Years after they sank their life-savings in the stock market in the wake of the cosmetic boom of the 2000s, most investors are still licking the wounds. But many, who have learnt the lessons, are not discouraged. They now understand the market better, writes Capital Market Editor Taofik Salako
His voice cracked with emotion. Adewole Peter, 70, was retiring in 2005 when the stock market frenzy caught the nation. Wherever he turned to and whoever he talked to about his retirement plan and savings, the wagers were on the stock market. He could recognise most of the companies. They have been around for quite a while, but some were new. The better-known companies were the banks, and they were also the more aggressive group. Wary and still unconvinced, held down by 40 years experience in a public corporation and age-long attachment to physical assets, Adewole started investing – grudgingly – in late 2005, starting first with a small portion of his pension payment. By mid 2006, the value of his shares had nearly doubled. With much similar stories around him and media reports of the surging wealth in the stock market, he needed less conviction to commit more funds. He piled up much funds in many stocks, mostly insurance and banking because the banks were quite supportive. With his deposit, he only needed to fill a teller to subscribe to a share offer and a courteous attendant was always at hand to help with the filling. He was offered the opportunity of using his deposit and shares to obtain additional loan to buy more shares, an enticing opportunity he found hard to reject. He found a new hubby, picking up the vocabularies of the investing world from the news media, fliers, subscription documents and the plethora of investors’ fora. The daily reports of the stock market activities by the news media became his daily staple.
At the Nigerian Stock Exchange (NSE), the imposing building on Customs Street, Lagos Island, where shares are traded, it was a celebration of milestone after milestone. The NSE was, and still is, Nigeria’s only stock exchange and its activities were directly related to the booming share-offering market. The NSE and the Securities and Exchange Commission (SEC), the regulator for the capital market, work closely. The SEC regulates the entire market, including the activities of the NSE – the secondary market that typically serves as the face of the market, and the primary market – the introductory segment of the market where shares and other investment units are first sold to the initial investors. The NSE, a self-regulatory organisation (SRO) that predates SEC, has a sense of independence. Established in 1960 as the Lagos Stock Exchange, in many instances, the top management at SEC cut their teeth at the NSE. Typically, a company or issuer will apply to SEC to float its offer for purchase by the investing public. The issuer will then apply to the NSE for approval to list its shares or units for trading on the secondary market after the completion of the offer. So, it was a positive correlation, as the primary market was booming, the secondary market was booming and the incomes of the regulators were also on the rise. The regulated and regulators literally came into the frenzy. The few words of caution were drowned by assurances from all stakeholders, including the Central Bank of Nigeria (CBN), the mother – figure for the financial markets whose banking consolidation and recapitalisation success depended on the booming market. At the NSE, a self-proclaimed not-for-profit organisation, it was also the period for distribution of multi-million naira surpluses and largesse to executives and council members.
A 2010 annual report and accounts of the NSE indicated that N1.39 billion was distributed to certain council members as share of surplus between 2006 and 2008, which the report regarded as illegal and a contravention of the Companies and Allied Matters Act 1990. When the lid blew off, some beneficiaries quickly refunded N607 million. The contention over the outstanding balance of N783.8 million is a subject of litigation. Joining the frenzy, the NSE in 2004 incorporated NSE Consult Limited, which commenced business in 2005 with principal objectives of serving as consultants, financial advisers and analysts and to carry on business as the investment and private sector arm of the Exchange. Few years after, the company became moribund and was provided for as such in the 2010 report.
A portfolio of shared stories
Adewole marked his second anniversary of stock market investing in 2007 with a tally of his portfolio-basket of shares, by multiplying the volumes of shares with a newspaper report of closing share prices for the previous day. With just about N2 million, his investments had notched up to about N8 million. He was confident he had joined the much-revered millionaire’s club. He had heard of the millionaire capsules from a raving personal finance print, which was devoted largely to stock market investment and promotion of group investing. Then, things unfolded. Everything happened so fast between 2008 and 2009, his portfolio had dropped to barely a million naira; some were completely wiped off by government intervention and the remaining ones had lost substantial volume and value.
The stories were similar, with little variance depending on the entry point or year and spread of investments in the market.
Shehu Mikhail, who has been investing in the stock market for more than three decades, recalled how he lost a large chunk of his investments to the meltdown.
