The stock market is looking at next January to enter a new phase of full dematerialisation; an era where there will be no share certificates and shareholdings will be denoted in electronic form. In this report, Capital Market Editor, Taofik Salako highlights the issues around the conversion from a certificate-based market to fully automated market.
Rectangular and squared, with swarming colours and terse words; share certificates come in various shapes and colours. For decades, they have represented the ownership of shares in a company. They come with the aura of wealth, class and symbolic reverence.
From generation to generation, there have been exciting stories of framed share certificates, rat-bitten and well-tucked shares in old wardrobes and boxes, among others. While Nigerians have since learnt to deposit money in banks and take the statement of accounts and credit alerts as evidence of their deposits, the attachment and decade-long bond with share certificates have made many people to demur from converting their share certificates into electronic share depository.
“Shareholders will be required to provide the CSCS with their stockbroker’s details. Shareholders with accounts in more than one stockbroking firms will be required to indicate their preferred stockbroking firm”
Protesting shareholders and reluctant capital market operators and quoted companies frustrated the initial effort to do away with share certificates from January 1, 2013.
Now, capital market regulators, operators, government, companies and other stakeholders are launching a new scheme to achieve full dematerialisation of share certificates and automation of issuance and depository at the capital market. Securities and Exchange Commission (SEC) and other stakeholders under the auspices of the Capital Market Committee (CMC) had set December 31, 2014 as deadline for full dematerialisation of share certificates. Dematerialisation is the elimination of share certificates or documents of title representing ownership of securities.
From share certificates
to electronic depository
The latest effort at full dematerialisation is by nearly all stakeholders in the capital market. The CMC, chaired by the director-general of SEC, consists of chief executives of all registered capital market operators, including stockbrokers, solicitors, custodians, fund managers, issuing houses, rating agencies, registrars, reporting accountants, trustees and consultants among others.
Other members included chief executives of the Chartered Institute of Stockbrokers (CIS); Nigerian Stock Exchange (NSE), Central Securities Clearing System (CSCS), NASD Plc, FMDQ OTC Plc, Africa Exchange Holdings (AFEX) and Nigeria Commodity Exchange (NCX).
The CMC also included two members each from observer groups, which included Asset Management Corporation of Nigeria (AMCON), Central Bank of Nigeria (CBN), Corporate Affairs Commission (CAC), Debt Management Office (DMO), Federal Ministry of Finance, Federal Mortgage Bank of Nigeria (FMBN), Federal Inland Revenue Service (FIRS), Nigerian Deposit Insurance Corporation (NDIC), Investment and Securities Tribunal (IST), Nigerian Investment Promotion Council (NIPC), National Insurance Commission (Naicom), National Pension Commission (Pencom) and Financial Services Regulation Coordinating Committee (FSRCC).
The missing link, the minority retail shareholders, is being co-opted through a programme of massive enlightenment. The only obvious challenge, besides the unwillingness to turn in share certificates by individuals, is the Companies and Allied Matters Act (CAMA), whose sections 146 and 147 (1) enshrined share certificate as evidence of shareholding.
The CMC is addressing legislative constraints through a high-powered lobbying and advocacy group, a capital market advisory council that will serve as advocacy front to lobby for legislative and policy changes.
The advisory council, whose membership is being finalised by SEC, will be mandated to engage the National Assembly, Judiciary and the Federal Executive Council on key changes to enhance the growth of the market. Under full dematerialisation, all share certificates will be converted into investors’ share accounts in the CSCS while subsequent issuance will be allotted through electronic-allotment (e-allotment). E-allotment is the direct transfer of subscriber’s share allotment to his investor’s account with the CSCS. Dematerialisation will also include automation of bonus share or scrip issuance, otherwise known as electronic bonus (e-bonus).
General Manager, Central Securities and Clearing System (CSCS) Plc, Joseph Mekilliuwa, has identified three categories of investors now under the CSCS; those who have fully dematerialised, partially dematerialised and those still fully holding to share certificates. The target now, according to him, is to get all shareholders into the first category of full dematerialisation. Under the initiative, registrars will be required to turn in the registers of companies in their custody to the CSCS, which will create shareholding accounts for all the certificates. Shareholders will be required to provide the CSCS with their stockbroker’s details. Shareholders with accounts in more than one stockbroking firms will be required to indicate their preferred stockbroking firm while those with multiple accounts either with the CSCS or stockbroking firm will be required to indicate their preferred account for the final uploading of the dematerialised shares. Shareholders can obtain dematerialisation forms from their stockbrokers and on the websites of the CSCS and SEC. Already, some 17 registrars have complied with the request to turn in their registers to the CSCS. Mekiliuwa said CSCS has created a seamless process to effortlessly convert and credit the shares to shareholders’ accounts.
