2015 will witness a lot of changes at the capital market. From the regulatory agencies to operators and investors, the New Year will see many twists and turns, writes Capital Market Editor Taofik Salako
For the capital market, next year will witness many changes. Against the backdrop of negative return in 2014, the expected tight macroeconomic condition in 2015 and the resultant fiscal and monetary adjustments will serve as the mixer for a mixture of political, operational and regulatory variables, which are expected to moderate the market’s performance and investors’ return in 2015.
The year is starting with the expiration of the tenure of the director-general of the Securities and Exchange Commission (SEC), Ms Arunma Oteh. The reappointment of Oteh or appointment of a new director-general will dictate the pace for many market developments, including the recapitalisation of capital market operators.
Ms Oteh resumed as director-general in January 2010. Her tenure ends January 2015. The Investments and Securities Act (ISA) 2007, the law regulating the capital market, provides for a five-year tenure for the director-general, in the first instance, renewable for a similar term of five years only.
Section 5, subsection 1 stipulates that the director-general and the three full time commissioners shall be appointed by the President upon the recommendation of the minister and confirmation by the Senate. Section 5, subsection 2 states that “the Director-General shall hold office for a period of 5 years in the first instance and may be reappointed for a further period of five years and no more”.
However, subsection 5 states that “Notwithstanding the provisions of subsections (1) and (2) of this section, the President may extend the tenure of office of the director-general and any of the Commissioners whose term of office has expired until a successor to such director-general or commissioner is appointed”.
In the alternative, the director-general may be requested to appoint one of the commissioners to supervise activities in her absence. Subsection 7 stipulates that “the director-general or, in his absence, one of the commissioners nominated by the director-general shall be responsible for the day to day management and administration of the Commission and shall be answerable to the Board of the Commission”.
The choice of the chief executive for the nation’s apex capital market regulator is already keeping the market on the edge. Discussions were in hushed tones at the Abuja headquarters of SEC and within the major financial centres of Customs Street and Victoria Island. Opinions are divided on Oteh’s continuity and otherwise. Oteh’s reappointment will give verve to her reforms, especially in corporate governance, disclosures and enforcements. She will step on with the recapitalisation of capital market operators, which has pitched her against the multitude of small and medium operators. She may also have another chance to push for her unrealised targets of full dematerialisation, unclaimed dividend management, new complaint management framework, demutualisation of the Exchange and review and promulgation of many laws that could aid market developments. Most important, she will be able to drive the long-term master plan for the capital market, a blueprint she had championed and launched in Abuja in the last quarter.
But Ms Oteh faces stiff oppositions from sundry market operators, investors and stakeholders groups, including staff of the SEC. She has major obstacles in the National Assembly, which has subsisting orders against her and had blocked subvention to SEC. The Presidency ignored the legislative resolutions but it will have to return to the National Assembly to get approval for any appointment into the office of SEC’s director-general. Several stakeholders want to see a new chief executive who could draw on the capacities of the various constituents, including the National Assembly, to push for major changes that could alter the market development. They cited inability of Ms Oteh to put the capital market forward as the vehicle for government’s divestitures in the power sector and absence of legislative supports for the market.
Ms Oteh, who had been accused of conflict of interest, is also unsuitable to supervise the demutualisation of the Exchange, some alleged.
The General Secretary, Independent Shareholders Association of Nigeria (ISAN), Adebayo Adeleke, is canvassing for a new chief executive, an opinion he said mirrored the feelings of the average retail Nigerian investor. Their grouse was the takeover of three quoted banks by the Central Bank of Nigeria (CBN) without whatever consideration for retail investors and lack of enforcement actions against the indicted executives in the banks’ malfeasance. Oteh’s reappointment will kick-start the implementation of the recapitalisation of capital market operators.
New capital, new operators
January 1, 2015 is a signal date for capital market operators. That’s the take-off date for the new capital new capital base for various functions prescribed by SEC as well as the minimum operating standard (MOS) requirements prescribed by the Nigerian Stock Exchange (NSE). With the December 31 deadline for compliance, 2015 will be a decisive year for the sifting the capital market operators. While there is ongoing intense lobby for extension of the recapitalisation deadline, it’s almost certain that capital requirements will play decisive roles in the classification of market operators going forward. SEC had in December 2013 announced new minimum capital requirements for all capital market operators, with a compliance deadline of December 31, 2014 and effective take-off on January 1, 2015. Under the new capital requirements, minimum capital base for broker-dealer was increased by 329 per cent from the existing N70 million to N300 million. Broker, which currently operates with capital base of N40 million, will now be required to have N200 million, representing an increase of 400 per cent. Minimum capital base for dealer increased by 233 per cent from N30 million to N100 million.