“I started investing in the capital market in 1982. The market was not well known then. All through this period till late 90s, many people were not aware of trading in the stock market. But as the market was becoming buoyant and portfolio investors were coming, the regulators did not keep up with the pace by providing policies that could checkmate activities of speculators, and this led to the meltdown in 2009,” Mikhail noted.
He recalled how he had built much hope on his shares in Intercontinental Bank Plc and Ecobank Nigeria Plc, unconscious of the toxic assets driving the valuations then.
Mikhail said: “I had shares in many companies. Even before the meltdown, we had suffered from the mergers and acquisitions brought by the consolidation policy introduced by the CBN. The mergers and acquisitions were not favourable to shareholders of the small parties in the arrangements, and that’s one of the failures of the regulators; failure to protect the minority shareholders.”
He was at a point having 740,000 shares of Intercontinental Bank, but the shares are less than 50,000 now and the price is nothing to write home about. He had a somewhat similar experience with Ecobank Nigeria Plc where he had some 640,000 shares but couldn’t even figure out the total shareholding now. Intercontinental Bank was one of the banks that were taken over by the regulators in the post-meltdown shake-down of the banking sector. In the process of the restructuring, a share reconstruction cancelled millions of shares and the bank was eventually acquired by Access Bank, in a deal widely regarded as a similitude of the hyena devouring the tiger. Intercontinental Bank opened in 2009 with total paid up shares of about 19.5 billion ordinary shares of 50 kobo each and total assets of about N1.4 trillion. Access Bank then had 16.14 billion ordinary shares of 50 kobo each with total assets of N1.04 trillion. That was shortly before the August 14, 2009 intervention in the banking sector by the CBN. By the completion of the post-intervention restructuring and reconstruction in 2012, only five billion ordinary shares of Access Bank were given to shareholders of Intercontinental Bank. Access Bank, the bigger bank, opens today at N6.18 per share. Access Bank had opened 2009 at N23 per share, few kobos below its 2007 high of N23.03. Intercontinental Bank had opened at its 2007 high of N40.60 per share. Ecobank Nigeria was later acquired and absorbed by its parent company, Ecobank Transnational Incorporated (ETI), after the latter had acquired additional stakes that violated the minimum public float for continued listing of Ecobank Nigeria on the NSE.
Alhaja Masiat Adebisi Bankole, 77, is a retiree. She recounted how she started buying shares in the 70s, building up her nest eggs bit by bit.
She said: “I was buying the shares then as I got the money, I was investing like N200, N150 and buying the shares as much as I can afford then before they all appreciated. I bought my First Bank shares (pointing at the First Bank’s shares in her Central Securities Clearing System (CSCS) statement to the reporter) in 1989, then they grew with addition of bonus shares, the bonus shares were so much then and at a point, the value of my First Bank’s shares alone was above N500, 000. Now, it has come down drastically,” Mrs Bankole said.
In 2007, First Bank was traded at N57.41 per share and its lowest price then was N32. It has since struggled below N10 per share. But despite the state of things, Mrs Bankole said she has seen the value of investing and understood the challenges. She came to the annual general meeting of Unilever Nigeria last week with her daughter. She attended a similar meeting by Wema Bank some days ago.
“The meltdown made the market to be unattractive but as a long-time shareholder, one just has to continue to pray for the recovery of the market and we are grateful now that things are becoming stable,” Alhaja Bankole said.
Mr. Ijoma Fidelis, a retiree from Delta State, has seen the good and bad sides of the market. He has since learnt the tricks of value investing.
“I put in 30 years of service in public service. Now I am retired. I have bought my shares long time ago. It’s now that I have to live on the shares that I bought during the active days while I was working,” Fidelis said, clutching a copy of the 2014 annual report of a fast-growing consumer goods company where he has investment.
While decrying the sharp practices and shabby treatment of shareholders, he recalled how investing in Nestle Nigeria has turned into a goldmine.
Fidelis said: “Nestle Nigeria is one of the companies that people have benefitted largely from. At the time we bought Nestle shares, it was not selling even at N5, but today, it is a very big stock. That’s all about share buying. You buy in order to realise value.”
As a long-term investor, he knew his onions. “People make mistakes and fail to understand the market. When shares are going up, that is when people rush to buy, but when shares are down, they rush to sell. Whereas, the best time to buy shares is when prices are low,” Fidelis paraphrased one of the maxims of value investing.
