This Day (Lagos)

11 December 2012

Nigeria: Committee Wants SWF Investment in Nigerian Equities

The Committee for the Resuscitation of the Capital Market set up by the Coordinating Minister for the Economy and Minister of Finance, Dr. Ngozi Okonjo-Iweala, has recommended that the Sovereign Wealth Fund (SWF) should invest part of its funds in Nigerian equities market for the stability of the market.

In its report, obtained exclusively by THISDAY, the committee, which was chaired by the Central Bank of Nigeria's (CBN) Deputy Governor in charge of Financial Stability, Dr. Kingsley Moghalu, advised that a major institutional investor like the SWF could help create stability since foreign institutional investors, which currently account for 70 per cent of the equities market, have contributed to its volatility.

The committee was set up to review and recommend forbearance to be given to stockbrokers given their role in the capital market and any other actions that would assist the resuscitation of the market.

The minister had on Monday, last week, announced a N22.6 billion bailout for 84 stockbrokers in line with Section 6(5) of the Asset Management Corporation of Nigeria (AMCON) Act.

The minister also unveiled tax incentives, all intended to give life to the capital market.

But while the leadership of the stock broking community has hailed the forbearance package, there were indications that some of the affected stock broking firms may reject the package because of the sanctions that would be imposed on them owing to the inherent moral hazard in the bailout for the brokers.

Giving reasons for the sanctions, the report noted that the forbearance must be accompanied with appropriate sanctions "to discourage similar behaviour in the future and also to dispel any notion of future rescue by the taxpayers".

In line with this, THISDAY learnt that AMCON will this week write to the affected stockbrokers to know those who would accept or reject the bailout.

A top official of AMCON, who confirmed the plan to write the brokers, said they would be given two weeks to respond.

As announced by the minister, stockbrokers willing to accept the bailout will be prohibited from providing any professional service to AMCON for a period not less than three years; they would also be required to reveal to the Securities and Exchange Commission (SEC) any dealings in any security valued at a minimum of N25 million executed in any single deal or multiple deals on the same day on behalf of their clients; and as part of their net capital requirements, no broker that has received forbearance shall permit his aggregate indebtedness to exceed 100 per cent of his net capital.

In addition, such stockbrokers will be prohibited from taking proprietary positions or trades on their own account for one year; their details shall be forwarded to the Credit Bureau Agency; and they would have to adhere to a strict requirement that imposes separation of assets and control of brokerage services and/or future facilities through the use of custodians.

But as AMCON proceeds with bailout for the stockbrokers, it is uncertain if the recommendation by the committee that the SWF should invest part of its funds in equities will be accepted by the minister and state governments. The states are part owners of the SWF.

"Apart from stabilising the market, the SWF can help allay the fears of skeptics who argue that the market may not be able to absorb equity listings by major corporations, and it would play a major role in promoting greater investor confidence in our local equity market," the committee said in the report.

The committee held the view that typically, SWFs take a long-term approach to investing, where considerable investments in equities and fixed income securities are used to achieve the long-term strategic financial goals of a sovereign.

According to the report, majority of SWFs, including those of China, the United Arab Emirates (UAE) and Singapore, structure their holdings to include large investments in the capital markets.

"For example, the Government of Singapore Investment Corporation (GSIC), considered a 'model' fund, invests approximately 50 per cent of its holdings in equities, 30 per cent in bonds and 20 per cent in other types of investments, including real estate and commodities," the report said.

Furthermore, the committee recommended that 20 per cent of all entities earmarked for privatisation should be listed on the Nigerian Stock Exchange (NSE) at the same time that they are being sold to strategic investors.

"This is a strategy to improve on transparency, disclosure and good corporate governance, while providing the general public the opportunity to buy shares at the same price point as strategic investors," the report said.

It added that this privatisation formula has been successfully implemented in many countries over the years, including "Argentina, Australia, Brazil, France, Hong Kong, Ireland, India, Japan, Malaysia and Poland".

"This strategy has contributed significantly to deepening their markets and has aided greatly in the transformation of their economies. Malaysia, for example, has successfully transformed itself from a producer of raw materials into a deep, multi-sector economy with an average GDP growth rate of six per cent over the last 20 years.

"Sinopec and Petrobras also transformed the economies of their respective countries, China and Brazil, upon listing," it stated.

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