The global financial meltdown which started from the US, in 2006 as a result of the glut in the mortgage industry, spread like a contagion to Europe, Asia, and then to the emerging markets in Africa, including Nigeria. That ill wind got to Nigeria in 2008 and no stock market was spared of the catastrophic meltdown, just like the Great market crash of 1929.

Even though it was a global financial meltdown, the Nigerian market was insulated until about 2008. The effect was mainly in the banking sector.

This is because banks account for about 60% of the listed securities. Therefore, whatever affects the banking sector has profound impact on the market capitalization. It is a known position that the Nigerian Stock Market has been slow to recovering, after the Global Financial Crisis which hit the global stock markets, commencing from the US mortgage industry and other corporate entities. Furthermore, I wish to state that the stock market is cyclical with boom and burst periods.

This is normal in all stock markets. However other markets are now moving upwards while the Nigerian market is still southwards. In order to have a thorough understanding and a holistic position of the current problem, it will be absolutely necessary to briefly outline the primary causes of the down turn and thereafter suggest remedial actions that will help to halt the free fall of the market; restore investors’ confidence and prevent further losses to the investing public.

Between January 2000 (when I became the Director-General) and December 2008, there were a lot of positive developments in the Nigerian Capital Market as exemplified by activities and transactions both in the primary and secondary market of the Nigerian Stock Exchange. In emphasis, issuers of securities had a ready market. The market truly lived up to its functions as a more prudent financing window for individual, corporate, state, federal and foreign investors. Apart from enjoying the benefits of the function of the market as a financing window, Federal and State Governments in Nigeria also benefited enormously from the boom in the market through tax revenue, enhanced employment opportunities and transaction fees that went to the Securities and Exchange Commission (SEC) as the Government regulator of the capital market.

During the period (performance measurement introduced); Market Capitalization of the Nigerian Stock Exchange rose from N800 million in Year 2000 to N13.3 trillion at the beginning of 2008; The All-Share Index hit an all-time High of 58,990.22 basis points in 2008 from 100 points in 1984 when I introduced Index in the Nigerian market; Annual capital raised by companies and Government on the Stock Exchange rose to the peak of N2.8 trillion at the end of 2008. All of this was as a result of a combination of factors, including experienced and effective Stock Exchange leadership. There were a lot of new entrants – issuers and investors alike; local investors and foreign investors. There was investor confidence and the Middle Class re-emerged… in Nigeria.

Margin Loans by Banks

The indiscriminate granting of margin loans by the banks to all manners of investors and market operators caused the market bubble. This is similar to what happened in the US mortgage industry. Margin loans by themselves are not bad, because they help to create more liquidity in the market, globally.

However, in the case of Nigeria, the banks gave out these loans indiscriminately, and in most cases insisted that such margin loans were used to purchase their own shares. Some banks were deeply involved in granting margin loans that were not properly structured and this created excess cash in the market, and the share prices got bloated.

The Nigerian Stock Exchange Management at several occasions WARNED market operators, that Regulators i.e CBN and SEC had not issued Guidelines on Margin Loans. Subsequently, it became quite evident that the margin loan facilities had been abused. However, they are off balance sheet items, not easily detected. (CBN/SEC recently issued the Guidelines on Margin Loans).

Numerous Unlisted Private Placement, IPOs.

Another factor militating against the Nigerian stock market’s rebound is the problem of unlisted private placement issues. Several companies undertook private placements which were NOT LISTED ON the Nigerian Stock Exchange. This had negative effect on investors’ confidence, because many of the subscribers bought the shares with the hope that they will be listed on the Stock Exchange.

The truth of the matter is that most of the issuers of these private placements MISLED the public via the style of placing and also wanted to list their shares at very high premium, instead of listing at the prices the securities were issued. The Management of Nigerian Stock Exchange objected and rejected any attempt of listing any shares above the price they were issued at private placement offer.

The NSE took this stand so as to protect innocent investors who would buy the listed shares at the secondary market level. The NSE took this step because it noted that immediately after the listing; the directors and officers of the issuing companies are usually the first to off-load their holdings, while they deliberately withhold the release of shares certificates to other subscribers. For all intents and purposes this is market manipulation on the investing public. The NSE does not regulate Registrars of companies (SEC does); however persuasive advisory was at different times advanced by NSE against the practice of issuers using their in-house registrars and issuing houses for their public offers.

