3 August 2008

Nigeria: Discordant Tunes Over Stock Brokerage Firms' Recapitalisation

Lagos — Since the Security and Exchange Commission (SEC) announced a N1 billion recapitalization ceiling for all stock broking firms in the country late last year, there has been ill-feeling among operators in the sector and among Nigerians, including the National Assembly.

SEC maintained that the sector needed to be recapitalized, because the need for all the sectors of the financial market to be strengthened and repositioned to cope with the emerging local and global challenges; the rising number of fringe players in the market (especially stockbrokers); and the record over the years confirmed the fringe players as being mainly responsible for various infractions that undermine market disciple, efficiency and competitiveness.

Currently, there are 246 registered brokerage firms dealing in just 213 equities on the floor of the Nigerian Stock Exchange. Stockbrokers and market markers have been identified as high risk participants as many of them are entrusted with large volume of funds and control investment assets far in excess of their shareholders fund. Most of these firms are not well structured and lack good corporate governance practices. This poses considerable risks to the market, SEC said.

The reforms, the commission said, have already been carried out in the banking, insurance and pension sectors.

In spite of all these, stockbrokers and members of the National Assembly were not satisfied. Early last month, the Chartered Institute of Stockbrokers (CIS) and the Association of Stock broking Houses of Nigeria (ASHN) led a protest to the Senate against the N1bn market recapitalization and suggested N250 million as minimum capital base.

Speaking on behalf of the associations, Oladipo Aina told the Senate, "we do not believe that raising the capital base to N1 billion will curb the activities of unscrupulous players. If the N70 million capital base has been adequate to move the market exponentially from N2.1trillion to N13.3trillion in 2007 without any systemic failure, it is, difficult to justify such an astronomical jump in the new capital base."

He said both bodies, while agreeing that there should be an increase, were "convinced that there is need to stratify the market into three categories: N1 billion; N500 million, and N250 million based on volume of businesses to be done. This categorisation will enable the market to evolve without causing any disruption."

Aina said SEC had a self-adjusting mechanism for determining the level of capitalisation for any stock-broking firm, vis-a-vis the volume of business it wanted to do with SEC.

"If this rule is strictly enforced by SEC, the issue of over-trading or high gearing ratio would be nipped in the bud. This rule makes it possible for both the small and the big players to co-exist in the market."

Aina said the new policy, if allowed to hold, "will shut out small investors from the market and will not encourage the growth envisaged, as the stock-broking firms with this level of capital will find it unprofitable to deal with small holders.

"The policy will further heat up the market and engender speculative trading of the few securities available giving rise to prices that have no bearing with the situation of the companies whose securities are being traded."

Most of the stockbrokers who spoke to Sunday Trust were in support of Aina's position. For instance, Dele Odusanya of Quantum Securities said N1 billion capital base was too much, as capital base alone could not stop over trading or other unethical activities in the market.

But, in its presentation to the senators in March this year, SEC insisted that the new capital base approved by government affected all categories of market operators, including Issuing Houses, Trustee, Fund/Portfolio Managers, and Registrars.

The Director General of the SEC, Musa Al-Faki, said only a few stockbrokers were complaining against the raise in capital base, mainly because most of them were not properly structured. He also said those companies lacked good corporate governance.

Following an analysis conducted on the 30 most active firms in the secondary market for the period ended on 30th September 2007, it was revealed that most of them had gearing ratios ranging from 913 per cent to 6,698 per cent. This was an indication of their level of indebtedness in comparison to their net capital. Most of these debts were provided by banks. When the levels of the firms' indebtedness were compared with their respective shareholders funds, it was evident that these brokerage firms had no asset cover for their huge liabilities.

The most disturbing finding of this analysis was the fact that firms that had gearing ratio between 1,220 per cent and 6,698 per cent were also the most active in the secondary market. At present, none of them has a paid-up capital of N500 million.

Al-Faki said it was true that the N1 billion base was huge but the firms could be consolidated into bigger entities, thereby reducing incidences of abuse and market misconduct as merging companies would ensure that proper checks are put in place. The companies would also easily pool together resources to provide the right technology and personnel that the business requires to become internationally competitive.

"The present low-level of capacity in the brokerage firms is largely responsible for the lopsidedness towards transactions in equities only. Despite efforts of the regulatory authorities, it has become challenging over the years for new products such as derivatives to be introduced in our market. A case to further illustrate this point is the fact that for the past 14 years, the Commission could not succeed to get the stockbrokers to establish an over-the-counter (OTC) for trading in unlisted Securities. This is mainly due to low level of capacity on their part" he said.

Al-Faki said despite criticisms, over 180 of the firms, had forwarded their recapitalization plans to the commission, while there were also indications that some firms had already met the new minimum capital base (33 as at December 2007), as many others have done Private Placements aimed at shoring up their respective capital base.

Furthermore, foreign firms have recently commenced entry into the market to compete with the local companies. It is, therefore, important that the recapitalization exercise should be implemented as approved by the Federal Government since, at the end of the exercise, the nation's economy will be the greatest beneficiary.

Meanwhile, last week, the House of Representatives adopted a motion seeking to reduce the amount fixed for the re-capitalisation of stock broking firms. The motion was entitled:

Sponsored by Rep. Ahmed Wadada (PDP-Nasarawa) and 21 others, the motion was passed after a voice vote.

Moving the motion, Wadada noted the efforts of the Securities and Exchange Commission (SEC) toward the re-capitalisation of stock broking firms in the Nigerian Capital Market.

He said some Nigerian companies had been unable to meet the minimum capital requirements of N1billion set for each stock broking firm by the regulatory agencies.

He pointed out that the capital market was the bedrock of the contemporary market economy, hence the widespread outcry and criticism by most of the stock broking firms against the N1 billion minimum capital as being "too high, outrageous and unrealistic" should not be ignored.

"There is the imminent danger of a possible take-over of the Nigerian Capital Market by mega banks and wiping-off of the dividing line between the money market and the capital market," Wadada noted.

Wadada urged the Federal Government and other relevant agencies to suspend any programme and exercise aimed at re-capitalisation of stock broking firms until consultations were made by the agencies.

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