Onyema: Increased Private Sector Investments Needed for Inclusive Growth

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Oscar Onyema

The Chief Executive Officer of the Nigerian Stock Exchange, Mr. Oscar Onyema, in this interview on AriseTV clarified issues surrounding the recent listing of MTN Nigeria Communications Plc on the stock exchange and also spoke about efforts to deepen the country’s stock market. Hamid Ayodeji brings the excerpts:

What does the listing of MTN Nigeria on the Nigerian Stock Exchange by way of introduction mean and this issue of free float and obstruction of retail investors from having access to the shares at this point?

Listing by Introduction is a process whereby a company is brought on to the exchange without doing what is called an initial public offer (IPO), that is without raising capital from the company, from the shareholders or selling shares to raise capital. The idea is that they are listed on the platform to allow the existing shareholders who may want to sell their shares in the open market to do so. However, you cannot force them to sell their shares. So, it is like me asking you to sell your house, you will sell it when you want to, either because the price is right or because you need the money immediately. With regards to free float, we have three listing boards for companies on the exchange – the premium board, the main board and alternative securities board and they have different listing standards you must meet to get on to each of these boards. The idea of having these boards is to segment the market and properly service the various segments of the market. The premium board is for companies that hold themselves out for having the highest standards as regards to corporate governance and have a minimum of N200 billion in market capitalisation. For those companies, we say they must have a minimum of 20 per cent in free float of N40 billion. The way we calculate free float, which is available on our website is that the directors, the promoters, their families are not calculated in that free float. That means free float is shares that are available to sell if you want to. In fact, in certain instances we actually lock up 50 per cent of the shares of the promoters for a period of time. For example, if you were coming to do an IPO. So, it is very important to educate the general public that free float means it’s a calculation that allows you to sell if you wanted to sell. In this case, the N40 billion free float was more than double, they met it and so that is not a problem at the exchange.

Let us talk about the waiver that was granted to MTN, it is not exclusive to MTN as you have granted such waivers to others in the past. But why did MTN deviate from its initial public offer?

MTN did not get a waiver on free float. The minimum free float is N40 billion for premium board companies and when they came in, they came in with 82 billion in free float, so there was no waiver there. Have we granted exemptions before? Yes, we have and we have given a compliance plan to such companies to meet those standards. So, again the exchange has authority to grant such waivers. But in this particular case, that waiver was not granted because they met the standards.  So with regards to an IPO, the company has publicly stated that they want to do an IPO and they would do it when market conditions are right and when they have dealt with present issues they have with the Office of the Attorney General of the country, that will then allow them to get a proper evaluation. We don’t typically speak on behalf of companies. So, in terms of the company’s plan, you would need to speak with the company. But this was what they presented to us and the public.  It wasn’t an exemption; there are many ways to be listed on the stock exchange. You can do an IPO, you can do Listing by Introduction, mergers and acquisition, you can do deposit receipt; so there are multiple ways and they are not exemptions, but avenues to attract people to bring their companies to list on the market.

Do you think it was right for the Economic and Financial Crimes Commission to have invaded MTN Nigeria’s office?

 I don’t think it is my place to comment on what security agencies and various financial regulators, do but at the exchange we hold ourselves to international standards. The first thing I want to make clear is that our market works the way it was designed to work, our market is a place that you come to of your own free will to buy and sell, depending on sentiments, price, analyses that you have done. We don’t conduct investigation in the public. So we look at market activities on a daily basis not to the second level, but to the micro second level, so we can actually replay everything that has happened in the market on a given day. So we look at market activity when there is noise to make sure nothing has happened, and if we do not do that, the system we have which is called Smart and is one of the best surveillance in the world was programmed to automatically kick out exceptions if certain parameters are not met. The reason why I said that is in international markets it is rear for the FBI to raid a company because there is negative news in the press about them. So, we should wait for the result of the investigation. I am sure the EFCC has their own operating methodology and they must have something they are looking at, so I am not competent to talk about what triggered their investigation. I can only talk about our own activity and ours is to make sure we have a fair and orderly market which we try to do using global standards.

