Nigeria’s capital market not fulfilling its main objective – Expert

DAVID Adonri is a capital market operator and executive vice chairman of Highcap Securities Limited. In this interview with EHIME ALEX, Adonri speaks on a number of issues confronting investors and market operators, and why the capital market is not living up to its primary objective.


The ICIR: Could you give us a summary of equities market performance amid the last general elections?

Adonri: Generally, the equities market does not like uncertainties. Political change as exemplified by a general election brings uncertainties into the socio-political arena. As political risk escalates, the tendency is that investors will assume a defensive posture. While we examine the market from the perspective of politics, we can also look at the impact of socio-economic factors on the state of the equities.

There was apathy initially as people believed Nigeria’s elections have never been credible even as the politicians vying for positions did not engender confidence in the mind of the electorates. But the emergence of the Labour Party flagbearer engendered enthusiasm and brought confidence as parts of what impacted the equities market.

Irrespective of the economic environment which ought to have eroded investors’ confidence, the third-quarter financial and full-year results of companies were impressive. This further enhanced investors’ confidence. A lot of companies did not disappoint in the distribution of dividends payout. But the impact of the elections affected the bottom line of companies in the first quarter as heightened political risk and economic challenges eroded investors’ confidence.

The outcome of the general elections continues to be a source of worry to the investing public as we wait to see how the legal system will right the wrongs.

The ICIR: In your view, what really is eroding foreign investors’ confidence in the capital market?

Adonri: Foreign investors’ confidence has been eroded over time. First, a lot of rating agencies have given negative sovereign ratings to Nigeria, which foreign investors rely on to take a position in the capital market.

Second, Nigeria had faced hard currency scarcity for quite a while, of which funds of foreign investors are trapped. This has severely eroded their confidence in the financial market, not just the capital market. The central bank cannot meet its obligation in servicing hard currency requirements from organisations. A case in point: the airlines have sold tickets, and the central bank cannot remit their hard currency.

The ICIR: The President-elect will soon be sworn in. Looking at his pedigree, what confidence would that bring to the capital market?

Adonri: The incoming president has a higher pedigree in financial intelligence –  economic and political – than the outgoing president. He is pro-market, meaning the private sector will become the engine room for orderly growth and development of the economy, using various policies, programmes and tools. He also leans towards heavy public sector involvement.

The President-elect may represent the interest of the money market a bit more, and may support short-term trading activities than long-term investment, which is the core of the capital market.

The ICIR: How do you see the Federal government’s intention to borrow from the capital market?

The Federal government is nosing around to raise funds and finance its activities. There are positives for a country to raise domestic debts than foreign debts because of the hard currency required to repay the loans. If the government issues domestic debts, it is open to investors all over the world to invest. If you are coming from China with your Yuan, you bring it to the foreign exchange market here and change it to naira, and you invest in the Federal government security. You pay in naira, and the foreign currency enters the central bank’s system. Same with American, British, German or other foreign investors. So, when the Federal government wants to redeem those debts, it also pays back in naira. That is how finance is done by financially knowledgeable countries.

The ICIR: But is the Debt Management Office (DMO) not supposed to guide the step?

Adonri: Yes! But the DMO is a department under the Presidency. It might have advised the Presidency what should be done, and they ignored it. The Federal government has seen that there is no way out there in the foreign market to raise loans because of the high premium, so it has come to the domestic market, which is the right thing to do.

The ICIR: We can’t over-emphasise the importance of protecting minority shareholders, especially when companies delist from the Exchange. What are your concerns?

Adonri: Under the Company and Allied Matters Act and the Investment and Securities Act, minority investors are well-protected. But where there is tyranny of the majority against the minority shareholders, the latter has strong grounds to seek protection under the law – either through the High Court or the Investment and Securities Tribunal. The minority shareholders have their rights and privileges that the majority shareholders cannot trample upon without incurring the wrath of the law.

When a company is delisted, both the majority and minority shareholders are out of the capital market but are still members of the company. They are now guided by the internal regulations of the company and could file for protection under the law if there are deviations.

Also for a company to delist, there is a court-ordered meeting that sanctions the delisting. To that extent, therefore, there is serious protection for minority shareholders. However, minorities have their say, but majorities have their way! So, once the majority have already resolved, even though the minorities are shouting we don’t want to delist, it is immaterial.

The ICIR: Are you saying that the chances of protection are slim?

Adonri: No! There is protection, but that protection is not absolute but qualified. It must follow the tenancy of the law. The law says if you want to delist, you must hold a general meeting and take a unanimous resolution. Once these are done, the company can be delisted.

The ICIR: The Securities and Exchange Commission has threatened to sanction capital market operators (CMOs) who are yet to renew their fees. What exactly is going on?

Adonri: That tells you what we are going through as market operators. The past eight years have been very tough for market operators in terms of income. You may be seeing the markets inching up and slightly down. Most of those volumes are moved by institutional investors who are just about 10 to 20.

Before Lamido Yuguda, the director-general of SEC came, market operators were not paying renewal fees. He re-introduced it. Although such a policy was there about 10-15 years ago, it was abolished after it was discovered that of the entire finance industry, only CMOs were paying the fee.

The ICIR: How much is this renewal fee?

Adonri: I think it is about N200,000 or N300,000 for stockbroking firms. If the business is booming, it is not up to what a stockbroker used in the past, before the meltdown, to take a flight to watch an Arsenal match in Highbury (North London) on Friday and return on Sunday. Retail investors as a result of the eroded disposable income have practically vanished from the market. Foreign investors who are bringing the money have practically disappeared, too.

