The Director-General, Securities and
Exchange Commission, and Chairperson, Africa/Middle East Regional
Committee of the International Organisation of Securities and Exchange
Commissions, Ms. Arunma Oteh, talks about critical issues in the
Nigerian capital market in this interview with SIMON EJEMBI
African capital markets are beginning to gain greater visibility globally. Where does Nigeria stand in the scheme of things?
The interest in the African capital
markets is very much driven by the interest in the opportunities that
Africa has to offer. Africa has been growing faster than the global
average. It is the second fastest growing continent after Asia, and it
has six or seven of the fastest growing economies. It is also because it
is underserved in terms of infrastructure and the provision of goods
and services to the large population. Africa’s population is youthful;
actually 50 per cent are women, 75 per cent are young people. You are
seeing rising income and a growing middle class. For a lot of investors,
the African capital markets provide an opportunity for them to partake
in investment opportunity that provides huge returns. If you take what
happened in the telecoms sector in the last 10 years, for example,
Nigeria went from 450,000 telephone lines to more than 140,000,000
telephone lines. Anybody who invested in the telecoms space 10 years ago
would have done extremely well today. Similarly, whether it is consumer
goods, retail, infrastructure or the natural resources such as oil and
gas and other minerals, the capital market has really provided an
opportunity for people.
The second thing is better regulation
across Africa. Many of us (regulators) are members of the International
Organisation of Securities Commission and we have principles which we
abide by. The regulators are really playing their role in terms of
ensuring that the markets have the highest level of integrity comparable
to markets in other parts of the world. So, the two main reasons are
the investment opportunities and the quality of regulation.
There is also the variety of products
available. The markets have greater depth than they had in the past. We
are not where we should be but today, you can invest through equity, the
bond market, mutual funds and you have non-interest capital market
products. There are diverse ways in which you can invest. There is also
more efficiency in investing because a number of our markets are
leveraging technology better. In some cases, you can even do trading on
smartphones and mobile phones.
What are the major challenges the capital market is facing?
For us, the stock market today does not
represent Nigeria’s economy. We don’t have companies in the utilities
that are listed. We believe that the privatisation programme that
President Goodluck Jonathan has been leading should ultimately lead to
the power companies coming to the market to raise capital. We feel also
that the transformational agenda on agriculture should enable a number
of agro businesses to list. The agro businesses that have listed have
done very well, whether it is Okomu (Oil Plc) or Presco Plc. There is
the potential for companies like Olam and other agro businesses that
have not yet listed to come to the market. In the telecoms sector, the
companies have done very well in the last 10 years and I think that
Nigerians expect that the companies will list and they too as Nigerians
can partake in the success. So, listing is important and it is a
challenge a number of African markets face.
The second challenge is market depth,
breadth and liquidity. Liquidity is important because it is the
barometer of how easily you can enter the market and how easily you can
exit, and if you can’t easily exit, you will be afraid to enter. That is
why liquidity is very important. In Nigeria, for example, on a good
day, the daily ticket size is about $30m, in Turkey, one stockbroker
could do about $2m to $3m. You can see the scale of what we need to
improve liquidity. Now, liquidity has improved significantly because of
some of the steps we have taken. One of them is approving the
Exchange’s programme of market making, so that you have designated
market participants that are able to trade in specific securities.
In addition to market making, we
approved rules on short selling. We approved rules on securities lending
and that has also boosted liquidity. Liquidity is one; risk management
and strong institutions are also important.
Today, we don’t have market participants
that are of the same size with the ones in the developed markets. And
if you are small, you will think small and will not be able to generate
the level of business that you should generate. For that reason, SEC has
focused on strengthening itself, the Exchange and other market
participants. So, our clearing and settlement organisation, the Central
Securities Clearing System, has gone through significant changes to
strengthen it. We are also raising the minimum capital requirement for
all categories of operators, fund managers, registers, broker dealers,
issuing houses, essentially so that institutions can be strong enough to
respond to markets that have the potential to be much larger.
