MEDIA BRIEFING ON THE NIGERIAN CAPITAL MARKET

ARUNMA OTEH DIRECTOR GENERAL

SECURITIES AND EXCHANGE COMMISSION 21ST FEBRUARY 2012

 

 

I. INTRODUCTION

I am delighted to welcome you to this briefing. Our goal amongst other things is

to outline the state of the market, report on the overall market performance in

2011, account for our stewardship of the market over the period and profile our

strategies for 2012.

Given our dream of building a world-class capital market, we believe that the

market is essential to the actualization of government’s economic

transformation agenda. A structured capital market can sustain government’s

ability to finance critical infrastructure. It can also energize key sectors of the

economy such as agriculture and facilitate the diversification of Nigeria’s

economic base from its dependence on oil. Indeed, a healthy capital market

can fast track Nigeria’s emergence as a leading economy in the world by the

year 2020 (“Vision 20:2020”).

Recognizing the significant role of the media as the fourth estate of the realm

and our principal ally in positioning the Nigerian capital markets to compete

favourably on the global scene, it is our belief that this session will engender a

common understanding of the Nigerian markets current position and offer

insight into the next phase of our strategies to transform the market.

II. STATE OF THE MARKET IN 2011

Activities on the Nigerian capital market began on a positive note in 2011. This

was largely in response to a series of transformative initiatives undertaken by the

SEC to stabilize and nurture the market and, in part, to the favourable outlook in

the operating environment.

On the first day of trading in 2011, equities market capitalization and Nigerian

Stock Exchange All Share Index (NSE ASI) opened at N7.92trllion and 24,770.52

basis-points respectively. This was a significant improvement over the market

performance of the preceding year which opened at N4.99 trillion market

capitalization and NSE ASI of 20,827.20 basis-point.

 

 

However, the gains which characterized the first half of 2011 were reversed in

the second half of the year. A number of factors accounted for this

development including the fragile global economy, especially the downgrade

of the US credit rating and the Euro zone debt crises, the banking crisis which led

to the nationalization of three Nigerian banks, post election security concerns,

investor apathy and the political crisis in Cote d’ivoire and some Middle East

and North African (MENA) countries.

At the end of 2011, equities market capitalization declined to N6.5trillion and the

NSE ASI fell to 20,730.63, representing a 16% drop from the closing figures of 2010.

Similarly, the total trading volume dropped to N644.2billion representing a 19%

decrease from N797.5billion recorded in 2010. Average daily transaction also

declined to N2.68 billion in 2011, a drop from the 2010’s daily average of

N3.32billion.

As you would note from Figure 1 below, the decline in the Nigerian market

notwithstanding, the Nigerian market outperformed a number of global markets.

Figure 1: Performance of major markets across the world in 2011

 

 

Nigeria’s decline of 16% in market capitalization should therefore be viewed in

the context of a 22.8% stock market decline in China (SSEA), 16.3% in Brazil,

22.6% in India, 48.9% in Egypt, 26% in Italy, 30.3% in Argentina, 18.4% in France.

Notably, the trend in the market did not impede issuance. In 2011, a total of 16

new issues (6 Rights Issues, 9 Private Placements & 1 Preferences Shares Issue)

worth N141.78bn were concluded in the year, representing an increase of 18% in

value over the 2010 figure of N120.34bn through 12 issues.

2011 also witnessed an increased inflow of foreign portfolio investment to the

tune of N478.62, as against N382.06 in 2010. Given positive fundamentals of listed

companies and the under-valuation of many stocks, foreign interest in market

grew with over 60% of trades driven by foreign institutional investors.

