Capital market apex regulator’s decision and counter views
Late last year (precisely on December 18, 2013), the board of Securities and Exchange Commission (SEC) decided to go public on the new minimum capital requirements for all categories of Capital Market Operators in pursuant to Section 313(6) of the Investments and Securities Act (ISA) 2007.
The release of new minimum capital requirement for all categories of market operators came barely three weeks after Arunma Oteh, director-general, SEC, at the third Capital Market retreat, said a world-class capital market boasted of strong institutions, adding that “this is why since 2010, we have prioritised efforts to strengthen the SEC being the apex regulator of the market and all market operators.”
Shortly after the news of new minimum capital requirements for all categories of Capital Market Operators (CMOs) broke to the public, the Chartered Institute of Stockbrokers (CIS) and Association of Stockbroking Houses of Nigeria (ASHON) made public their views, faulting the newly increased capital base for CMOs, saying it was ill timed and uncalled for at this moment in time that the market was experiencing recovery from the global meltdown.
The new minimum capital requirements
Following the amendments, the capital requirement for broker/dealer has been increased from N70 million to N300 million. For broker only, the capital requirement has been increased from N40 million to N200 million, while for dealer it has been increased from N30 million to N100 million. The minimum capital requirement for Issuing House has also been increased from N150 million to N200 million, while that of Underwriter has been increased from N100 million to N200 million.
For a Registrar in the Nigerian capital market, the minimum capital requirement is now N150 million from N50 million, while for those in Trustees business their capital requirement has been raised to N300 million from N40 million. Furthermore, the minimum capital requirement for Rating Agency has been increased from N20 million to N150 million, while the capital requirement for Corporate Investment Adviser remains at N5 million.
From an initial capital requirement of N500,000 every Individual Investment Adviser is expected to have at least N2 million as capital, while Fund/Portfolio Manager’s minimum capital requirement has be raised from N20 million to N150 million.
CIS and ASHON pick holes
The two groups said they will engage the SEC to address the grey portion of the new capital structure, even as they recommend a risk-base regulatory framework. Ariyo Olushekun, president of CIS, had noted that “the new structure is faulty with apparent deficiencies as regards to investor protection and risk management.”
According to him, “We intend to approach this issue in a way to show we are not at logger head with SEC. SEC, ASHON, CIS and other trade groups in the market have worked together in the last five years to resolve issues in the market and the result of our joint efforts is the level of recovery that we are seeing now in the market.
“The re-capitalisation structure is faulty and has apparent deficiencies, especially as it relates to protection of the investors. We believe that SEC has not consulted adequately on this. We believe that the focus of any minimum share capital requirement structure should be risk based management; how to address the risk that every capital market operator is exposed to and that is why you are seeing apparent deficiencies in this structure. We are going to express our feelings and point out those deficiencies to SEC. We believe that the deficiencies we have observed are not what SEC cannot consider and address.”
Emeka Madubuike, chairman of ASHON, was said to have described the new minimum capital requirement as a rude shock and a setback to gains recorded so far in the industry, adding that the new capital requirement, if implemented by SEC, would distort the overall policy geared towards earning confidence of both the operators and investors.
“We believe that the market is still undergoing demutualisation programme and it should be allowed to run its course. The timing for the upward review of operational capital of operators is not appropriate because the market is still emerging from the pangs of global financial meltdown.
“We need to sit down and look at this policy once again. We have to engage SEC and to reconcile on some fundamental issues. That will be to the best interest of the market. We are not against any re-capitalisation programme but to express our feelings that certain other things need to be put in place before embarking on such policy. We have requested that we should be given another opportunity so that we can sit together and put things together that will be in the overall interest of the market,” Madubuike said.
Were there indeed extensive and exhaustive consultations?
Obi Adindu, communications adviser to the director-general, SEC, confirmed to BusinessDay that the decision on the new capital requirement was taken at the 73rd meeting of the board of the SEC, which took place in September 2013.
In a release by the commission recently, it reiterated that the SEC board’s decision was the outcome of extensive, indeed exhaustive consultations with stakeholders within and beyond the Nigerian capital market.
According to SEC, the new capital regime is the outcome of a process that commenced in 2010 with the setting up of a technical committee chaired by a former executive commissioner, Operations at the SEC.
“The committee featured representatives of the capital market industry trade groups such as the Association of Stockbroking Houses of Nigeria (ASHON) and the Chartered Institute of Stockbrokers (CIS) as active members. The new minimum capital regime which was recently announced on the basis of a September 2013 SEC Board decision was a finalisation of the work of that industry-wide committee,” SEC said.
Is the decision ill timed?
The apex regulator reiterated that an enhanced capital base for CMOs in the Nigerian capital markets was long overdue, saying “it is an inevitable logical step in the industry reform effort being led by the SEC and which has the buy-in of all industry stakeholders. The reform has led to unprecedented market recovery with market capitalisation and the All Share Index (ASI) attaining and exceeding the pre 2008 peak global financial meltdown figures, thereby positioning Nigeria within the top 10 bracket of the world’s best performing capital markets for the third year running. “This recovery process can only be sustained with the strengthening of market operators through enhanced capital, better technological infrastructure, qualitative human capital, improved operational set up which provides for seamless and efficient linkage between the front, middle and rear offices as well as a corporate governance structure which moderates the often pernicious link between ownership and control.”
It noted further that “the new capital requirement is inspired by current international best practice which requires that operators hold capital which is commensurate with the size of risk which they bear in the market place. Indeed the new capital regime, when depreciation in the value of the naira is factored in, merely takes the Nigerian capital market back to the 2004 baseline capital situation. The significant erosion of capital which reduced many CMOs to hollow shell entities was a vital factor in the flight of investor confidence from the Nigerian market which, in turn, frustrated the market’s recovery for a long time.”
It further stated: “The stark realities in the market underscore the need to migrate to an enhanced capital regime. There are presently 281 registered market operators out of which 250 are active. 20 percent of this active group controls 80 percent of total transactions in the market by volume and value. The relationship between transaction volume and value on one hand, and number of operators on the other, makes the Nigerian market a most parlous picture relative to other peer and non peer markets as many more operators chase after fewer businesses (in the Nigerian market). The direct consequence of the above is multiplication of acts of market indiscipline, rule infraction and sundry malfeasance as puny, poorly capitalised CMOs adopt untoward practices to stay afloat. Some 80 percent of CMOs in this category control about 20 percent market share and or total transactions but constitute the source of over 79 percent of complaints about unethical conduct and rule infraction.”
The pervasive presence of undercapitalised and hollow shell CMOs therefore undermines market integrity, erodes investor confidence and hikes regulatory cost which is incurred through investor complaints management and other remedial undertaking.
The SEC believes that stronger, well capitalised CMOs with requisite capacity, on the other hand, will widen market access through deployment of (their) qualitative human capital and ICT infrastructure. They will raise the integrity bar in the market alongside investor confidence, reduce regulatory cost through commitment to ethical and best practices and constitute a magnetic pull for reputable international players to berth in the Nigerian market.
By: Iheanyi Nwachukwu
