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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.