Figure 2: Foreign Portfolio inflow 2010/2011

050

100150200250300350400450500

Inflow Outflow Net

382.06

195.24 186.82

478.62

312.65

165.97Billi

on N

aira

2010 2011

The Bond market witnessed significant activities in 2011. While the Federal

Government issued a total of 28 new tranches of outstanding bonds valued at

N791.27trillion, a total of N183.79billion worth of new fixed income securities was

issued by states and corporates. State government issuers were Benue (N13

billion), Niger (N9 billion), Delta (N50 billion) and Ekiti (N25 billion), totaling N97

billion variously applied for infrastructure project across the individual states. Also

 

 

noteworthy is the increase in the tenor profile of these bonds - Seven (7) years for

three (3) out of the four (4) sub-national bonds from the 3 – 4 year tenor of

previous issues. Invariably, State Governments have realized the potential of the

market to augment actualization of their developmental agenda and are

willing to leverage the market for longer. Over the period, the Asset

Management Company of Nigeria (AMCON) also issued an agency bond worth

N12.88billion.

In the secondary market segment, a total of 8.95billion units of FGN Bonds

valued at N7.99trillion were traded, a drop from 15.8 trillion in value of FG bonds

traded in the preceding year. Most of these transactions were conducted on

the OTC market.

In the area of collective investment schemes (CIS), eight (8) new Unit Trust

Schemes were approved in 2011. At the close of 2011, the 44 registered Unit Trust

Schemes (comprising forty four) had a combined net asset value of N85.31billion

covering 20 Equity based funds, 2 Money market funds, 4 Bond funds, 4 Ethical

Funds, 2 Real Estate Investment Trust Schemes, 11 Balance fund and 1 Sector

based fund. Our figures indicate that there are about 230,000 Nigerian

participants in collective investment schemes. In December 2011, the Newgold

Exchange Traded Fund valued at N988million was listed on the Exchange.

Figure 1: Performance of major markets across the world in 2011

2.22

53.8365.14 60.86

83.48 85.31

0

15

30

45

60

75

90

2006 2007 2008 2009 2010 2011

Billion  Naira

NET ASSET VALUE OF COLLECTIVE INVESTMENT SCHEMES IN NIGERIA

 

 

There were also in existence six (6) registered venture capital funds.

III. ACHIEVEMENTS IN 2011

In 2011, we focused primarily on strengthening the Commission’s capacity to

discharge its mandate of market regulation and development. The Commission

introduced among others, a new code of corporate governance, served as a

vanguard for the conversion to IFRS, strengthened the mechanism for Anti-

Money Laundering and Counter Financing of Terrorism (AML/CFT).

Specifically, the following were some of the regulatory and developmental

initiatives undertaken by the Commission in 2011:

1. Strengthening the SEC

A. Human Capital

Following a rigorous and transparent process, the Commission established the

Young Professionals Programme (YPP). After the exercise, 52 young Nigerian

professionals (including Lawyers, Economists, Accountants, etc) from across all

36 states of the federation were successfully on-boarded. Leading up to this

selection, a total of 34,292 applications were received out of which 2,283

candidates were accredited for aptitude tests. 219 candidates made it through,

out of whom 198 were selected for the final stage of assessment.

As part of the on-boarding process, the intakes have since commenced an

intensive induction programme which included a 3-week training by a

reputable UK based company, a boot camp in Lagos and internship with select

group of organizations and capital market operators.

The new members of staff are expected to assume duties fully in the first quarter

of 2012

 

 

In light of the ever evolving nature of the capital market, the need to continually

build personnel capacity cannot be over emphasized. The Commission, in

realization of this fact, continually trained staff in the critical mandate areas. Of

note is the training facilitated by the International Monetary Fund (IMF) aimed at

strengthening supervision in relation to AML/CFT. The training also covered

enhancing the effectiveness and efficiency of risk-based approach to

management and supervision for capital market operators and regulators

B. Technology:

In 2011, we commenced the process of overhauling our Information and

Communication Technology system. Recognizing the potential of the World

Wide Web to engender public education, awareness and interaction, the

Commission undertook concrete steps to reposition its website in 2011. The old

corporate website was reconstructed. The new site is more functional,

interactive and user friendly. A unique feature of the site is the complaints,

observations and other feedback pane which allow for greater interaction with

the Commission. The Commission has also registered its presence on a number

of social media platforms such as Twitter and Facebook.

We commenced the development of an application software for electronic

registration and returns analysis and succeeded in building a shared technology

system for common services and capabilities. Consequently, the Head office

and Zonal offices are connected over a wide area network.

