened direct lines of communication and information sharing with the EFCC for reporting and investigation of incidents, leading to a more proactive law enforcement and swift recovery of stolen securities.

The initiative recently led to the arrest of three individuals suspected of forgery, impersonation and fraudulent sale of shares. No doubt the exchange has done well in putting in place necessary institutions and policies to protect investors. Stakeholders believe what is needed now is the encouragement and support of all market operators to advance the course of the market for the good of the nation’s economic advancement as well as creating wealth for those who form the habit of saving and investing.

The Longman Business English Dictionary defined investors’ protection as “Actions to encourage honest advertising of financial products, and to prevent fraud to make sure that investors do not lose money if their investments default.

However, the extent to which an investor can be protected is defined by the commercial laws and the enforcement of such laws such that investors are protected from expropriation by company insiders”.
In the capital market, investor protection is usually measured by indicators that quantify explicit protections awarded to shareholders and creditors by corporate, bankruptcy, and re-organisation laws, as well as the quality of law enforcement. Examples of such explicit protections are those that impact shareholders’ ability to vote down directors, including whether to allow shareholders to vote by proxy.

Analysts believe that difference in investor protection across countries are substantial and are responsible for difference in the development of financial markets and ultimately for differences in economic development. In Nigeria, the Investment and Securities Act (ISA) 2007 provides the ways and manners investors are protected.
In line with Part XIV of the ISA 2007, the NSE has established an Investors’ Protection Fund and also appointed a Board of Trustees to administer it. The purpose of the fund is to compensate investors with genuine claims of pecuniary loss against dealing member firms resulting from these key areas – the insolvency, bankruptcy or negligence of a dealing member firm of the exchange; or defalcation committed by a dealing member firm or any of its directors, officers, employees or representatives in relation to securities, money or any property entrusted to, or received or deemed received by the dealing member firm in the course of its business as a dealing member firm.

Other initiative to protect investors
Apart from signing the MoU with EFCC, the NSE has also identified investor education as another veritable tool towards protecting investors in the capital market. The NSE kicked off its financial literacy programme in protecting investors in February 2012. This programme is designed to enhance investors’ understanding of the basics of investing around portfolio construction, asset allocation and risk diversification. In 2015, The NSE conducted over 172 programmes across Nigeria, including school outreach sessions, seminars and workshops to educate investors, market participants and the general public about responsible investing and sustainable capital formation, reaching about 15,000 people.

Corporate governance rating system
Also in order to promote sound practices of corporate governance, the NSE introduced the Corporate Governance Rating System (CGRS), an initiative designed to rate listed companies on the exchange based on their corporate governance and anti-corruption culture, thereby improving the overall perception of and trust in Nigeria’s capital markets and business practices.

According to the Chief Executive Officer of the NSE, Mr. Oscar Onyema, the introduction of the CGRS is to improve the overall perception of the capital markets and business practices of listed companies.

He said: “It is expected that companies will enjoy tangible business advantages from risk-oriented and/or ethically sensitive business partners and investors. In addition, competitors would be challenged to establish the same level of good governance by setting standards of excellence. Companies would not only set themselves apart from their peers, but also contribute to improving the climate for doing business in Nigeria.”

Direct cash settlement
Similarly, as part of efforts to protect investors by enhancing access to their cash as well as eliminating fraudulent activities in the Nigerian capital market, the NSE in collaboration with the Securities and Exchange Commission (SEC) and Central Securities Clearing System (CSCS) commenced the Direct Cash Settlement (DCS) earlier in the year. The initiative allows for the direct payment of proceed of sale of securities into an investor’s nominated bank account.

The initiative is a great departure from former practice where proceeds from sale of securities is paid directly into the stockbroker’s account. Stockbrokers then deduct transaction fees and remit the balance to the client’s account. Historically, issues have arisen on occasions when the proceeds of sale were not remitted into the clients’ accounts, thereby necessitating the need for the initiative.

Smart market surveillance platform
In terms of enhancing surveillance, the NSE equally acquired NASDAQ’s SMARTS Market Surveillance platform to power its compliance program. The technology will provide the NSE with the surveillance expertise needed to grow and expand the market and equip the exchange with the surveillance tools necessary to monitor market manipulation, including spoofing and layering.

X- Initiatives
The NSE launched its whistleblowing portal (X-Whistle) in 2014, to enable operators, investors and other stakeholders disclose information on market infractions and abuse. The X-Alert, which is a service that allows the investing public to know when a transaction has been made on their account has also been introduced. Explaining the importance of the initiative, the NSE said: “Each time investors buy or sell a security, an alert is sent via a text message to the recipient’s mobile phone or via an e-mail to the recipient’s mailbox.

The initiative brought real time notification plus transparency to the market at market rates, while safeguarding against unauthorised sale or purchase of securities.”

To increase the level of market compliance, the NSE launched the BrokerTraX, a tool that provides transparency of broker and brokerage firm compliance with the rules of the market. The Exchange also introduced the X-Compliance Report, a transparency initiative designed to help maintain market integrity, by providing compliance related updates on all listed companies.

Recently, the exchange commenced the use of enhanced Compliance Status Indicator (CSI) codes on the ticker tape for listed companies, as part of efforts to further improve market transparency and integrity, provide timely information for investment decision as well as enhance the protection of investors in the capital market.
Under this initiative, the exchange tags all listed companies with a three character code that indicates the compliance status of the listed company at any particular point in time. This compliance code will enable investors to make informed decisions while ensuring a transparent market guided by timely information.

Access to retail bond market
In a bid to ensure that retail investors benefit from the federal government bonds(FGN), the NSE collaborated with the Debt Management Office (DMO).

According to the Director General of DMO, Dr. Abraham Nwankwo, there had been efforts to ensure that the FGN bonds were democratised for retail investors to participate since 2012. He said the organisation appointed Stanbic IBTC Stockbrokers to assist in the democratisation of the initiative to ensure that its services were not only for the upper class.

He said: “We wanted Stanbic IBTC to assist us in making sure that every retail investor with little money can also participate in the investment thereon. The NSE is not an elitist platform for only those who are millionaires and billionaires, but also for those with little money like N10,000 to invest in the government bond and have it listed on the NSE.”

Nwankwo said the move had yielded some positive results, noting that job is to encourage retail investors to buy FGN bonds and have their bonds traded on the NSE just as big investors.