Nestle Nigeria has defied the boom and burst cycle. While it traded at a high of N347.14 in 2007, it has since rose beyond the N1, 000 mark. It opens at N900 per share, N250 below its 52-week high of N1, 150.
Also, Mr. Yekinni Adisa, who started investing in the capital market in 1972, said though the meltdown turned back the hand of the clock for most shareholders, they have shrugged it off and now focused on how to avoid such experience in future. His losses were mitigated by the spread of his investments and some other non-stock investments outside the stock market.
“The meltdown really affected most of us who had been long-time investors; like a person having N10 million worth of shares and it gradually reduced to N500, 000. It was a bad experience. But, thank God, the market is recovering,” Adisa said.
He continued: “I thank God that all my investments were not in one way then, all my eggs were not in one basket, I spread them over. Besides, I still had investments outside the capital market; that one helped me a lot.”
Pumping up the burst
The road to the 2008-2009 meltdown was laced with intrigues, deceptions, greed, mistrust, gross dereliction, ignorance and bandwagon effect. The stock market turned into this century with a confident gait, sustaining a streak of consecutive appreciation. The All Share Index (ASI), the composite value-based index that tracks prices of all quoted equities, initially evidenced the attractiveness of the market as Nigeria notched up favourable ranking as emerging market. But, between 2003 and 2007, the years of banking consolidation and recapitalisation, it was evident the stock market was under undue influence other than ordinary market dynamics. At the peak of the rally in 2007, the ASI indicated average full-year return of 74.73 per cent. It rode on the waning momentum to reach all-time high of 66,371.20 points in March 2008. Several reports have shown that market operators, driven by recapitalising banks, were engaging in the unethical practice of “pump and dump”, a market manipulation method in which unscrupulous stockbrokers, and sometimes with the active connivance of the issuer and other professional parties, conduct round-tripping purchase and sale transactions to push up prices and whet public appetite for a stock. Since such pricing is not based on fundamentals, natural corrections will follow and the stock price will crash once the “pump and dump” reaches its extreme.
Forensic investigation by SEC later discovered that banks particularly, directly and indirectly, encouraged “pump and dump” to prop up their shares in order to enhance the attractiveness of their offers. During this period, the NSE used to place stocks undergoing public offer on technical suspension, which entails the freezing of the share price while trading continues on the shares. In a bid to create huge discount to offer price, the issuers were then pushing up their share prices before requesting for technical suspension. Such inflated share price was then used in valuation and marketing of the offer.
Besides, banks and other financial services companies fuelled a large asset bubble with poorly structured margin loans.
As banks were raising funds in the capital market, they were actively using depositors’ funds to create margin loans, which collaterals were also their shares. In 2007, new issues peaked at N1.3 trillion, underlining how the margin-based primary market laid the foundation for asset bubble. Margin loans exposures by banks have been estimated at about N1 trillion by the CBN. In the post-meltdown crisis management, about N23 billion was granted in forbearance package to stockbrokers to block the gaping holes created by margin loans. It was not until mid 2013 that SEC released guidelines on margin lending, restricting the number of stocks and persons that can engage in margin lending. Besides, some directors of quoted companies were found to have engaged in massive insider dealings and transactions, including granting unprotected loans to family members and cronies. In one instance, former directors of Resort Savings & Loans Plc and other insiders had nearly N4 billion in outstanding non-performing loans, more than three-quarter of the bank’s total balance sheet size. The former directors and their cronies were indebted to the tune of N3.99 billion. The company’s total assets and shareholders’ funds were N5.24 billion and N2.87 billion respectively, according to the 2011 audit. Out of the 25 insider credits totaling N3.99 billion, only one loan of N15.44 million, less than 0.4 per cent of total insider credits, was performing. The forfeiture of assets totaling N191 billion by the sacked Managing Director of Oceanic Bank International, Mrs. Cecilia Ibru, also underscored the massive underhand dealings that preceded the crash.