The problem of unlisted private placement of shares can be solved if SEC (who approves private placement) compels all the companies to list those shares at the prices the shares were issued, or at a marginal premium, because of the time value for money. This will bring some respite to the market and will enhance market capitalization, in addition to boosting investor’s confidence. If not, the issuers must be made to refund monies to investors, with interest.

Insider dealings

The above connotation is a well-known practice in Stock Market the world over. Although S.111 (1) and (2) of ISA, makes Insider Trading (by Directors of Quoted Companies) a crime, the proof of insider trading is usually very difficult to establish and prove, therefore the law needs to be revisited to make it more effective.

This is a crime that is not easy to establish even in the more advanced stock markets. As a criminal offence, the standard of proof is “Proof beyond reasonable doubt”. This is a very ‘tall order’ for market regulators the world over, therefore some jurisdictions have shifted emphasis from criminalising market insider dealing infraction to “market abuse model” which emphasises civil liabilities and the encouragement of voluntary compliance with the market laws, rules, regulations, practices and conventions.

Public Offering by Banks

Following CBN directives to banks to capitalise from N2billion to N25 billion as minimum share capital, almost all banks utilized and accessed the capital market to raise funds. Within two years, many of the banks besieged the capital market falling over one another to raise funds through mega offers in a single tranche. The banks competed in mopping up every liquidity from the stock market, thus crowding the market. A total of about N2.2trillion was raised through various public offers dominated by the banks in 2008, via Listing on the Nigerian Stock Exchange.

Divestment by Foreign Portfolio Managers

This is another factor that seriously contributed to the continuous fall of the Nigerian Stock Market. Many foreign investors that already had troubles in their home economies pulled out of the Nigerian Stock Market leading to dumping of shares beyond the ability of domestic investors to absorb.

The way out / forward

For the market to recover and start moving upwards, I wish to professionally suggest that the following palliative measures be considered for implementation. The Nigerian Stock Exchange Transformation Document 2010-2015 which the Council, Management and Accenture worked on 2008-2010 contains the solutions for our capital market to bounce back. The synopses are as follows: Federal Government Intervention via AMCON / Ministry of Finance Incorporated.

Only direct physical injection of funds can change the direction of the capital market just as AMCON did for the Money Market. No amount of “Workshops and Discussions” will avail.

A strong Government Bail-out as obtained in USA, Britain, Russia, Singapore e.t.c is the magic wand needed. Asset Management Corporation of Nigeria (AMCON) was set up by CBN to buy these toxic assets (Margin Loans) with the hope of divesting when the market picks up. However, the modus operandi of AMCON in this respect seems unconcerned as far as market operators and shareholders are concerned.

AMCON seems to concentrate only on banks. The Nigerian Stock Exchange and its stockbrokers worked assiduously in collaboration with CBN to bring AMCON to life and the day the National Assembly acquiesced to AMCON, we were all here in the presence of the President of Senate, Deputy Speaker of the House, Senate & House Committee Chairman on Banking and Capital Market…Senator Nkechi Nworgu, Senator Ganiyu Solomon, Hon. Ozomgbachi and Hon. Buba Jubril. Assurances were reiterated that AMCON will bail-out both the money market and the capital market i.e. beneficiaries will be Banks, Stock broking firms and Nigerian Shareholders. Urgent action needs to be taken on this because AMCON is largely servicing Banks only at the moment.

Appointment of Market Makers and their Fund Providers

In April 2010, The Nigerian Stock Exchange appointed market makers who would provide market liquidity and stock-lending. The market makers could not take off in 2010 because the CBN did not approve their proposed Fund Providers (Deposit Money Banks).

Now that the NSE has re-appointed them, investors need to know more details in this area of market markers recently appointed. What securities are they making market on? Are the selected market markers well-funded to undertake this role of buyer and seller of last resort? Have their Fund Providers been approved by the Regulator? How much money is the Transaction Float? Certainly this policy will encourage new investors, especially the retail investors. This is a quick-win solution…if properly implemented.