The point raised about the EFCC intervening, if there are infractions should that not be the responsibility of the Securities and Exchange Tribunal (IST)?

I think there is a lot of educating that needs to happen on the way the market works. The exchange is a self-regulatory organisation. That means we do front line regulation pursuant to delegated authority from the Securities and Exchange Commission, which has the responsibility to make sure we have a market place that works the way the law orders. If there are criminal activities, the NSE and SEC do not pursue such cases. We have relationship with organisations that have such authority. For instance, we have an MoU with the EFCC. So, if there are cases we looking at with criminal aspects we pass them on to the EFCC based on our MoU which also allows for a number of other things including capacity building which they train us twice a year and we also train them twice a year so that we can operate together smoothly. When there is a case brought up that is not criminal we do have our administrative processes that goes from the exchange level to the SEC level, to their own administrative proceedings and to the IST, which is like a court with people that sit as judges almost equivalent to the High Court. So, what they did is not usually the first line of approach, it is usually when you have established that there is something and you are going through dispute resolution mechanism in the capital market.

What has been the effect on the market?

I think it has been very bad for the market. We have worked very hard to create a market place that is credible and people can have trust in; the only thing that makes the market works is trust and the noise that this listing has generated has been such that with initial activities in the market you saw various companies benefit from the renewed interest investors had in the market. The All Share Index rose up and post the raid, we have seen it go back into negative territory. One of the reasons we hold ourselves to high esteem is because 52 per cent of market activities is international, while about 48 per cent is domestic in terms of market activity. It is very important we view these things from the lenses of the national economy, the capital market and the impact they could have on millions of investors that participate in the market on a daily basis.

Airtel has also indicated its intention to list on the NSE. What are you doing to attract institutional investors such Pension Fund Administrators who are holding N9 trillion pension funds according to recent report?

The first thing is there is a lot of work that goes into getting any company to come to list. To be listed, they must find value in the listing proposition and it must meet their strategic business objectives before they are listed. So, we are in conversation with hundreds of companies in different industries that are operating inside and outside of Nigeria, but have some Nigerian linkage to list. So, I cannot comment on a particular company, but I can give you the general feedback. In regards to attracting institutional investors such as pension fund administrators into the market, it is based on trust and other things, with the first being country risk whereby you ask if you would be able to make more money in country A versus country B, based on the policies, how easy it is to do business and the competitiveness of the country. Once you have passed that hurdle the next thing is industry risk; which industries are growing fast and competitive and also gives you the highest form of return you are looking for. For PFAs, the most important for them is to protect the principal because these are money they are holding in trust for people that are contributing towards their retirement, so 30 years from now, when people that are in their 30s start getting to retirement age, they should be able to have money in their retirement account to spend to maintain their lifestyles. So they run through those types of analysis to decide whether they want to put money in equities or fixed income or other asset classes. They must have diversified financial portfolios because we know from modern financial theories that a diversified portfolio gives you the best return in the long run. You can put all your money in one stock, but it is highly volatile; so you want to maintain a number of asset classes that are not highly correlated but would give you good risk adjusted returns. So for us, we are always engaging with the PFAs and other institutional investors such as asset managers and insurance companies to continue to make the case for them to use our platform which is a multi-asset platform. We offer equities, fixed income, exchange traded funds and now we are working on derivatives so they can have multiple channels from which they can invest in and they do use.

In developed and developing economies, pension funds contributes a large amount to the stock exchange, unlike in Nigeria. Can the relationship between the NSE and PenCom become profitable so that we generate a higher percentage on the NSE?