By the time the 2007 United States’ subprime mortgage lending crisis riveted the global financial markets in 2008, the Nigerian market was already primed for recession. Large portfolio outflows by international investors, who were struggling to cover deficiencies in their home countries, exacerbated the decline and threw the entire market into panic. Margin calls failed to cover and both local and foreign investors were dumping shares, creating supply glut. Between 2007 and 2009, the market lost over 70 per cent of its value. The CBN responded to the contagious asset bubble and banking crisis on August 14, 2009 with the unprecedented takeover of management of five banks, including Intercontinental Bank, Oceanic Bank International, Union Bank of Nigeria, FinBank and Afribank Nigeria Plc, all of them quoted on the NSE and with hundreds of thousands of shareholders. The apex bank again on October 2, 2009 took over three other banks- Bank PHB Plc, Spring Bank Plc and Equitorial Trust Bank (ETB) Limited. Both Bank PHB and Spring Bank were quoted on the NSE. With the takeover of the banks, the investors’ world literally came crashing.
Counting the losses
Shareholders lost substantial values due to the mergers, acquisitions, share reconstruction and restructuring that followed the takeover. Intercontinental Bank, Oceanic Bank, Union Bank and FinBank were acquired by other banks, with only a fraction of shares allocated to their shareholders after the re-evaluation of their real assets. For instance, in the case of Union Bank, then Nigeria’s second largest bank, the share reconstruction reduced outstanding ordinary shares from 13.51 billion ordinary shares of 50 kobo each to 2.53 billion ordinary shares of 50 kobo each based on exchange ratio of 16 pre-scheme ordinary shares for three post-reconstruction shares. The three other quoted banks- Afribank Nigeria, Bank PHB and Spring Bank, were nationalised in questionable circumstances in August 2011, wiping away all investors’ monies. Afribank Nigeria traded at a high of N36.89 in 2007. Bank PHB and Spring Bank traded at N35.26 and N7.16 respectively. The market capitalisation of the three banks were N30 billion on the eve of the nationalisation.
The recession also scared away several companies that had floated initial public offerings (IPOs) and private placements from listings at the NSE, trapping several investors’ funds in close-ended firms. Subsequent investigations showed that many IPOs and new issues were fraudulently over-valued. The post-meltdown crisis management by the NSE also included compulsory delisting of some quoted companies, shutting in more than N250 billion investors’ monies in the companies. Some of the delisted companies included: Okitipupa Oil Palm, Grommac Industries, Incar Nigeria, Intra Motor, Rietzcot Nigeria, Albarka Air, Aviation Development Company, Ceramic Manufacturers Nigeria, Wiggins Teape Nigeria, Onwuka Hi-Tek, Beverages West Africa, Ferdinand Oil, Foremost Diaries, Tate Industries, Footwear and Accessories Manufacturers, Aboseldehyde Laboratories, BCN, Christlieb and Maureen Laboratories.
Others included: Epic Dynamics, Liz-Olofin and Company, Nigerian Lamps Industries, Niyamco, Oluwa Glass Company, West Africa Glass Industtry, Aba Textile Mills, Asaba Textile Mill, Enpee Industries, Flexible packaging, Krabo, NewPak, Nigercem and Tropical Petroleum, Starcomms Plc, Big Treat Plc, Afroil Plc. and Pinnacle Point Group.
The entire textiles sector was wiped off by a combination of compulsory and voluntary delistings.
Several companies that had raised huge funds in multi-billion naira share issues have nothing to show for the funds. Subsequent investigations showed that most of the companies either used their funds for speculative trading and got the funds trapped in the asset bubble at the capital market, or misappropriated the funds against the utilisation of proceeds stated in the offer document. With no fundamental value and loss of investors’ confidence, most investors have been stuck with these stocks which have stagnated at their nominal value of 50 kobo. Investors in insurance and other financial stocks are worst hit under this category. Out of the 29 insurance stocks currently on the NSE, only three stocks-AIICO, Mansard Insurance and Custodian and Allied, are trading at 100 kobo and above. Not less than 22 insurance stocks are stuck at their nominal value of 50 kobo while others are trading slightly above this base value. The depression in the insurance sector has defied global and national stock market recoveries, underlining the depth of asset bubbles in the sector. But in the early 2008, nearly all insurance stocks were trading in three digits, in multiples of their nominal values and considerably in competitive prices with other related stocks. For instance, Prestige Assurance and Intercontinental Wapic Insurance – two sectoral leaders by share prices, opened February 2008 at N11.40 and N10.60 respectively. Today, Prestige Assurance is stuck at 50 kobo per share and Wapic Insurance has slumped to 54 kobo.