The introduction of over-the-counter
platforms is also something that we are very proud of. The risk
management, for me, is very critical because if you have a risk
management culture, you will be able to predict and prepare for the
varieties of uncertainty that happen in the market. For example, what is
happening with respect to tapering of quantitative stimulus in the
United States is affecting the markets globally, starting with emerging
markets. If you have got a risk management culture, you will be more
prepared to respond to tapering.
Why are companies not coming to list despite your campaign?
Listing is not what happens overnight;
nothing is holding the companies back. There is a process – there are
listing requirements that you need to meet. One of the big issues is
that, in 2010, on the recommendation of the different regulators and the
market participants, the President accepted that we would move to
International Financial Reporting Standard, and the requirement is that
beginning from 2012, as a listed company, you have to report under IFRS.
If you are not ready as a company, what you will do is to focus on
transition to IFRS before you list. Secondly, there was an unprecedented
decline in our market following the global financial crisis. If you
want to do an Initial Public Offer, basically, you are setting a price
at which others can participate in your company. What you would like to
do as a promoter is to get the highest price possible. So, a number of
the promoters have waited for the valuation to come back to the level
that they feel comfortable with before they offer their companies for
IPO. What we’ve seen is that now, more people are certain that valuation
is more like what they will like to see because we had our market rise
by 35 per cent in 2012 and by 47 per cent last year. Now, they feel
comfortable with the valuation that they will get.
The other thing is that the process of
listing takes time. They need to meet other requirements; make their
submissions to SEC and to the Exchange; get their approval and come to
the market. My view is that this year, we’ll probably see a number of
important companies come to the market. As for the privatised entities,
they have only just been handed over to the private sector. I suspect
that what the companies are doing is to put their house in order,
determine how they will raise funds – some of them have already raised
funds from banks. As they start to invest to revamp some of what they
have acquired, they will need to get additional capital, but there is a
limit to the leverage that they will have. They will need equity
capital. Some of them will also like to divest and do other things with
it; so, coming to the market is a veritable option.
Is there any plan to review the listing requirements?
But one of the achievements of SEC and
the Exchange is actually a review of the listing requirements. At the
beginning of 2012, SEC approved new listing requirements. Your required
record of profitability is a three-year track record. And in many cases,
for example, in the exploration and production sector, you could
decide, if you are a green field project and you don’t have a track
record, that the feasibility study for your project, along with some
review of the promoter or technical partner could be considered as an
alternative to a track record. So, we’ve already revamped the listing
requirements and that is why a number of companies today are looking at
listing. Some of those privatised companies would not have been able to
come to the market in the past because of the five-year requirement of
profitability. But today, they can come to the market.
Similarly, the revamp of the second tier
and third tier market and collapsing them into the Alternative
Securities Market with specific requirement, with nominated advisers
that can handhold you through the listing process and even after you’ve
listed is clearly something that did not exist before. So, we have
already taken those decisions.
Despite several reforms over the
years, investors, especially retail investors, do not get their
dividends. What are you doing about this?
With respect to dividend payment, our
view is that in the era that we are in the world, we clearly need to
move towards e-dividend. We’ve taken a number of steps. One of them is
the collaboration with the central bank. In 2010, we were told that a
number of commercial banks did not accept dividends to be paid into
savings accounts. And in collaboration with the central bank, we were
able to resolve that. But ultimately, I think we should move to a model
where there is dematerialisation. There is electronic payment of
dividend because that will resolve challenges such a late delivery,
unclaimed or missing dividends.
SEC’s focus has been on protecting the
retail investor. I think one of the challenges we faced prior to 2010
was that people were lured into investing in things they were not
familiar with. If you do not understand the benefits and risk of
investing, it just does not make sense to do so. And that’s why we‘ve
also been keen to promote mutual funds, which allow you to diversify
your risk as a retail investor, but also allow you to benefit from the
expertise of a regulated registered fund manager.
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