We have some structural challenges concerning the way we run some things in the country. If you look at some countries, that have well developed pension system and well developed capital markets that would have been achievable because the assets they are holding are for a long period of time and those assets would be invested so as to generate the highest returns over a long period of time. Secondly, they would also invest in equities market as the foundation of their holdings because empirical studies show that over long period of time, equities give you the highest risk adjusted returns. Things do not function that way in Nigeria. But consider the fact that our stock exchange has only been in existence since 1960; it is relatively new compared to more developed markets. We have discovered that when you do the analysis on an inflation adjustment bases you are beating inflation by just a margin, if it was done on a dollar basis so as to compare your performance with other countries, you lose all those gains. So, we have a lot of work to do to become a very competitive market and not from only the equities perspective, but every other instruments pension funds can put their money into. The reason why I said we have structural challenges is that If you look at inflation rate and you look at rates that we are paying for treasury bills, bonds, and then look at the people borrowing, it is mostly the government. So you could argue that there is a crowding out effect. The size of government’s spending is actually small compared to the private sector. So, so we need to channel funds to the private sector to allow for a more inclusive economy that would drive higher valuation because the profit sector knows how to do business and the private sector tends to give high returns.

All of these issues have exposed a lack of transactional activities between the equities market, but the NSE has an investors education programme. So is it safe to say the programme has failed or needs to be revamped?

On an average we do have face to face contact with 20,000 people annually across the country in our various investors programme. In a country with 190 million people and with about 65 per cent of that population under the age of thirty; we need to find new ways to reach these potential investors. So we are deploying technology to reach people in ways they are used to being communicated to. So, the answer to your question is that it has not achieved its objective but we understand that we need to keep evolving with our approach methods, using technology as a key tool. We also know that not everyone is technologically savvy, so we are also making use of the traditional methods of approach, which includes face to face interactions, radio stations, newspapers, television stations. Clearly, one of the things that struck us is that there seems to be lack of understanding of how the market works.

Earlier you mentioned compliance framework, how strong is that compliance framework at the NSE? For example, in 2010, when Dangote Cement came into the market, they did offer for sale instead of Listing by Introduction and they have been getting waivers annually from the exchange, why haven’t you compelled Dangote Cement to offload more shares to the retail investors. You have rules about timely declaration of results and still these companies break these rules, and the NSE has been very lenient with pursuing these cases, why is that so?

I do not think that is how it is, we deserve some credits for the work we have done concerning compliance. Generally, we have revamped compliance framework since 2011 and we have focused on a number of things consistent with international standards. The first thing is transparency. If you look at the reports we put out on our website, it shows you the compliance status of companies that we have issued fines to and have not met their reporting timelines, companies that have one deficiency or another. Secondly, we introduced the companies’ status indicator symbols, an eleven symbols that show companies below the listing standards, even on the ticket tape it is almost like a buyers’ beware, stating that the company is below listing standard as you try to make a decision concerning buying the stocks of that particular company. We have actively engaged with the issuer committee who make it a lot easier for them to report too various distribution platforms that we have. We also started proactively engaging the companies reminding them when the deadline is about due and for them to inform us if they are having challenges and we changed an aspect of rules making sure that a company that will file late puts up press release in the newspapers stating why. Having worked with such companies up to the point of the deadline for reporting, if they miss those deadlines, we issue fines. In fact, we have been accused of issuing too many fines. So because of our activities concerning compliance, we issue out fines, delist companies, suspend companies for lack of regulatory compliance and again we were criticised for delisting companies.

Yes, that is because of the investors’ rights. What happens to the investors?

The investors have the responsibility to protect their investments and the law provides for that, which is why investors have the right to attend Annual General Meetings, they have the right to ask members of the board questions. You cannot put your money on the table and walk away; your eyes need to be on your money. That is the first line. As an investor, the law allows you certain rights to make sure you are holding your directors and management to account. The NSE now has a wrap around that to make sure the companies continue to make their listing standards; so they have to file quarterly financials, market-moving information and then there is the apex regulator in the capital market which is the Securities and Exchange Commission, which has its own rules and regulations around investor protection. So, there are so many layers to protecting investors. It is like driving because the first responsibility in driving is for you, making sure that you abide by the rules of driving. In addition to that, you have the police to make sure that other drivers keep to the rules and don’t  drive into you.