Also, issuing houses, which facilitate new issues in the primary market, will now be required to have minimum capital base of N200 million as against the current capital base of N150 million. The capital requirement for underwriter also doubled from N100 million to N200 million. Trustees, rating agencies and portfolio and fund managers had their minimum capital base increased by 650 per cent each from N40 million, N20 million and N20 million to N300 million, N150 million and N150 million respectively. A Registrar will now have a minimum capital base of N150 million as against the current requirement of N50 million. While the minimum capital base for corporate investment adviser remained unchanged at N5 million, individual investment advisers will have to increase their capital base by 300 per cent from N500,000 to N2 million.
Stockbroking firms under the auspices of Association of Stockbroking Houses of Nigeria (ASHON) have already called for a deferment of the deadline. Many wanted the suspension of the recapitalisation altogether. President, Association of Stockbroking Houses of Nigeria, Mr. Emeka Madubike, said the stockbroking firms have made a case for extension or deferment of the deadline. According to him, the recapitalisation, as it is now, is not in the best interest of the market and should be reviewed. “For me, I believe that whatever we are doing, we are doing it in the interest of the market. So, if whatever you are doing doesn’t seem to be in the interest of the market, you need to restrategise. What we are asking for is a deferment of the deadline,” Madubuike said. Many stakeholders feel that the new minimum capital requirements may adversely impact the market penetration and financial inclusion programme.
But the NSE has already indicated it will stick to the December 31 deadline for its reclassification programme for stockbroking firms based on the operating capacity of the firms. The new MOS standards relate to all the three classes of dealing members including broker-dealers, brokers and dealers and address the five broad areas of manpower and equipment; organizational structure and governance; effective processes; global competitiveness; and technology. The Nation had reported that a circular was dispatched to stockbroking firms on the eve of the Yuletide holidays affirming the deadline and outlining the implementation framework for the MOS. Under the MOS, stockbrokers will be reclassified under four categories according to operating capacity in 2015 while other stockbroking firms that fail to meet requirements for any of the four categories will be exited from the market. Also, existing stockbrokers that fail to meet the first three levels of operating standards will be reclassified as sub-brokers, partially recognised operators, and they will lose their membership of the Exchange.
With effect from March 31, 2015, each dealing member of the NSE is required to submit a final MOS compliance level report in the prescribed templates previously provided by the Exchange. Dealing members that do not comply by March 31, 2015 will immediately be suspended from trading until they comply. Also, commencing in April 2015 and until the beginning of the fourth quarter of 2015, the Exchange will conduct thematic reviews and examinations to evaluate each dealing member’s level of compliance with the MOS. Following the thematic reviews and examinations, stockbrokers that are not in compliance with the MOS by the fourth quarter of 2015 will be advised to reclassify from broker-dealer status to a classification with lower MOS requirements. These include splitting the functions and becoming either a broker or dealer or becoming a sub-broker, a quasi operator with no membership of the NSE. Other stockbroking firms that fail to meet any of the four categories will be directed to “exit the market in an orderly manner”. Head, legal and regulation division, Nigerian Stock Exchange, Ms Tinuade Awe, said the objective of the minimum operating standards is to transform the operators into more competitive and compliant operators. “We intend to ensure that the broker dealers, brokers and dealers have very robust controls, strong governance framework and sustainable operations that will enable them compete on a global scale for the benefit of the investors and the Nigerian capital market,” Awe said.
Analysts’ estimate indicates that not less than 200 stockbroking firms may be affected by both the recapitalisation and the MOS scheme. This may further pressure the delicate overall market situation, which is under extraneous influence of the global crude oil crisis and resultant national monetary and fiscal adjustments.
Another difficult year
Head, Equity Research, FBN Capital Limited, Olubunmi Asaolu, said 2015 could be another difficult year for investors given the global crude oil crisis, a variable that has served as triggered for a chain of reactions, including tight monetary and fiscal policies. “Given the challenges which the oil price decline is posing, we expect next year to be another relatively difficult year for the equities market, though we don’t expect it to be as bad as this year,” Asaolu, a chartered financial analyst (CFA) said. Nigeria earns more than 70 per cent of its national revenue from crude oil. With a steep decline in global crude oil, by some 40 per cent, rocking the national economy, the Central Bank of Nigeria (CBN) had responded with increase in monetary policy rate (MPR) from 12 per cent to 13 per cent, the first change in three years. It also devalued naira exchange rate to N168 per dollar with a band of +-5.0 per cent, that is, N160-N176. It was previously at N155 per dollar with a band of +-3.0 per cent, that is, N150-N160. Many analysts said they expected the apex bank to further devalue the Naira in the New Year. The increase in interest rate, the devaluation of Naira and expected spike in inflation rate are expected to combine to further constrained corporate earnings in the New Year. This will also be compounded by the unrelenting violence in the Northern region. Already, the International Monetary Fund (IMF) has cut its 2015 growth estimate for Nigeria to five per cent, as against initial 6.9 per cent estimated for 2014.
