8 May 2012

Nigeria: Banks Used Fake Firms to Crash Capital Market

Photo: CBN
Central Bank of Nigeria.

The director-general of the Securities and Exchange Commission (SEC), Ms. Arunma Oteh, that the extent and nature of the market abuses carried out between 2006 and 2008 are the primary reasons for the continuation of investor apathy in the nation's stock market.

In a bid to stem the tide, she said, the commission has made a proposal to the relevant authorities to amend the Company and Allied Matter Acts (CAMA) and the Land Use Act, among others.

Ms. Oteh, while making a presentation on the Nigerian capital market at the public hearing organised by the House of Representatives Ad-hoc Committee on the Capital Market, gave some clear examples of market abuses.

Oteh's presentation also accuse the former director-general of the NSE, Dr. Ndi Okereke-Onyiuke, of infractions and financial mismanagement.

In one instance, Oteh said, the Okereke-Onyiuke-led NSE bought a yacht for N37million and wrote down the book value within one year by recognising it in the books as a gift presented during its 2008 Long Service Award (LSA), yet there are no records of the beneficiary.

"The exchange also spent N186 million on 165 Rolex wrist watches as gifts for awardees out of which only 73 were actually presented to the awardees. The outstanding 92 Rolex watches valued at N99.5million remain unaccounted for. These were the kind of financial impudence that was perpetrated at the NSE. These transactions were routed through companies owned by some senior officers of the Exchange," Oteh stated.

Also, she referred to the huge amounts spent on a construction project that was yet to be completed many years after inception as well as the inability to perfect the title of a key asset, the Stock Exchange headquarters building. The assets grew by nine times between 2006 and 2008 while expenses rose by more than 150 per cent from 2007 to 2008, she said.

In the presentation, which was made available to LEADERSHIP, she said that the management and directors of Afribank, Afribank Trustees and Afribank Registrars committed various grave market infractions in share buyback schemes, and made misrepresentations in the returns to the SEC to prevent detection that the bank funded its public offer, violating Section 106 (4), and Section 110 of the Investments and Securities Act (ISA) 2007 as well as Rule 109B of the SEC Rules.

According to her, shares owned by 1,258 entities (some fictitious) and individuals were merged into 14 accounts of nine companies some of which were owned by Afribank and its directors. These transactions were done outside the floor of the Nigerian Stock Exchange (NSE) using Falcon Securities, Fidelity Finance and Spring Capital to perpetrate the infractions, she said.

Also, between August 2006 and December 2008, she said, the executive team of Finbank engaged six law firms to incorporate 95 companies and transferred more than N25 billion of depositors' funds to nine of these companies and purchased 2.8 billion units of its own shares, violating Rule 109b of SEC Rules. The bank also violated Section 105 of the ISA 2007 which prohibits a person from creating a false or misleading appearance of active trading of a listed security, Oteh stated.

She continued: Between June 2007 and December 2008, Intercontinental Bank, its directors and principal officers engaged in unlawful share buyback schemes, buying about 3.4 billion units of shares using depositors' funds. It violated Section 105, 106 and Section 110 of ISA 2007 as well as Section 160 of CAMA and Rule 109b of the SEC Rules.

In 2007, she said, Union Bank borrowed amounts totalling N30.4 billion from two foreign investment banks. These funds were transferred to Union Trustees which in turn transferred the funds to Falcon Securities. In four days in November 2007, Falcon purchased 620.4 million units of shares worth N30.8 billion ahead of a public offer/rights issue. In 2007, Falcon Securities carried out 181,088 transactions with respect to Union Bank shares. This drove up the share price of Union Bank stocks from a low of N23.30 in January 2007 to N50.33 in November 2007, which indicated a price appreciation of over 110 per cent within 11 months.

In a bid to confront the ugly situation, she said, recommendations on laws to be amended have been sent to the appropriate authorities

Oteh recalled that the CAMA was enacted in 1990 before the age of widespread digital technology. Section 117 gives companies the general powers to issue shares. Section 125 makes provisions relating to allotment of shares and issuance of share certificates.

"We recommend amendments to allow companies electronically issue shares through CSCS accounts. The law should allow electronic application for shares, electronic allotment and transfers of shares. This should lead to the dematerialisation of paper share certificates. Generally, review sections 114 to 165, CAMA," she said.

On electronic Service of Notices, Oteh said Section 220 provides for service either by giving the member personally or sending it to him by post or to his registered address. Where the member has no registered address within Nigeria, the section allows service to "the address, if any, supplied by him to the company for the giving of notice to him."

"We recommend that CAMA be specifically amended to provide for service of notices electronically in the first instance where a member has provided an email address as a means of communication. Section 220(1) should allow sending of notices "by post or electronic means," and the definition of registered address should include an electronic address," she said.

Concerning electronic Register of Members, she recalled that Sections 83 - 90 provide for the keeping of register of members. Oteh however wants Sections 83 and 84 to recognise the use of electronic registers (as a mandatory back-up) and provide for a location of that register securely on independent servers or disks not in the premises of the company or the registrar.

She wants section 379 on Dividends to be amended to allow electronic payment of dividends. After a grace period, all payments should be by electronic means.

Concerning the Land Use Act and Housing Finance, she said it is estimated that there is a deficit of nearly 18 million housing units in Nigeria. This is a significant opportunity to provide shelter, collateral for businesses and develop the Nigerian capital markets.

"However, the principal legal instrument contains major obstacles to investment in real estate. Specifically, for every transfer of title to land, whether by way of conveyance or mortgage, the governor's consent is required under the Land Use Act.

This has generally been identified as the biggest single impediment to investment in the housing sector. There is need to remove this impediment, and allow freer transfer of land. In addition, many investors would prefer the reconsideration of the provision granting absolute title to the state governors," she said.

On the issue of unclaimed dividends, the SEC DG said that, in 2002, the commission constituted an industry-wide committee to examine, among others, issues relating to unclaimed dividend in Nigeria. The committee, among others, recommended the setting up of an unclaimed dividend trust fund and drafted the Unclaimed Dividend Trust Fund Bill. The draft bill was forwarded to the National Assembly but was however not passed into law. If enacted, it is hoped that these processes will eliminate the issue of unclaimed dividends in the long run, she said.

"Given the foregoing, it was important to me that we engage the NSE to address these weaknesses. Unfortunately the former CEO of the NSE did not attend most of the meetings we scheduled," she said.

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