Recapitalisation: Stock brokers savouring COVID-19 respite

The sudden outbreak of Covid-19 and its devastation on the economy may halt stock brokers’ recapitalisation plans. Chris Ugwu writes

The issue of recapitalisation by operators in Nigerian capital market has continued to be of great concern to market regulators as well as operators and other stakeholders. In 2008, the Securities and Exchange Commission (SEC), in collaboration with the Nigerian Stock Exchange, directed the firms to increase their capital base from N20 million to N1billion. But the issue generated controversy in the market; pitching operators against the regulators as they considered the amount too outrageous.

Experts believe the directive started the first major capital market crash even before the spill over effect that the market had from Europe and America in 2008 as operators tried hard through different means to meet up the capital requirement. The fall out was a run on various accounts of shareholders in different stock broking companies, because they did not know the company that would survive the recapitalisation policy, even as shareholders gave orders to their stock brokers to sell at any price so as to recoup their investment before the dateline. Also, many dealing firms involved themselves in double dealings.

Shares of investors were sold without their consent. Some firms even diverted funds that belonged to their investors into activities that are outside financial instrument transactions. The N1billion recapitalisation was believed to have destroyed the market in the sense that it made firms to go into activities that are against corporate governance. However, the board of SEC in pursuant to section 313(6) of the Investments and Securities Act (ISA) 2007, in SEC, on Dec. 19, 2013, issued a new capital requirement for capital market operators.

The capital requirement for broker/ dealer was increased from N70 million to N300million. For broker only, the capital requirement was increased from N40 million to N200 million; while for dealer, it was raised from N30 million to N100 million, among other operators. After series of deadline extension, the Securities and Exchange Commission (SEC) on January 4, 2016 announced the final results of recapitslisation programme where it disqualified 24 capital market operators for noncompliance or inability to substantiate claims of compliance by the audit firms.

The list, which was uploaded to the SEC website after capital verification had been conducted, showed that 429 CMOs adhered to the minimum requirements while 24 others were disqualified. However, with the advancement of technology and the depreciation of naira, some market operators have in different fora opined that the present minimum requirements for stockbroking firms were not enough to meet the current operational challenges in the face of innovations and new ways of doing businesses, hence need for further recapitalization that will spur merger and acquisition.

Current challenges

Managing Director, Asset Management Division of CardinalStone, an investment firm, Mr. Mohammed Garuba, while speaking to New Telegraph on the challenges facing stock broking firms had said: “I think I will approach it in two fold, one is the issue of knowledge gap, there should be proper integration with the developed market, there has to be synergy between local and foreign in terms of product innovation and product understanding.

“For instance derivatives have become an interest areas of finance which is non existence here and it will continue to remain non existence because the push to create product never really come from the regulators, it comes from operators seeking the regulators to ally with them to push the products. Therefore the more we have more firms pushing for this the better for everybody.

“Number two is capitalization. When a business is not well capitalized there is a limit it can do, it can’t hire the best people, it can’t deploy the best resources, it can’t advertise properly and so it will be hampered. “Example I will use the Soludo era, before the banking consolidation when capital was moved from N2 billion to N25 billion, Nigerian banks would hardly do much. We had 89 banks then, but they were insignificant, people were losing money because they were too many and CBN could not supervise them. “The stockbroking firms are not well capitalized and anytime they want them to be capitslise, the issue of no money will crop up and the more you don’t put enough resources you won’t employ the right brains and the right people and because of that you will continue to be hampered. So there are not enough knowledge, we are not adequately capitalized for the quality and quantity of volume of business we are trying to do”

Consideration for recapitalisation

Following the clamour for the recapitalisation, SEC in February under the leadership of the immediate past Acting Director General, Ms. Mary Uduk, said the commission was considering jacking up the minimum capital requirement for stock broking companies. She told reporters in Lagos that capital market operators should start preparing for another round of industry recapitalisation. She, however, did not disclose when the recapitalisation would begin and the structure it would take. Responding to a question on the need for recapitalisation in the industry, Uduk said: “A number of other sectors are recapitalising. For instance, the Central Bank of Nigeria (CBN) has indicated that the banks should start thinking about recapitalising and we are also telling the capital market operators to start thinking about it because sooner or later, it would have to happen.” Also, the Acting Commissioner, Legal and Enforcement, SEC, Mr. Reginald Karawusa, said stronger and better recapitalised firms would be beneficial to the capital market. “If we have say 20 or 50 big firms playing, as opposed to the about 255 firms we have now, I think the market will be better. “We want strong and well-capitalised firms.