The Commission also invested in an Enterprise Resource Planning to automate its

administrative and financial management processes. This will ultimately

engender reduced overhead and improved efficiency. The first phase of the

soft ware deployment will concluded within the first quarter of 2012.

 

 

C. Markets

In pursuit of its objective of investor confidence restoration in the market, the

Commission, in collaboration with the US Securities and Exchange Commission

and the USAID, organised a week-long training workshop in July 2011 which

attracted three hundred and forty six (346) market operators and financial

sector regulators. The workshop served as a forum for exchange of ideas on

global best practices in the development and regulation of capital markets

and provided also provided participants with up-to-date tools to professionally

handle enforcement and contemporary market development and oversight

duties particularly in the light of global economic and financial challenges.

2. Improved Regulatory Mechanisms

To improve market transparency, efficiency and competitiveness, the SEC in

2011 took various necessary steps to improve its regulatory and surveillance

mechanisms.

A. Rules: A total of 29 new/amended rules were incorporated into the

Commission’s Rules and Regulations in 2011, covering areas such as

securities lending and borrowing, ethical/Islamic fund, exchange-traded

funds, payment of dividends etc. in 2012, we shall finalise rules on private

equity funds.

B. Monitoring, Investigation and Enforcement (complaints management):

During the year under review, the Commission strengthened its working

relationship with law enforcement agencies especially the Federal Ministry

of Justice, Economic and Financial Crimes Commission (EFCC) and the

Nigeria Police (NP). The Commission had resident legal teams from both

the Federal Ministry of Justice and the Nigerian Police which assisted in

investigation and enforcement activities.

In the course of the year, we successfully resolved 709 out of the 1,393

complaints.

 

 

Pursuant to the mandate to ensure compliance with the Anti-Money

Laundering Prohibition Act (2011) and relevant Rules and Regulations, the

Commission conducted ninety (90) inspections on CMOs. We also

reviewed a total of 1,594 returns from three hundred and thirty seven (337)

market operators in 2011.

The NSE in pursuing market integrity with the same vigor as the SEC,

suspended sixty (60) stockbroking firms for failing to comply with the

directives of the Commission to maintain a N70 million minimum capital

base. We also facilitated the refund of about N200million by market

operators in cases of breach of contractual agreements and non-refund

of money to investors during the year. We penalized fourteen (14) fund

managers for non-rendition of returns while one (1) case involving

mismanagement of funds was earmarked for enforcement action.

C. Code of Corporate Governance: The Commission in 2011 revised the 2003

Code of Corporate Governance. The new code has been widely

acclaimed to be in tune with international best practices. It is designed to

promote transparency, accountability and good corporate practices.

Among other differences, the new Code is not exactly optional:

companies must comply or explain their failure to do; and they are

required to include their state of compliance with the Code in their

periodic reports.

D. Adoption of International Financial Reporting Standard, IFRS: Given that

2012 is the migration year stipulated by government for IFRS in Nigeria, the

SEC in 2011 continued to invest enormous resources to ensure seamless

transition by public companies. The Commission in liaison with other

stakeholders such as the Financial Reporting Council of Nigeria has put in

place necessary measures to build required capacity in this regard. The

Nigerian Capital Market Institute (NCMI) was approved for the proposed

 

 

IFRS Academy. In a similar development, the SEC is working with the World

Bank to organize IFRS Clinics for the purpose of providing technical

support to public companies. A series of workshops and seminars were

held to acquaint Chief Executive Officers, Finance Directors and

Compliance Officers of targeted companies with the new regime in

financial reporting.

3. Investor Education & Public Enlightenment

A. Investor Outreach: As part of its financial literacy strategy, the Commission in

July 2011, collaborated with the Rivers State Government and successfully

hosted an investor/issuer education outreach for the government and people of

Rivers State. Over 1000 participants were offered critical insights into the market

as an ensemble of capital market experts presided over the interactive sessions

under the supervision of the SEC. This was done to educate the citizenry and

government of the state on the benefits of investing in and sourcing funds from

the capital market.

