Goddy Egene writes that although the capital market’s performance is a reflection of the adverse economic situation, if current efforts by regulators and other stakeholders are sustained, it will play its role in capital formation distribution.
Nigeria’s capital market effectively came on stream the same year the country gained its independence. Hence, the fate of both the market and country has ever since been tied together. Therefore, the market’s performance is similar to how the country has fared in the past 57 years. There have been good times and bad times. Although the capital market has been the major centre for the formation and distribution of long-term capital, its performance has been hampered by some factors.
The Nigerian capital market really became active with the establishment of the Nigerian Stock Exchange (NSE) in 1960, the same year Nigeria got its independence. The market has evolved over the years and has taken a new shape which has given hopes that with little push and good policies, it would developed to the desired level.
With the coming on board of two other platforms, the FMDQ OTC Securities Exchange and NASD OTC Securities Exchange, the future of the market is very bright. The FMDQ OTC is the platform for the trading of debt and fixed income securities and currencies, while the NASD OTC is for the trading of equities not listed on the NSE.
NSE’s evolution
The NSE of today was established as the Lagos Stock Exchange (LSE) in 1960.
However, the name was changed to NSE by the Indigenisation Decree of 1977 as a result of the recommendations of the Industrial Enterprises Panel (Adeosun Panel) of 1975 that branch exchanges should be established. Consequently, six new trading floors of the NSE were established in Kaduna, Port Harcourt, Kano, Onitsha and Yola.
Also, as part of efforts to make the market more accessible to smaller companies, the Second-tier Securities Market (SSM) of the NSE in 1985. Also in 1998, the trading in Rights Issues was permitted as the first derivative instrument in the Nigerian stock market.
The Central Securities Clearing System (CSCS) was incorporated in 1992 as the official central clearing and depository of the NSE. The CSCS was introduced to implement a computerised Stock Exchange Management System (SEMS) which places emphasis on the immobilisation of share certificate in a Central Depository.
Similarly, the Automatic Trading System (ATS) was introduced in the Nigerian stock market to replace the open outcry method. The ATS is a security trading arrangement whereby transactions on the stock exchange are achieved through a network of computers operating on-line, real-time, automatically. With the introduction of the ATS, the settlement efficiency was increased from T+2 weeks to T+3 days.
In order to make the market more vibrant and assist in the growth of the economy, the federal government set up a panel led by late Dennis Odife (popularly called the Odife Panel) in 1996. In some specific terms, the panel was mandated to review the history, structure, conduct and performance of the Nigerian capital market and its contributions to the Nigerian economic development among others.
The recommendations of the panel led to the enactment of the Investment and Securities Act (ISA) No.45, 1999. The ISA repealed the Securities and Exchange Commission Decree of 1998, the Lagos Stock Exchange Act of 1960, the Nigerian Enterprise Promotion (Issues of Non-Voting Equity Shares) Decree of 1990, Part XVII of the Companies and Allied Matters Act of 1990, Sections 3(d) of the capital Gains Act and Section 21 (2) of the Nigerian Investment Promotion Decree of 1995. The act is now the basic legislation guiding the conduct and operations of the Nigerian capital market.
Impressive performance amidst challenges
Reviewing the performance of the market over the years, it has done fairly well, considering the many challenges in the operating environment. The market has had challenges such as lack of capital market-friendly economic policies, massive ignorance on the part of many people, policy summersault and political instability. In spite of these challenges, the market has witnessed improved performance. For example, total of new issues before 1989 was below N1 billion but increased to N10 billion and crossed the N10 billion mark in 1997. Between 1996 and 2001, a total of 172 new issues (securities of public companies amounting to N56.40 billion) were floated in the capital market. The total of new issues was valued at N5.85 billion in 1996 but it rose by about 532 per cent to N37.198 billion in 2001. This improved to N61.284 billion in 2002, N180.079 billion in 2003. 2004 and 2005 accounted for N195.418 billion and N552.782 billion respectively before it crossed the trillion naira mark to hit N1.935 trillion in 2007 when the market was at its peak.