Listing of Upstream Oil Companies / Telecom Companies

The Federal Government should encourage the Upstream Oil companies and the major Telecoms companies to list on the Daily official list of the Nigerian Stock Exchange. However, the Government should induce them by introducing tax holidays, and other incentives such as Gov’t contracts to make listing attractive to them. The truth is that all these companies are listed in their home countries; why are they refusing to list in Nigeria?

In addition, more indigenous quotable companies should be encouraged to seek listing, by giving them incentives like tax holidays, tax rebate and other incentives. This will boost the economy by generating more jobs and government will get more tax revenue. Furthermore, their listing will enhance transparency of financial disclosure in their operations. One incentive that never fails is a policy of Government that ONLY Companies Quoted / Listed on the local Stock Exchange can get Gov’t contracts above certain amount (N2Billion Naira or $500million dollars.)?

Mergers of Stockbroking Firms

Stock broking firms should be encouraged to come together, either through merger or outright acquisition. This will make them stronger and more viable and it will enhance good corporate governance and professionalism in the affected entities. As at today many of the surviving stockbroking firms that are too weak financially to stand alone may be allowed to practise as Broker / Dealer only without Portfolio Management.

Dematerialization: e-dividends, e-certificates.

This means the conversion of share certificates from paper form into electronic format as in the CSCS —The Clearing House of the Nigerian Stock Exchange. A specific time frame (3-6 months) when the market will be fully dematerialised should be announced by SEC, NSE and Registrars. Same goes for dividend payments.

Unclaimed Dividends / Unclaimed Certificates

A large portion of Unclaimed Dividends and Certificates emanated from the 1972 and 1977 indigenisation when photocopying machines were not available for people to keep track of their signatures. A lot of those unclaimed instruments are Statute Barred (12 years). There is absolutely no need to establish a new inefficient parastatal for unclaimed dividend. The Law in CAMA is that after 12 years, the money should be utilized by the company concerned to create more wealth for shareholders. In practice, if the beneficiaries of a late investor appear, The Stock Exchange always persuades the company to pay.

Regulatory Oversight: sound and effective corporate governance

The regulatory authorities of the Nigerian Capital Market and of the whole financial system must ensure that the approved code of corporate governance is adhered to by all entities under their supervision. To guard against market abuses and insider trading, the monitoring units of these agencies must be strengthened and well equipped to perform their functions. Also, SEC must not ignore its Developmental functions to grow the market; this function must not be left for the stock exchange and market operators alone… for you must bake the cake before you can eat it.

Federal Government should Fund SEC 100% SEC as government regulator of the Capital Market should be fully funded by the Federal Government. At the moment, SEC is partly dependent on the market fees and penalties collected from the market operators. This may have the tendency of compromising its regulatory functions.

Privatisation

Government must ensure that its Privatisation programme remains on course to kick-start the market; BPE should be energised to perform to expectation.

Abolition of VAT on capital market transactions.

VAT should NOT be imposed on capital market investments in any form, it is a disincentive to investment. Taxes should be on consumption. Hence, any form of tax including stamp duties should be removed on listed securities. The governments of Ghana, Zambia etc have done away with VAT on listed securities to encourage new stock market Listings and Gov’t earned more revenues because Listed companies PAY APPROPRIATE TAX, unlike many private companies.

Conclusion

Hon. Chair & Hon. Members may I conclude saying that this market is my passion and I believe that our capital market will bounce back by the Grace of Almighty God. This will require the collective effort of all stakeholders with the Federal Government leading and creating the positive environment. Also, the oversight function of this Honourable House will surely provide the required investor’s confidence which will positively impact on the market. We should all work hard to ensure that our market is brought back to life by pursuing genuine measures geared towards achieving a robust stock market. In this regard I promise that even in my VOLUNTARY retirement, I stand ready to DONATE my time and expertise to the resuscitation of the market for the benefit of ALL Investors, Issuers and our dear Nation, NIGERIA.

Professor Okereke-Onyiuke(OON), former DG Nigerian Stock Exchange, delivered this to the Ad-hoc committee of the House of Reps during the capital market probe