The making of an e-stock market
The full dematerialisation of share certificates is the main link in a jigsaw of the full automation of stock market. Initiatives, including electronic allotment (e-allotment), electronic bonus (e-bonus) and electronic dividend (e-dividend), would synchronise with fully dematerialised shares to create a stock market that runs figuratively on the screen, almost without papers. E-allotment, the direct transfer of subscriber’s share allotment to his investor’s accounts with the CSCS, will remove some loopholes in the current process of capital issue.
The capital issue is long-drawn, with many steps but allotment is a major stage during which shares are allocated to subscribers according to their applications, the volume of shares on offer and the subscription level. After the verification and clearance of the allotment by the SEC, then come several steps, including printing of share certificates, signing and sealing of certificates and packaging and posting, all which are subject to many extraneous manipulations.
Complaints of missing-in-transit, incorrect names and addresses and the often-excruciating process and cost of dematerialisation are major disincentives in the share certificate system. The process of correction of any error, no matter how small, is as laborious as the initial process of issuance, and sometimes more difficult. To the issuer, the cost element in the share certificate system is usually high given costs of printing several thousands of share certificates, some with units that barely worth the cost of the paper, packaging, posting and duplicate share certificates among others. Under the e-allotment, the registrar will simply send a “soft” (electronic) copy of the final allotment, cleared by SEC, to the CSCS, which will automatically credit the account of all shareholders, cutting off all other cumbersome steps, especially dematerialisation. The registrar, however, will still notify shareholders of the allotment. The same applies to bonus issue.
Perhaps the most significant immediate gain from the full automation of the shareholding framework is the enshrinement of the principles of equality and access in the capital market. All shareholders, high networth, medium and small; highly connected and less influential, insiders and outsiders, will be on the same pedestal with regard to access to their shares and can take investment decision as they wish. Allotted shares from initial public offerings (IPOs) and supplementary offers as well as bonus issues would be credited to shareholders’ accounts simultaneously, removing a major incentive for share certificate and market manipulation. This is an immeasurable gain to the public.
The share certificate system has been under unyielding criticism over allegations of preferential release of share certificates to select influential investors, who quickly take advantage of high capital appreciation before the masses of investors get their share certificates and follow through the windy dematerialisation process. Besides, equal access to listed shares, will enhance the efficiency of the market and minimise extraneous influences that unduly distort the price discovery process in the stock market. With other systems, such as e-dividend, the registrar-to-bank direct lodgement of shareholders’ dividends in their bank accounts, and direct cash payment, a new system that will directly pay net proceeds of any investor’s transaction to his bank account rather than the current system of payment to stockbroking firm for onward disbursement, dematerialisation will enhance good corporate governance and best practices in the capital market, the much-needed tonic for sustainable long-term growth.
Between hopes and fears
For effectiveness of the full dematerialisation plan, all stakeholders have crucial roles to play. The first role is for all stakeholders-shareholders, registrars, issuers, issuing companies and other professional parties and the regulatory authorities, to put their collective will behind the dematerialisation and other related systems and form a collective front to seek for solutions that may impede the realisation of the objective. There is already a groundswell of supports for the dematerialisation, but these also come with some reservations and fears of possible unintended negative consequences.
Chairman, Ibadan Zone Shareholders Association (IBZA), Chief Sola Abodunrin, said dematerialisation would further enhance the global competitiveness of the capital market. Abodunrin, who is a member of the board of the Investors’ Protection Fund of the NSE, said minority retail shareholders have realised the need for full dematerialisation and would support the initiative.
He however called for adequate investors’ education to enlighten investors about the benefits of full dematerialisation and other initiatives under the capital market master plan. Most other shareholders’ leaders echoed the same opinion. Shareholders’ leader and founding member of the Nigeria Shareholders Solidarity Association (NSSA), one Nigeria’s largest and most active minority shareholders’ group, Alhaji Gbadebo Olatokunbo, said while the older generation of shareholders might find it difficult to adjust to the technology-driven system, adequate investors’ education would assist in bridging the gap and convince all about the need to embrace the new system.
He said the CMC should design appropriate checks and outputs that ensure that shareholders can still have access periodic hard-copy and printable reports on their shareholdings. “We might start to lose focus on record-keeping of our stocks if everything is done electronically. We need to have periodic paper notifications on all the transactions. Even though some registrars do send counterfoils and notices on e-dividend and e-bonus, most others only rely on the electronic system, which are not good enough for record purposes, because several people still don’t take “SMS” serious,” Olatokunbo said. He said the full dematerialisation framework should include some mandatory hard-copy notices in addition to electronic notifications from registrars and the CSCS. He noted that CSCS provides such print-out based on shareholder’s request but rather it should be a generalised service to ensure that all shareholders have periodic updates on their accounts.