In terms of number of securities on the NSE, it grew from eight in 1961 to 60 in 1971,194 in 1981, 239 in 1990. The number of securities improved to 264 in 2010 but reduced to 247 as at the end of 2016 due to delisting of some companies.
In terms of market capitalisation, which is the most widely used indicator in assessing the size of a capital market to an economy, it hovered between N10 billion and N57 billion 1988 and 1994. It improved to N1. 3593 trillion in 2003, N2.1125 trillion in 2004 and N5.12 trillion in 2006. The market capitalisation recorded the highest value of N13.2294 trillion in 2007 before falling to N9.562 trillion in 2008 due to the global financial meltdown. It closed at N12.217 trillion last Friday. The NSE All-Share Index, which was introduced with a base 100, has also followed the same pattern of fluctuation over the years but closed at 35,439.98 last Friday.
Some reforms
The apex regulatory body for the market, the Securities and Exchange Commission (SEC) had tried to make the market attractive prior to the financial meltdown in 2008 and 2009. But the market witnessed major changes. The market witnessed some noteworthy product innovation, improved listing rules and landmark bond market reforms. This brought the bond market closer to the same level with the equities market, making it attractive enough for Triple A issuers such as African Development Bank (AfDB) and International Finance Corporation (IFC) to issue bonds, introduction of Exchange Traded Funds (ETFs). It further widened participation in the markets through licensing and coming – on – stream of other capital trade points FMDQ OTC and NASD OTC.
SEC equally made sure that the market integrity was restored by considerably enforcing rules. Additionally, an 18-man Nigeria Police Force team was introduced as a resident enforcement team at the SEC to handle enforcement matters swiftly and on time. This was a first-time record in the history of the regulator.
SEC also strengthened disclosure requirements and led the implementation of international financial reporting values for listed companies. To top it all, SEC set up a community that came out with 10-year Capital Market Master-plan, which is currently being implemented to transform the market.
Operators said the policies and initiatives so far introduced by SEC in line with the master plan, are capable of making the market investors’ haven once the external challenges subside.
For instance, the strengthening of capital market operators (CMOs) with the successful completion of the recapitalisation last year is a good development that has helped to reposition them for better competition.
Also, SEC’s collaboration with the Central Bank of Nigeria (CBN) and Nigerian Inter-Bank Settlement System (NIBSS) for the introduction of the electronic dividend payment platform that will address the challenge of unclaimed dividends in the market is another positive move.
Another laudable development is the introduction of direct cash settlement (DCS), which allows investors to have direct access to the proceeds of their shares sold by brokers.
In addition, SEC launched the Capital Market Masterplan Implementation Council (CAMMIC), National Investors Protection Fund and Corporate Governance Scorecard, which are expected to enhance the market performance going forward.
On its part, the NSE performed over the years. But the coming of Mr. Oscar Onyema as the chief executive officer of the exchange in 2011, led to more innovations aimed at deepening the market and offering investors more opportunities.
No doubt the low patronage of the Nigerian stock market is partly attributed to the losses it suffered during the 2008 and 2009 market downturn, which was blamed on inadequate protection from regulators.
Realising this factor, the NSE swung into action by signing a Memorandum of Understanding (MoU) in 2013 with the Economic and Financial Crimes Commission (EFCC). This MoU is aimed at tackling market infractions and curbing market abuse 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.
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. The product offering has also been improved with the many ETFs coming on board to give investors investment choices.
Stakeholders’ Assessment
Assessing the market performance, the Group Chief Executive Officer of United Capital Plc, Oluwatoyin Sanni said the market has evolved over 57 years into a vibrant market place and a key source of funding for listed companies and capital growth for investors.
“Whilst the market has suffered a few crashes in correlation with the adverse global developments, it has proved its resilience and ability to recover each time,†Sanni said.
Speaking in the same vein, the Chief Executive Officer of Highcap Securities Limited, Mr. David Adonri said for the past 57 years, the capital market has been the epicentre of capital formation and investment outlet for the economy.