B. “Project 50”: To commemorate fifty years of capital market regulation in

Nigeria, the Commission on October 31 2011, organized an international investor

forum in Abuja under the theme “Nigeria, the preferred investment destination.”

Well attended by leading international and local investors, as well CEOs, and

financial sector leaders, the event showcased the wealth of investment

opportunities in Nigeria. “Project 50,” as the series of events marking the Golden

Jubilee is called, will culminate in a bigger investment forum in October 2012.

C. Non-traditional Investor Education (Movies): At the October 31, 2011 event,

the Commission unveiled a Nollywood movie, titled “Breeze”. The goal of the

Commission amongst others, was to leverage the following enjoyed by

Nollywood as a platform to reach a wider spectrum of people.

 

 

4. Registration of Market Operators

The Commission is unrelenting in its effort to ensure that only competent

individuals or companies with requisite skills participate in the market. Thus, only

sixteen deserving applicants, out of a total of 131 applications that were filed,

received operating licenses to function in the market in various capacities after

a rigorous examination in 2011. This level of scrutiny prevents individuals with

poor or low levels of expertise. We also granted approval in principle to the

National Association of Securities Dealers (NASD) Ltd to operate an Over-the-

Counter (OTC) market.

5. Demutualization of the Exchange

To improve the operations and global competitiveness of the Nigerian Stock

Exchange, the Commission, in September 2011 set up an industry-wide

Committee to examine issues around demutualization of the Exchange and

make appropriate recommendations to the Commission. The Committee is

expected to submit its report to the Commission within the first quarter of 2012.

Demutualization is a process through which a member owned company

becomes shareholder owned. Demutualization comes with a host of benefits,

among them, greater independence of management, stronger corporate

governance, improved investor participation in the ownership and

management of the exchange and operational efficiency. Others are

increased resources for capital investment and access to global markets. The

NSE is probably the only market in its class that has yet to be demutualized.

In addition, the Commission had obtained technical assistance from the

International Finance Corporation through First Initiative, with the engagement

of a consultant to provide advisory and capacity building services to the

Commission in particular and the market as a whole especially in the area of

demutualization. The Consultant is expected to present his final report to

stakeholders before the end of the first quarter of 2012.

 

 

IV. PLANS FOR 2012

Against the backdrop of the state of the market as highlighted earlier in this

presentation, and taking full cognizance of the challenges that continue to

weaken global economic recovery, we have in place a viable strategy to move

the Nigerian capital market in the direction of sustained recovery and growth. I

highlight some of our plans for this year as follows:

A. Restructuring the Abuja Securities and Commodities Exchange (ASCE):

An inter-ministerial meeting was held with the World Bank in the third quarter of

2011. This was with a view to aligning the structure and operations of the

Exchange with the Agricultural Transformation Agenda of the federal

government. In its summation, the World Bank amongst other things advocated

for the privatisation of the ASCE, a position with which the Commission is in

agreement.

Given its importance to the growth of the national economy, the Coordinating

Minister for the Economy and Honorable Minister of Finance is leading the

collaboration of the Ministry of Agriculture, the Ministry of Trade and Investment

and the SEC to reform the ASCE. This action is further underscored by the fact

that ASCE was originally listed for full privatization under the Public Enterprises

Privatisation and Commercialisation Act of 1999. At the insistence of the SEC the

ASCE was mandated to comply with minimum financial regulations with regards

to the submission of audited annual financial statements. The ASCE for the first

time in history in 2010 presented its financial results for the period 2004 – 2009.

B. Developing the Housing Finance sector

Housing finance is at the front burner of our programme for 2012. The provision of

affordable housing tops the agenda of the Federal Government, and those of

many states. We are thus positioning the capital market in 2012 to play a

leading role in making this a reality. There is an estimated deficit of up to 18

 

 

million housing units in Nigeria and government housing schemes cannot do

much to reduce the size of the deficit.

Our housing sector roadmap at the SEC emphasizes that government should

focus on creating the enabling policies for private sector investment in the

housing sector. The capital market can channel investible funds in a manner

that meets government’s goal of providing affordable housing for the majority

of Nigerians, while also providing expected returns to investors. This alone can

dramatically reduce the jobless rate and grow the economy. We project that

our housing roadmap will increase home ownership from about 10% today to

nearly 50% in the medium term.