The stance of shareholders
President, Constance Shareholders Association of Nigeria, Shehu Mikail, said the capital market is ripe for full dematerialisation.
“Modern-day business transaction is being done electronically; why not make market also compliant. We, investors, just have to understand that we cannot stand on one point; we need to move along the modern way of business transaction. It will also give more room for the companies to save some expenses,” Mikail said.
He called on the National Assembly to earnestly undertake any amendment that would facilitate the process of full dematerialisation, urging the legislature to enact laws that would block all loopholes and leakages to enhance investors’ confidence in Nigeria.
Managing Director, GTI Securities Limited, Mr. Amos Aledare, said full dematerialisation would further unlock the latent potential of the stock market and lead to increase in turnover at the NSE and better price discovery.
According to him, full dematerialisation will save time, cost and translate to efficiency in the operation of the market while positioning it as internationally competitive and transparent.
“It is a welcome development as it will cause a better turnaround timeline for settlement between purchase of a security and selling of a security. However, it will impose huge responsibility on the CSCS in ensuring that the shares domiciled in its system are properly aligned to the right owners,” Aledare said.
He also stressed the importance of massive enlightenment to outline the process and benefits of the new system to the people.
Chief Executive Officer, Finawell Capital Limited, Mr. Tunde Oyekunle, emphasised the need for all-inclusive approach and evaluation as undertook in the conception of the framework all through the implementation.
“The advice is that stakeholders should sacrifice self interest and work together towards an efficient and successful dematerialisation process that will improve the capital market. The process should be viewed from all stakeholders’ perspective with participation and contribution from all stakeholders. The objectives should be streamlined and revisited to ensure that the process does not lose sight of stated objectives,” Oyekunle advised.
Director-General, Securities and Exchange Commission (SEC), Mr. Mounir Gwarzo, said the Commission would work with all stakeholders to address the main challenges facing the implementation of the full dematerialisation and other initiatives, including inadequate investors’ data bank, otherwise known as Know Your Customer (KYC), regulatory bottlenecks and low level of financial literacy.
SEC has already demonstrated that it can build interconnected platform to drive the initiative with the launch of the e-dividend payment portal, which was developed in collaboration with the Central Bank of Nigeria (CBN) and Nigeria Inter-Bank Settlement System Plc (NIBSS). This collaboration removed long-standing barrier in paying dividend to non-current and dormant accounts. The e-dividend will facilitate payment of dividends into any type of bank accounts, including current and non-current accounts as well as dormant accounts.
The CMC is also looking at leveraging on the bank verification number (BVN) to complement the shareholder authentication. According to NIBSS, there are 17.5 million Nigerians with the BVN. There are about five million investors in the capital market.
Gwarzo assured that SEC would make all necessary institutional changes to ensure the success of the dematerialisation while driving collective efforts by all stakeholders to address changes beyond the ambit of the Commission. Already, SEC has reviewed some of its rules and issued new guidelines.
For instance, SEC, through new guidelines, directed registrars to convert company registers they manage into electronic formats and supply same to the CSCS as part of the dematerialisation. SEC has also launched a massive public enlightenment campaign that covers the 36 states and the FCT, being aired in Nigeria’s three major indigenous languages, English and Pidgin English. The campaign is expected to run massively for three months and continue incrementally afterwards.
Undoubtedly, the success of the full dematerialisation depends on the supports of all stakeholders. While the regulators should provide enabling environment and seamless process to facilitate the success of dematerialisation, they must also show the firmness to push this through and deter flimsy excuses by other parties. Shareholders, arguably the greatest beneficiary of dematerialisation, should support the success of this scheme by complying with basic requirements.
“Perhaps the most significant immediate gain from the full automation of the shareholding framework is the enshrinement of the principles of equality and access in the capital market. All shareholders, high networth, medium and small; highly connected and less influential, insiders and outsiders, will be on the same pedestal with regard to access to their shares and can take investment decision as they wish”
Registrars’ reaction
Registrars have onerous responsibilities in the implementation of dematerialisation. The main task is that of adequate technological and human capacity to back up the system. Registrars need to build up adequate resources including compliant software to support full dematerialisation. The listing of CSCS on the NSE, besides its listing on NASD Plc, will also reinforce confidence in the depository as a collective asset of all shareholders. In all these, SEC, beyond its regulatory muscle, could further incentivise the process to encourage operators that interface with investors, such as stockbrokers and registrars, to lead the change.