“The market has reasonably fulfilled its mission in respect of above objectives. However, performance remains below expectations due to the short term nature of the economy which favours the money market. Notwithstanding, the capital market can still be credited with facilitating emergence of many Nigerian enterprises as African champions in banking and manufacturing industry,†he said.
Another operator, Mr. Kasimu Garba Kurfi of APT Securities and Funds Limited, said the it is encouraging that the market has grown from 17 listed securities in 1963 to more than 270 currently and less than N300 million in capitalisation to N16 trillion.
“We started with less than 10 stockbrokers, now there are more than 200 stockbrokers. We started with equities and debentures only , but today we also have exchange traded funds(ETFs), federal savings bonds and Sukuk, state bonds among others,†he said.
On their own parts, shareholders rated the performance mixed. For instance, the Chairman, Ibadan Zone Shareholders Association (IZSA), Mr. Eric Akinduro, said the capital market has come with a lot of improvement in the areas of technology, surveillance, trading period and settlement cycle.
“These and many more have positioned our market to be one of the proactive markets globally. It has served as a vehicle of financial breakthrough for many investors that were fortunate to invest in good companies. Likewise we have companies that were performing wonderfully over the years but today they are moribund due to macro-economic challenges and bad management. The role of regulatory authorities in protection of investors’ rights and creating enabling environment for investors to invest cannot be over looked and it is also commended,†he said.
He added that the activities of shareholders associations within this context have also helped the market.
“They served as checks and balances and also act as pressure groups to keep the companies’ board and management on their toes. They are also voice to the voiceless. Only of recent that some of the leaders of these groups are failing in performing their roles and responsibilities due to closeness to companies’ board to the detriment of their members. Also some of them do not give room for democratic process to elect officers,†Akinduro said.
Looking ahead, the IZSA boss said one of the anticipations of the investors is the demutualisation of the NSE, saying “if this can be achieved within the shortest period, it is going to catapult our exchange to very high level in comity of nations.â€
“Nigeria capital market still has a lot benefits that investors will derive by the time all what is been put together start to materialise. But by then, only those that have total confidence in the market and invest wisely will gain from it,†he added.
Another shareholder activist and founding member of the Nigeria Shareholders Solidarity Association (NSSA), Alhaji Gbadebo Olatokunbo, said the performance of the market is mixed liked that of Nigeria as a nation because it failed to perform like its age and position demands.
“Like Nigeria, the NSE’s infancy period was wasted in egoism of been a privilege-club, while the adulthood was that of a unsettled-parents, who realised the purpose of existence late in life and later woke up to reality of its mandate and had to be on the run since the discovery. Still, it was a blessing that, the market was established though it failed to run like a private organisation that it is. It provided the platform for growth to the industries and might do better that it is currently doing provided it amended some of its egocentric-manners,†he said.
Olatokunbo described the Hayford Alile’s years at the NSE as that of laying the foundation, while that of Ndi Okereke-Onyiuke as full of ego, “when it supposed to be on the run to catch the moving train, before the intervention period of SEC that knocked senses into all stakeholders and then the advent of the current team of management.
“To be candid, l never took the current management so serious, but they have proved their worth and a lot still need to be done if the real progress is to be recorded,†he said.
The investor said the NSE succeeded in sending my companies parking at the detriment of their shareholders.
“No consultation and no provision for the investors before showing them the exit and they were given free tickets to fly with our money, whereas SEC and NSE should have provided security for the investors who relied on both the regulators’ approval for their quotations. It was after sending many away that, the NSE later introduced policies that encourage good corporate governance,†he said.
Speaking on the planned demutualisation of the exchange, Olatokunbo said the NSE has been finding it difficult to implement the programme due to the “erroneous belief of the stockbrokers that formed majority of NSE Council that they alone own NSE despite the fact that capital market operates with investors’ money. They forget that without investors, the NSE and capital market cannot exist.â€