There is a vast wealth of opportunity waiting to be tapped in the housing sector.

We plan to deploy such instruments as securitization to tackle the challenges of

asset liability mismatch that make commercial bank financing of mortgages

unattractive in Nigeria and elsewhere. In addition, we are pushing for larger

reforms in land registration, land title, the tax regime and registration of

collateral, which have constituted obstacles to the development of a viable

housing market here.

C. Forbearance

Today, many brokers still contend with overhang of margin and underwriting

loans from the boom years. In spite of the significant drop in exposure to

N44billion in 2011, from over N300 billion, the overhang continues to impede the

ability of many stockbrokers to provide liquidity to the market. We have made

representations on their behalf through the Ministry of Finance. This year, we will

continue to explore ways of alleviating the impact either by way of

forbearance, debt forgiveness, etc to revitalize the firms, improve liquidity and

restore investor confidence in the equities market.

 

 

D. Increased market participation:

Nigeria has the advantage of a large base of potential investors. Estimates

however have it that only 5 million Nigerians, roughly 3% of the total population,

participate in the market. This year, we are undertaking a number of initiatives to

encourage and boost participation by Nigerian retail investors. One way of

achieving this is by finding more innovative ways of building a culture of savings

and investment. Also we are set to encourage the participation of Nigerians

through institutional vehicles like mutual funds and collective investment

schemes.

E. Targeted Listing of Critical Sectors of the Economy

In 2012, we aspire to attract to the market companies operating in sectors that

have little presence in our capital market. Among these are oil and gas,

telecommunications and agriculture companies as well as SMEs. We have held

preliminary discussions with targeted multinationals, particularly in the telecom

and upstream oil and gas sectors. Oil as you know is the mainstay of our

economy, contributing over 90% of our foreign exchange earnings. Telecom

similarly is a significant segment of our economy with an estimated 80 million

subscriber base, representing roughly half of the Nigerian population. As for

agriculture, recent figures released by the Bureau of statistics indicate that it

accounted for over 40% of GDP in 2011. Yet these sectors - oil and gas, telecom,

and agriculture, SMEs – account for a mere 3%, 0.28%, 0.34%, and 0.06%

respectively of our stock market capitalization. We are working to incentivize

these companies to seek listing, relying largely on the experience of other

jurisdictions. Following the example of China and other BRIC countries, in 2012,

we aim to attract SMEs (only 12 of which are currently listed) to list as this will

create more jobs and encourage entrepreneurship.

Finally, we expect that the imminent privatization of the power sector will result

in the listing of large utilities companies, currently absent from the stock market.

 

 

F. Boosting Investor Confidence

One of the outcomes of the capital market retreat in December 2011 is that in

2012, boosting investor confidence shall be our primary emphasis. We are aware

that some investors have yet to recover from the losses they suffered as a result

of the impact of the financial crisis. We are embarking on broad-based investor

enlightenment, strong regulatory oversight and punishment of misconduct in our

effort to reassure domestic and international investors that our markets are fair

and efficient.

G. Solving the Problem of Unclaimed Dividends

The registrars have informed us that there is N41 billion outstanding unpaid

dividends. While this marks a reduction from the N44 billion of the previous year,

last week we took on registrars on a radical solution to the problem. We jointly

considered a number of options, and by the end of this quarter, the results will

be felt. Our target is that in 2012, we shall reduce the size of outstanding

dividend by 50%. We also aim to finally dispose of the operational and

regulatory bottlenecks that have led to the accumulation of unpaid dividends.

H. Market Deepening

Part of our focus in 2012 will be on diversifying market offerings and product

types in the market. The Commission had commenced the process of revitalizing

the Bond market following the reconstitution of the Bond Sub-committee at the

maiden CMC Retreat held in December 2011. The Commission would also work

closely with the Ministerial Steering Committee to improve bond market liquidity

through the establishment of a virile secondary bond market. This is

notwithstanding recent efforts by the Commission to license inter-dealer brokers

with the intent of establishing electronic trading platforms for bonds.