What you see in the market are activities of what the Pension Fund Managers and a few insurance companies are doing. If a lot of CMOs are troubled, then the SEC needs to find out why instead of threatening sanctions. CMOs were strong in the past, why are they now so weak? If you sanction them, who will run the market? However, the market, as we know, has a circle of boosts and busts. It goes all up and down! If the SEC can be lenient and treat the current situation with understanding and ensure people survive the hard times, a time will come when the performance will be better, and renewal fee will not be a problem.

The ICIR: What confidence do we have in the Investments and Securities Bill, about to be signed by the President?

Adonri: I was a member of the SEC rules-making committee at a time. Then I had the privilege of taking a look at the bill and making inputs when it was proposed along with other market operators.

It is a good thing for it to come at this time because the provision in the old bill, Investment and Securities Act (ISA 2007), has become obsolete. As things change from time to time the law also has to be in tandem with the changes that are occurring in the market. We hope that the President will ascend to it.

The capital market is faced with risks, one of such is tackling Ponzi schemes. With the new bill, those operating Ponzi can be indicted and punished for defrauding people.

The ICIR: What is it about the Supreme Court judgment affirming exclusive rights to the Investments and Security Tribunal?

Adonri: before now, the Investments and Securities Tribunal (IST) did not have exclusive jurisdiction over capital market disputes. A lot of petitions were going through the High Court – state and federal – rendering the powers of IST almost non-existence.

The ICIR: If the provision of the IST is already in the ISA, why did the Supreme Court have to affirm it?

Adonri: The provision was made in the ISA, but disputes were still going on through the normal courts. Even though the ISA has jurisdiction over the capital market disputes, it did not prohibit any courts from entertaining the disputes. Now with the interpretation of the Supreme Court, it is now clarified that other courts are prohibited from entertaining capital market disputes.

The ICIR: Do you think the SEC has the capacity to ensure zero tolerance of Ponzi schemes?

Adonri: The SEC can contribute immensely, but it has to work with the monetary authorities (CBN) and security agencies. From the monetary aspect, a lot of transactions go through the banks. And a lot of those transactions are reported to the security agencies. So, they must all work in harmony as enforcing the money laundering and counter-terrorism acts is very important for the economy and social harmony of the country. If proceeds of crimes are easily laundered through the capital market, then there is an incentive for criminals to commit heinous crimes against humanity and contaminate the capital market with such easy funds.

For instance, if a drug dealer has access to a huge amount of money and invests it in the capital market, it can destabilise the orderly process of the market. Such money can orchestrate purchases in a manner that can cause a force-market, making the price of a stock to continuously escalate unreasonably.

It is, therefore, important that fraudulently acquired funds should not be allowed to go close to the capital market, in fact to the financial system.

The ICIR: What do you think is more paramount in the capital market?

The capital market has two principal objectives. First is capital formation. That is to raise capital for the productive economy. And, second, is to serve as a profitable, liquid and safe investment outlet.

In the past eight years, the market has only been functioning on the investment side, giving investors some level of profits and creating liquidity, assuming a reasonable level of safety, while capital formation has been non-existent. This is the principal challenge facing the Nigerian capital market.

The capacity of the Nigerian capital market to form capital is under-utilised. In fact, it is as if not utilised.

For the past several years till the end of the global meltdown, new issues have practically dried off from the market. So, the fundamental essence of the capital market has been non-existent. Capital markets exist to form (provide) capital that the economy uses to create wealth and generate productive employment.

Since 2012, the capital market has not been forming capital for the economy, especially the equities side. We need to revive the new issue by way of offer for subscription, private placement, and venture capital. Those are the missing links! On the debts side, what of the corporate bonds market? Why is it that corporate bonds are sporadic and few? Why is it difficult for corporate entities to raise bonds? Why is the Federal government bond crowding all of the bonds out?

These were the hallmark of the Nigerian capital market before 2008. Nigerian was strong in the primary market. When Nigeria did the two rounds of indigenisation exercise in 1972 and 1977, the capital market was the platform through which a lot of divestment of foreigners occurred. When the Federal government privatised lots of enterprises, the capital market served as the platform through which those privatisation exercises were done.

When Dangote was struggling to survive, he came to the capital market and was able to raise funds through an offer for subscription with which he built all those cement factories, making Nigeria self-sufficient in cement production. He financed his debts and that catapulted him to becoming the richest man in Africa.

During the 2005 reconsolidation exercise, a lot of banks came to the equities market to raise funds. Other companies did, too. Private placements were all rolling in, stockbrokers were smiling! But since the 2008 global crisis, it has been difficult for us to revive the primary market, especially for equities. It was not only Nigeria that faced these difficulties; other markets like the United States faced similar situations but they resolved that this issue must not cripple their capital markets. They came up with programmes and policies that revived their primary market and capacity to form capital. Up till now, Nigeria has not taken that aspect seriously.




    The ICIR: Who should shoulder the responsibility?

    Adonri: The challenge is coming from the macro economy. The reason issuers are not issuing new securities is that they are afraid that their securities will be under-subscribed. Issuer confidence has been eroded; it is low by the state of the economy and the market.

    Also monetary policy too has not been supportive of capital formation. That is why Nigeria’s economy is structured to be short-term in nature. So, enterprises that support and drive the economy are short-term enterprises like the banks that provide short-term funds because it is a mercantile economy and not a productive economy.

    Another issue is the yield on debts and equities. The yield of debt is predicated on the interest rate policy of the central bank. Over time, the yield on debt has been much higher than the yield on equities, so equities are at a disadvantage competitive to debt as a result of which there is a constant flow of financial assets to debt. That is a macroeconomic defeat that has to be solved by the CBN.

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