It is something that should happen, as opposed to the situation we have now,” he added. Earlier in her presentation, Uduk had said the 2020 outlook for the commission took into account initiatives such as regulatory regime, information technology, financial technology, master plan execution and enforcement. Under the regulatory regime, she said: “The commission will continue to implement risk-based supervision, to ensure our monitoring effort is more efficient. The upgrade of identity management on investor accounts will include Bank Verification Numbers and verifications against the Nigerian Interbank Settlement Systems Limited (NIBSS) BVN validation portal.

CIS seeks suspension

Capital market operators had urged the regulators to suspend the plans regarding the recapitalisation of the stock broking community, calling for the consideration of the current economic realities posed by the COVID-19. President, Chartered Institute of Stockbrokers (CIS), Mr Tunde Amolegbe, made this known at a webinar organizmsed by the Capital Market Academics of Nigeria themed: “Mitigating the Impact of COVID -19 on the Capital Market.” Amolegbe explained further stating that the pandemic had slowed down NSE demutualisation programme The implication of this will thus be a possible aggravation of the funding challenge of the CIS. Given its level of importance, he believed that the Federal Government should treat the capital market as a priority sector in terms of pandemic alleviation strategies. “In view of the existing major constraints with regard to trading liquidity, the Central Bank of Nigeria should formulate policies that will drive more liquidity into the hands of CMOs, especially equity traders,” he said. He added that the stability and growth of the equity market would eventually lead to an overall market rebound as well as growth in the economy.

In his acceptance speech after his swearing-in last week by the Institute’s Assessor, Disciplinary Tribunal, Justice Adesuyi Olagbegi as the 11th President President of CIS, Amolegbe reiterated his earlier position that regulators should not increase the minimum capital base of market operators as the current operating environment would not support such a move.

“We will continue to work in close partnership and cooperation with the Securities and Exchange Commission (SEC), the Association of Securities Dealing Houses of Nigeria (ASHON) and all the registered securities trading platforms in the country; and may I at this juncture make a strong plea that any plans to increase minimum share capital requirement for Capital Market Operators be suspended for now. It will simply not be right in the face of the gargantuan operational and revenue challenges currently facing the industry.

“The essential need of the Nigerian capital market, especially the stock trading at this moment, is access to trading liquidity. It was liquidity that enabled our stock market to grow in quantum leaps during the historic bull market run of 2005 – 2007, and that in turn galvanized the primary market where several companies and governments at various levels were able to raise massive capital for expansion and development projects. We will work assiduously to return the market to that level, albeit with a more effective, stronger and coordinated regulatory mechanism.

“As we have already witnessed, the Nigerian capital market has proved its resilience and world class structures by carrying on its major day to day operational activities unhindered since the pandemic started. It is an easily verifiable fact that many investors have received dividend income and earned capital gain even during the lockdown period.

“My team will ensure that CIS queues in maximally on the new world defined by high technology and enlarged business horizons. The covid-19 pandemic has worsened an already bad operating environment for stock brokers and securities dealing firms, and that is the reason why we shall redouble our efforts in the area of advocacy; to get government and key players in the economy to accept the fact that the capital market holds the key to the long term economic sustenance of Nigeria as a country; to understand that this capital market has to be given maximum attention and topmost priority to play its natural role of mobilizing the necessary financing to close the country’s huge infrastructural development gap and galvanize private sector participation in our economic development.”

Last line

Despite the future of the local bourse still being cloudy due to several factors leading to persistent low investor confidence, COVID-19 has further worsened an already bad operating environment for stock brokers and Smsecurities dealing firms.




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