THE NIGERIAN CAPITAL MARKET

CORPORATE GOVERNANCE AND THE NIGERIAN CAPITAL MARKET DEVELOPMENT

The Introduction

The question is has the Nigerian Capital Market lived its dreams so far? It is very evident that the Nigerian capital market currently lives below expectation, even though it is common knowledge that the as the U.S capital market competitiveness remains less of a corporate governance issue, being now a corporate governance regulations point. However, the same cannot be said of the Nigerian Capital Market, as the crash of it was unprecedented, following the sudden drop of market capitalization from 13.5Trillion in May, 2008 to 4.5Trillion by 2^nd week of Jan.2009, and about 8Trillion as at the writing of this essay. More so, the all share index (measure of the magnitude and direction of general price movement) dropped from 660 basis points to less than 220, which is its current position.

The Background

Going down memory lane, the recommendations of the Financial System Review Committee in 1976, that led to the establishment of the Securities and Exchange Commission was borne out of the need of developing the modern market to cope with emerging challenges then.

For this to produce any meaningful result, the report of the Financial System Review Committee which was set up to review the capital market, the Securities and Exchange Commission Decree No. 71 of 1979 was promulgated to supersede the Capital Issues Commission in 1979. The decree which was not until January 1, 1980 was strategically empowered to regulate and develop the Nigerian Capital Market, with such responsibilities as price determination and setting the basis for allotment of securities.

Prior to the establishment of the commission there existed a functional ad-hoc consultative and advisory body known as the Capital Issue Committee, established under the aegis of the Central Bank of Nigeria (CBN). The committee was mandated to examine applications from companies seeking to raise capital from the capital market and recommend the timing of such request to avoid clustering issues capable of overstretching the market’s capacity. The committee remained under the CBN until the promulgation of the Nigerian enterprises promotion decree in 1972.

Furthermore, following the rising level of economic activities, the need to establish a more legally empowered body with regulating capacities, necessitated the creation of the capital issues commission to take over the activities of the Capital Issues Committee in 1973 by the Decree Capital Issues Commission Decree in March 1973.

In-spite of the 1979 Decree, Capital Market Issues, corporate governance was repositioned to meet global compliant by all standards and the pursuit of growth set the part for further review and empowerment of the capital market to meet its new emerging issues. Beyond that, in pursuit of investors’ protection, a review of the capital market was carried out in 1996 by the chief Dernis Odife led panel leading to the enactment of the investment and securities act No. 45 of 1999, promulgated on May 26. In 1999, the act repeated the SEC Act of 1998. The new acts were expected to promote a more efficient and virile capital market, pivotal to meeting the nation’s economic and developmental aspirations. Today the SEC currently derives its powers from the investment and securities Act (ISA) 29 of 2007.

As all these events unfolded, stock movement experienced a free for all downward movement regime with more than 60% of slightly above 300 quoted securities on constant offer, (Supply exceeding demand) on a continuous basis. There was little or no liquidity by most quoted companies as their holders are trapped, not being able to convert them to cash to meet their domestic and other investment needs. On the other hand, “fresh investors became cautious of jumping into a vehicle that does not seem to have a brake, should they wish to disembark” reports one of the financial analyst on a national daily.

Tentative efforts towards deregulation largely fell by the wayside in the wake of the financial crises of 2007. Instead massive new regulations came into being especially in the ISA Act 29 of 2007. The growth and development of Nigeria capital markets, however, continues to decline at a fast rate and most companies cannot access the market for fund any longer. While it is normal for the capital market to swing in different direction, as a result of the market forces of demand, that of the Nigeria capital market seems to be following a path of hopelessness, thereby doing untold damages the little trust the Nigeria investors built during the boom.

While some school of thought argue that the global economic meltdown phenomenon, which led to the pull out of most foreign investors amongst other things stands out as the primary reason for the sharp decline in the stock prices. If this argument were to be considered, a well thought out and tested parameter by which global stock decline had been subjected to and therefore proves as a standard for judgment in cases of their magnitude.

I beg to disagree with this school of thought, as I believe and think otherwise. For it is only rational to opine that issues such as litigations and regulatory actions remain essentials if the Nigerian capital markets are to return to its part of glory in taking and maintaining the continental leadership position. It is therefore not wise to conclude that corporate governance regulation follows a ratchet effect, in which the regulatory scheme becomes more complex with each financial area, because, if so, significant reforms may be difficult to achieve.

The growing concern surrounding these developments raised the need for questions which seeks to confirm that the Nigerian capital market have a clear direction with regards to the capital market development and corporate governance issues.