One of the greatest issues that has come up concerning cost of transactions on the NSE is that it is on the high side. Is this something you are going to look into to deepen market participation?

We did a transaction cost analysis years ago where we looked at the entire cost of listing and trading in Nigeria. The first thing to highlight is that there are many players involved in the listing process. There are statutory fees you have to pay SEC, then listing fees to pay NSE, eligibility fees to pay the CSCS, you would also pay your advisers, investment bank, brokers, lawyers. So looking at the entire value chain I agree we are not competitive from a pricing perspective so there has been an effort led by the SEC and NSE to see how we can make the market more competitive in terms of pricing. Changing prices does not necessarily mean more listing or volume in the market, we have tried that before. There are a number of things that need to be put in place, in our alternative securities market where we slashed the prices such that listing fee is N100,000 and we have not seen companies knocking at our offices that they want to list. One of our challenges concerning this is the feedback we get from companies are bigger issues around what kind of incentives do we get for being a listed company?  So those companies say can we get some tax break? Considering all the regulatory weight that has been placed on them. They want to know the kind of tax incentives they can get from being listed. Another feedback we got from them was that, once they are listed the feasibility of the company is high, everyone sees the activities of the company; however, the feasibility can be positive or negative. For example, all the agencies go after them for sign levy and other fees, so I think we need to get the environment working right. Given the feedback from companies, we also decided to make it sharper for them to understand the value proposition for listing which is when you become a listing company it shows you have gone through a rigorous process on whichever of the boards you decide to list. It means people can give you the benefit of the doubt because your transaction activities are more transparent, even getting loans from banks becomes cheaper, raising capital you have the flexibility of raising either equity or debt on the same platform. Thus, strategic investors find you more attractive for investments and if there are multiple companies listed in that industry you have a peer group you can be compared to.  For companies that have founders, you have to think about how the company can transition into one generation and the other and listing gives you the best opportunity for your company to continue surviving. Studies have shown that coming to list gives your company credibility.

The NSE has been talking a lot about demutualization, what does that mean?

It means you are transforming from a company that is limited by guaranty to a company that is limited by shares. And in other for you to demutualise you need to have a framework that is supported by law. By the way stock exchanges all over the world have already demutualised. In the world federation of stock exchanges, out of the 65 board members there are only eight that are not demutualised and Nigeria is one of them. In Africa we have 11 that have already demutualised so that is the way to go because it allows you to unlock various potential with regards to the growth of the capital market and exchange market. In Nigeria, the company law did not have a clear path to go from a company that is limited by guaranty to one that is limited by shares. It is not bullet proof so we to create the Demutualisation Act. We thank the National Assembly for passing that bill and also the President for signing the bill into law. We now have a framework that allows us to move through the demutualisation process. There is also the need to mention the SEC rules concerning it, there is a demutualisation rule that we follow. Putting together documentation, we all already had a whole team which includes lawyers and financial advisers. We are also working on the ecosystem to make sure we put in place all the mechanisms that would allow us to transition seamlessly from a company limited by guaranty to one that is limited by shares. We are not demutualising for the sake of it, we are doing it so we can unlock certain values for the economy and capital market. It is also not just about following the rules of SEC and the Demutualisation Act, it is also about critically examining your business. And there are certain requirements for demutualising and eventually going to the public market. One of them is separating your business activities from your regulatory activities and there are three models for doing that.

As the CEO of NSE, what should we expect at the end of your tenure?

My legacy would be that we have been able to prove to the international market that this is a preferable option for investment that facilitates the durability of millions that are potential investors in the market.