We are working to expand Collective Investment Schemes (CIS) such as Ethical

and Islamic funds, and Real Estate Investment Trusts (REITs) among others. The

 

 

Commission will also support the efforts of the NSE in its aspiration and plans to

introduce five (5) new products within five years. It would be recalled that the

Exchange launched the first Exchange Traded Fund in 2011. The Commission will

collaborate with the NSE for the speedy and orderly introduction of other new

products.

I. Conversion to International Financial Reporting Standards (IFRS)

As stated earlier in this report the commission will collaborate with relevant

stakeholders to ensure the seamless transition of public companies in Nigeria to

IFRS in 2012.

J. Capacity Building

In 2012, we shall not relent in our training and retraining of the SEC staff. In this

regard, we will continue to leverage our strategic relationships within IOSCO, US

SEC, Oxford University, Guarantco and others on relevant training modules to

develop requisite skills in the critical mandate areas and grow the capability of

operators to enhance market efficiency and professionalism. In 2012, we will

review the business model and operational framework of the Nigerian Capital

Market Institute (NCMI) to be able to effectively deliver on its mandate of

providing training and other capacity building services to Nigeria and by

extension the West African sub - region.

This quarter, we shall take delivery of our first set of YPs. Expect a more vigorous

SEC.

The Commission, also intends to commence in 2012, a training and certification

programme for directors of public quoted companies in Nigeria. The objective is

to ensure that only fit and proper persons are appointed into such positions as

this will engender increased accountability and effectiveness in the

management of public companies.

 

 

K. Stronger backing to the NSE

The management of the NSE is overhauling its processes, technology, regulation

and governance. The Exchange has set a target market capitalization of

$1trllion by 2016 and has outlined a strategy for transforming the market to a

world-class status within the same time frame. We are fully supportive of the

initiatives of the NSE leadership and shall build on our partnership in 2012.

L. Stronger Public Enlightenment

The Commission will also continue to deploy resources to strengthen its public

enlightenment and investor education mechanisms to appeal to various target

groups. In the first quarter of 2012, we shall host an investment forum for women

as part of “Project 50.” We will continue to engage the target publics through

outreaches, town hall meetings and infusion of capital market studies in the

curricula of secondary and tertiary institutions in the country. We are also

determined in 2012 to intensify the use of new media such as Twitter, Facebook,

and short message services to build the required knowledge base among

investors and the general public.

M. Leveraging Technology for regulatory and market efficiency

Out technology upgrade is an ongoing project. The Commission will also in the

year, boost the application of technology to improve its regulatory oversight of

the Nigerian Stock Exchange.

The Commission will ensure that market operators acquire a minimum level of

information technology support so ensure improved efficiency and

transparency in the market.

 

 

N. Whistle Blowing

Keeping up with international best practices, the Nigerian SEC has remarkably

improved its regulatory and market development processes. One such

enhancement is in the use of whistle blowers for market surveillance. The SEC

encourages individual employees of firms to report infractions committed by

either their employers or by other capital market operators (CMOs). As you may

know, Section 306 of the Investments and Securities Act (ISA) 2007 gives an

employee the right to disclose information suggesting that a crime has been

committed or is likely to be committed, to their employer, or to the Commission.

Whistle blowers are protected under the law: an employee who suffers any form

of victimization as a result of making disclosures is entitled to reinstatement or

compensation. And the Commission is under a duty to investigate complaints

received from whistle blowers.

We have set up whistle blowing hotlines. Professionals are currently undergoing

training and before the end of April, we shall fully launch the whistle-blowing

platform. A code of conduct will be released as part of this initiative.

V. Conclusion

Ladies and Gentlemen, the potential of the Nigerian capital market to galvanize

the economy for growth has never been more profound. Being an enabler of

socio-economic development, the market is a ready source for raising capital

with which government can deliver on its social contract to the citizenry. We

count on your support to build our capital market.

The current challenges in the market notwithstanding, the Commission remains

optimistic that the outlook of the market is favorable given the economy’s fairly

decent growth and the relative stability the country enjoys.

Thank you for your attention.