The sudden growth

Prior to 2004 the Nigerian capital market remained a less important issue to an average Nigerian, as the capital market was one of the least understood sectors, while all stock brokers were resident in Lagos where a little hope was near sight for their daily upkeep. The only knowledge of the market was that of the daily stock performance published on national dailies. These never helped in creating the level of awareness needed to enlighten the common man on any market’s instrument in which he can invest excess cash.  This also posed a major challenge as per growth and market development.

Meanwhile, there is less agreement as to the role corporate government played in the declining status of the Nigerian capital market, as on the one hand; the country’s political establishment blamed the various economic crises of the decade in part on perceived corporate governance flaws.

It is important to note that prior to the CBN policy of 2005 there was hardly a time any Nigerian corporation considered the stock market as a fertile ground for raising long term low risk funds for investment, not to talk of government bonds until the successes of most financial banks came on board. As the courage to approach the market increased, shabby and unprofessional practices began to loom the market. Irregular price fixing became the order of the day as people’s attention was diffused from other means of business investment to which short term return on investment was possible into believing that the capital market was a nice place for get-rich-quick fixing then came the doom.

Was corporate governance the problem?

There is little evidence that poor corporate governance practices contributed to either the economic turmoil of the decade in general or the declining performance of the Nigerian capital market. The alleged corporate governance deficiencies are considered a causal factor and with respect to the crises that have taken place, the issues created important new corporate governance regulations at the federal level. Experts have identified ineffective market regulation, and supervision, unregulated merging finances as responsible for the unsavory development in the capital market

Therefore, corporate governance was in a way below average in the global picture, even when the fall from the market positioning was taken into account. In general, the trend with respect to major corporate governance practices had been towards enhanced management efficiency and accountability.

Specifically, it was pointed out that the general decline in investor confidence has been heralded, among other things by ineffective market regulations and supervision, weak institution and corporate governance; lack of regulatory pro-activity and cohesion; unregulated merging financing; concerns over transparency; uncompetitive cost structure and inefficient cumbersome processes. However, the sudden surge in the capital market activities brought a challenge of capacity, such as technology and human capital to deal with the situation by both regulators and operators.

To set the market on the part of growth, there is need to eliminate political interference which puts undue pressure on regulators to professionally carryout their duties, such as the suspension of the recapitalization of the capital market operators by SEC and members of the national assembly which would have strengthened the market’s capacity and eliminate fringe players and making it internally competitive.  To shareholders, enough attention needs to be paid to regulatory anomalies within the system. This was not as captured in the report of the national committee on the review of capital market structure and processes. As the committee noted in the report that the widespread market perception that NSE as a self regulatory organization (SRO) is an entity independent of SEC and not subject to SEC’s rules and regulation, despite unambiguous provisions of the ISA Act to the contrary.

But SEC, the apex regulatory body, could have had its authority undermined by its structure and administrative profile, which throw up NSE in the perception of shareholders, as an equal partner. According to the report, ISA provides SEC with extensive powers that are considered sufficient, to allow effective regulations and enforcement of rules for an ordinary fair and transparent market in Nigeria.

However, SEC does not appear to have adequate capacity, to implement the provisions of the ISA and effectively exercise it authority over market operators, exchanges, SROs and other market participants, especially as the market has grown rapidly in size and complexity. For instance, the dependence of SEC, which currently reports to the ministry of finance, may limit SECs’ ability to operate autonomously, without influence from government and to act independently in the best interest of the capital market’

Analysts pointed out further that NSE as a precursor to SEC, operates on effective monopoly market and its proximity to the market and prominence given to its daily activities had given it a larger than life posture.

The Summary

A market analyst, Mr. Johnson Abiri, in a chat with the Guardian stated: “you see the chairman of NSE council is usually an individual of immerse business and political statures, with other council members being people of no less profile, unlike the situation with SEC, where its director General reports to the minister of finance, NSE’s council chairman is usually a president and the presidency, in a situation of conflicting interest, the two bodies NSE has the Edge over SEC”.

Mr. Tunji Olamore another analyst corroborated Abiri’s standpoint when he said: “some years ago, SEC within its statutory function wanted to implement Odife’s panel’s report the strategy and called for the sanctioning of NSE and its officials to browbeat them into lines of SEC’s authority.

Finally, the need for the Emergence of a non-partisan regulatory body, that has the autonomy, independence and capacity to turn around the situation at the stock market spared in ensuring that the stranglehold of some Oligarchs, who are poised on bending the rules, for their self interests. Is a non-negotiable one for a better capital market development.