The acceptance of the forbearance package by 54 stockbroking houses is good development that will impact the capital market positively.
The forbearance package announced by the Federal Government for stockbrokers last December in the nation's capital market was long expected as the major panacea needed to resuscitate the market.
The clamour for a bail-out package by the capital market community began when the huge debt overhang was affecting the recovery of the market from the crash of 2008.
Global markets and economies that suffered from the financial crisis received one form of assistance or other. In Nigeria, the banking industry got a relief from the Central Bank of Nigeria (CBN), which took over eight banks and injected fresh funds into them.
But the capital market never had a direct government's intervention, a development that led the capital market community to intensify its lobby for a Federal Government's solution.
This clamour informed the Coordinating Minister for the Economy and Minister of Finance, Dr. Ngozi Okonjo-Iweala, setting up a body- Committee for the Resuscitation of the Capital Market headed by the CBN Deputy Governor in charge of Financial System Stability, Dr. Kingsley Moghalu.
After deliberating on the issues affecting the market, the committee made some recommendations including the forbearance package.
Unveiling the N22.6 billion package last December, Okonjo-Iweala said it was meant to bring the market back for it to perform its role in the development of the economy.
According to her, a vibrant capital market is, essential to the government's Economic Transformation Agenda, especially in terms of raising much-needed long-term financing for critical infrastructure and the housing sector.
She explained that activities on the Nigerian capital market, particularly the stock exchange, had been very slow in the aftermath of the global financial meltdown and the Nigerian banking crisis.
She therefore, said that the N22.6 billion would remove the heavy debt burden and allow the brokers to fully re-enter and re-invest in the market, and make the market more vibrant.
"In furtherance of AMCON's cleanup of the banking sector, it is necessary to wipe off the debt overhang in the capital market, as this is dampening market activity.
"But let me state clearly that this forbearance will be accompanied with sanctions to discourage excessive borrowing behaviour by capital market operators in the future," she cautioned.
The sanctions included prohibition of brokers benefiting from the forbearance from providing any professional services to AMCON for a period not less than three years.
There will also be greater disclosure, as firms will be required to reveal to SEC, any dealings in any security valued at a minimum of N25 million executed in a single deal or multiple deals on the same day on behalf of their clients.
Besides, as part of their net capital requirement, no broker that has received forbearance would be permitted an aggregate indebtedness exceeding 100 per cent of net capital.
The brokers will also be prohibited from taking proprietary positions or trade on their own account for one year.
The capital market community welcomed the relief package, with the Chairman, Association of Stockbroking Houses of Nigeria (ASHON), Mr. Emeka Madubuike, disclosing that for over three years, the stockbroking community had solicited for the intervention.
"This singular act by the Federal Government gives us in the capital market a lot of hope that the market will begin to play its pivotal role as the engine room for the transformation of our nation's economy. We trust the government will continue to look for other ways to resuscitate the capital market to enable it compliment the various reform programmes of government and to become an integral component for the growth and development of the economy," Madubuike said.
However, as good as the package was, the conditions attached discouraged some brokers from accepting the offer.
This made AMCON to write the 84 broking firms to know those willing to take the package. By the end of January, which was the deadline, 54 brokers, with debt valued at N8.9 billion, accepted the offer.
Those who accepted the offer represents 64 per cent, while 22 stockbroking firms or 26 per cent did not response to AMCON's letter.
Only six or seven per cent rejected the offer, while two or two per cent settled their loans.
The Implication of Offer
The acceptance or the rejection of the AMCON's offer has implication for the individual brokers and the market generally.
According to the President, Chartered Institute of Stockbrokers (CIS), Mr. Ariyo Olusekun, the package was a big relief for the market and operators.
He noted that each individual broker must have looked at their different situation before taking their decisions regarding the AMCON's offer.
He explained that for those who believed they would be able to resolve their debt independently, there was no need to accept the offer.
"But those who examined their position and realised that the package would take the burden off them and start on a clean note, they have gone for it. These brokers, who have accepted the offer do not have to bother about paying those debts again because the burden has been shifted to AMCON. Such brokers can now recapitalise and do business again," Ariyo said.
The debt overhang had affected stockbrokers' liquidity in the market as they were unable to borrow. But with the relief package, the brokers would now be in a better position to do business in the market.
Understanding the Forbearance Package
When Okonjo-Iweala announced the N22.6 billion forbearance, some stakeholders had kicked against it, saying the government was using public funds to bail out brokers who incurred debts in the course of their normal business.
While the position of such stakeholders is understood, the package does not entail the brokers getting cash from AMCON to settle their debts. Rather, what has happened is that AMCON has taken over the debts of the affected brokers by giving cash to the creditor banks and assumed ownership of the underlying securities. AMCON will later sell those securities and realise its money.
Throwing more light on the situation, the Managing Director of AMCON, Mr. Mustafa Chike-Obi, recently told THISDAY that many people had misunderstood the forbearance package.
According to him, the package was extended to capital market operators, who in the course of businesses acquired loans that they could no longer pay.
"So we are forgiving what people could not pay. We are not giving them something. The notion that government is going to take N22.6 billion and hand over to market operators is out there and people are saying the government should have used the money for something else. This is the money they owe and they cannot pay. And even if we pursue them with the support of the law, all we could get is the instruments they pledged for these loans, which they will surrender to us in any case," Chike-Obi said.
According to the Managing Director/Chief Executive Officer of Partnership Investment Company Plc, Mr. Victor Ogiemwonyi, some of the stakeholders talked outrightly out of point because they had no real understanding of the issue.
"Even till date, many are yet to comprehend the proper context of what has transpired. It seem like stockbrokers have been made to take what Americans call 'a boom rap' that is, answer for what you are not responsible for; or as a friend of mine would say, taking Panadol (pain killers) for someone else's headache. Part of the misunderstanding came from the fact that the public thought the N22 billion was to be given to stockbrokers. Not many knew that this write off was inevitable," he said.
Ogiemwonyi noted that there was no way AMCON or the banks will collect this balance between the loans AMCON bought from the banks and the value of securities underlying them.
"It was also in the interest of AMCON that a closure was brought to this. Without a final closure to the matter many court cases were looming ahead ," he said.
The Margin Loan Controversy
It is believed that the huge margin loans that virtually brought the market to its knees would not had any negative impact on the market is if brokers and banks had played their respective roles very well. When the banks were awash with cash after recapitalising to the N25 billion and beyond, the capital market became the field where all of them played.
There was indiscriminate lending to stockbrokers and sometimes, individual investors without distinguishing between share loans and margin loans. When the bubble eventually bust, the blame game began.
Margin loan is a trading line with a bank that requires the broker to a margin contribution of about 30 per cent. The bank is expected to monitor the value of the shares on a daily basis and any short fall is immediately communicated to the broker , which is referred to as "margin call."
But many of the banks did not follow this process.
"The lack of understanding of what a margin account is, for many participants including banks, was the reason for the blunder. Many lenders including the banks confused margin lending with stock purchase loans. A stock purchase loan is where you approach a bank to give you a loan to buy a specific stock or a portfolio of securities. This is a specific obligation that you will be required to pay as contracted like any other loan," Ogiemwonyi said.
He stressed that it was the banks' business to make sure the stockbrokers did not trade over the line and expose the banks to risk.
"It was the failure in this regard that led to the crisis. This should be blamed on the banks instead of stockbrokers who are now made to bear the brunt of what, essentially, was a system failure," he said.
By and large, it is believed that the forbearance package is a big relief for the entire market and it would help in sustaining the recovery being witnessed in the market.