A worsening macroeconomic outlook, especially with regards to reactive monetary policies, could proof to be fatal for the capital market in 2015. The Nigerian capital market is dominated by foreign investors, whose initial concerns about the macroeconomic performance had sustained decline all through the second half of 2014. Latest Foreign Portfolio Investment (FPI) by the NSE showed that foreign investors had taken away more than N101 billion from their portfolio investments in Nigeria by October 2014. The October report indicated that Nigeria recorded a net foreign portfolio deficit of some N101.41 billion over the past 10 months as divestments significantly outpaced investments by foreign investors. The NSE report is generally regarded as a credible gauge of foreign portfolio investments in Nigeria as it coordinates data from nearly all active investment bankers and stockbrokers. Nigeria operates a mono stock exchange, which makes the NSE the sole gateway to the nation’s stock market and the NSE’s benchmark indices, the country indices for Nigeria. Foreign portfolio outflow was N676.67 billion as against inflow of N575.26 billion during the 10.-month period, representing a net deficit of N101.41 billion. While the ratio of foreign-domestic investors participation fluctuate month-by-month, trading data have established firmly that foreign investors are the largest and most dominant bloc in the Nigerian capital market. In October 2014, foreign investors accounted for 87.5 per cent of total market transactions.
Head, research and investment advisory, Sterling Capital Markets, Mr. Sewa Wusu, said anxieties over Nigeria’s macroeconomic and monetary outlook in the light of the declining global oil prices and rising economic risks would combine with political risks to moderate the performance of the market.
Head, financial advisory, GTI Capital Limited, Mr. Kehinde Hassan, said the 2015 general elections hold strong influence on the performance of the market going forward. Both Wusu and Hassan agreed that either way, the politics of 2015 will modulate the market performance. According to the analysts, a change in government in the February 14 presidential election and renewal of ongoing presidential term will influence the economic direction and investors’ reaction.
Besides, the expected cut in banks’ earnings in the New Year could have strong sectoral influence on the market. Banking stocks are the most active stocks and they have influence on the overall market situation. The progressive reduction in Commission on Turnover (COT) will again reduce this charge from N2 per N1,000 in 2014 to N1 per N1,000 in 2015, halving banks’ earnings from this source. Impending capital adequacy ratio (CAR) changes are also expected to impact cost and earnings. Large commercial banks classified as systemically important banks (SIBs) are required to have an additional 100 basis points on the general benchmark of 15 per cent, that is, 16 per cent CAR with effect from April 2015. Nigerian banking industry will be adopting Basel II Capital Accord with effect from October 2015. “The adoption of Basel II essentially means additional capital charge for market and operational risks,” Head of Finance, FBN Holdings Plc, Mr Oyewale Ariyibi said.
There is also the fear that the large exposure of banks to the oil and gas sector may have a pronounced impact on their bottom-line. While Ariyibi allayed the fears of burgeoning non-performing loans, he agreed that the exposures to the sector could impact on margins. “If the fundamentals of the obligors’ businesses do not change, loans do not go bad; however, temporary macroeconomic challenges might impact margins and profitability,” he said.
Asaolu noted that the performance of the market may not be as worse as in the outgoing year. Head, Research and Intelligence, BGL Plc, Mr. Femi Ademola said although the volatile political situation is likely to scare investors away from the market, expectation of strong year end results and attractive corporate actions by listed companies could still lead to positive sentiments for the equity market. He noted that the recent reversal in oil price from below $60 to about $62 per barrel with a one year outlook of about $65 per barrel would also help to stem exchange rate volatility and thus attract portfolio investment to the country, post-election.
“Empirical evidence suggests that Nigerian market usually recover strongly once elections have been settled and the likely policy stance of the new administration established. Therefore, we are optimistic of a positive outlook for the market in 2015, albeit modest,” Ademola said.
Whichever twist, whichever turn, the New Year is loading, and it will throw up many challenges and opportunities.