The inability of SEC to wield its statutory power to protect and compensate investors, worsened investors’ losses and pains. The Investment and Securities Act (ISA), which enshrines investor’s protection as the core mandate of SEC, gives it wide-ranging powers to protect investors from any form of abuse. SEC is statutorily empowered to “ intervene in the management and control of capital market operators which it considers has failed, is failing or in crisis, including entering into the premises and doing whatsoever the Commission deems necessary for the protection of investors” while it can also “in furtherance of its role of protecting the integrity of the securities market, seek judicial order to freeze the assets (including bank accounts) of any person, whose assets were derived from the violation of this Act, or any securities law or regulation in Nigeria or other jurisdictions”.
Despite being in possession of mind-boggling evidence of sharp practices and abuses, the SEC neither sought for judicial orders to freeze ill-gotten assets of indicted executives, nor compensation for unsuspecting investors.
Besides, investors continue to struggle with sundry market challenges, including share frauds by hard-pressed, illiquid stockbrokers and absence of proper documentation for their shareholdings. Many boom-era investors have come to the market on the wave-of-the-moment without prior investment education. This shortfall has manifested in growing unclaimed dividends and poor documentation and processing of shareholding.
A September 2014 report by SEC showed that unclaimed dividends had risen to N90 billion. Several shareholders only have deposit tellers to show for their subscriptions while many had received dividend warrants without their share certificates.
The Director-General of SEC, Mallam Mounir Gwarzo, said the Commission recognised that there is still a huge gap in investors’ education. It was estimated that more than two million new investors joined the market during the boom-era period, making up about 40 per cent of the market’s domestic investors’ base.
Preventing reoccurrence
“The regulators then showed lack of foresight, sound regulations could have staved off or lessened the harsh meltdown,” said Mikhail, echoing the call by Adisa for a proactive regulatory stance by the regulators and other SROs.
Bankole urged the government to pay more attention to the capital market.
He said: “They have not really focused on the market before; they didn’t provide any tangible assistance to the market. All over the advanced economies in Europe and America, share investing is a way of life. The government should make policies that will make the market attractive and provide incentives for quoted companies so that they can grow and provide better dividends to shareholders.”
Fidelis also agreed on the need to use policy initiatives to address the lopsidedness and dominance of the Nigerian stock market by foreign portfolio investors, who are more speculative than investing.
Managing Director, Capital Assets Limited, Mr. Ariyo Olushekun, said the best and most effective way to protect investors is to institute and enforce proactive measures that enhance market integrity and forestall abuses.
“The importance of effective regulation in the capital market cannot be overemphasised. Regulations must be designed to address current market realities and by this, they must be up-to-date and relevant. The importance of regulation and enforcement of rules is paramount in investors protection and in gaining investors confidence,” Olushekun said.
Executive Director, Investment One Financial Services, Mrs. Abimbola Afolabi-Ajayi, said both the regulators and operators must make concerted efforts on investment education to forestall instances of abuses and ensure that investors play in the market according to their objectives.
To many, mutual funds, despite their inadequacies, remain the best options for risk-averse investors. Less than 250,000 Nigerians are participating in mutual funds, underlining the penchant for individual shareholding.
Chief Marketing Officer, Flobal Trust Limited, Mr. Abayomi Adeyeri, said investors should avail themselves of the services of professional investment managers noting that investments’ risks are greatly reduced when investors seek advice from professional investment managers and also show commitment towards continuous savings and investments.
Both SEC and the NSE have been showing commitments to market reforms. The NSE has removed the placement of technical suspension on issuing company’s stock; implemented wide review of rules and regulations for operators; dealers and quoted companies; instituted a whistle-blowing mechanism; upgraded the market’s trading engine and infrastructure; instituted the investors’ protection fund to compensate investors for sundry operational defalcations and now pursuing demutualisation among others to further enhance the competitiveness of the market.
The SEC, which sacked the former NSE management, has also led several reforms in rules, regulations, institutional capacity, market structure, products, disclosures, reporting standards, compliance and enforcements among others.
The new SEC Director-General, a former stockbroker, who understands the intrigues and intricacies of the market, has shown early commitments to recapitalisation of inadequate market operators.
Undoubtedly, the stock market, notwithstanding its cycles of fluctuations, remains the most attractive investment in the long-term; as empirically proven by several global research reports. But investors must keep in mind the articles of faith for the stock market: investing is risk-taking, seek knowledge and expert advice and focus on the long-term.
