Nikhil Rathi, head, international development, and Ibukun Adebayo, head, emerging markets, London Stock Exchange Group, in this interview with Edozie Ifebi and Daniel Ojabo, say as a global operator, they are here to play because Nigeria is the largest economy in Africa, and with the most exciting speed and scale of growth. Excerpt:
What are the attractions of the Nigerian Stock Exchange, comparing it to the Johannesburg Stock Exchange?
We have a partnership with the Johannesburg Stock Exchange, but what is exciting about Nigeria is the speed and scale of growth. At the moment, Nigeria has a relatively underdeveloped capital market. it’s around 25 percent of GDP, but we can see that over time, it can rise to 250 percent, or 300 percent of GDP. With an economy of this size, where the fundamentals are sound as Nigeria’s capital markets, it should concur to funding and financing of Nigerian businesses.
So, I think the potential of the capital markets in Nigeria is huge for Nigeria to serve the wider Africa region, support Nigerian companies accessing global markets, and for international investors, especially in the UK to access Nigerian markets.
After Seplat, which is the first Nigerian company to achieve dual listing – both in Nigeria and London, what has the reaction been from investors in the UK, are they getting excited about potential listings over time? Can you gauge the international investor sentiment towards Nigerian companies?
There have been other dual listings in the London Stock Exchange by Nigerian companies, but Seplat was the first dual ‘geo-simultaneous listing,’ and it was the first listing between Nigeria and London using ordinary shares. Previously, it had been shares in Nigeria, and then a Depository receipts in London. So, this is the first, with Seplat.
The other first is that we have used for Seplat, a very unique new settlement mechanism, to ensure more efficient secondary markets trading. In the old days when we traded, we used to have two registers, you’d see perhaps trading become very lumpy in one venue, and no trading in the other venue, mainly because of costs and cross-border transaction difficulties. But with this, we have simplified the process, we have provided all of the commissions, we have put the structures in place to ensure that cross-border trading happens much more effectively, and as a result, what we have seen is that, even though half a billion dollars was raised by Seplat, 70 percent of that raised in London, but we saw at one point 70 percent of the trading happening in Lagos.
This shows the efficiencies of the system and the ability to transact between both markets. Now, over time the trading shifted back to London mainly because of the naira depreciation, stock market falls, and people wanting to protect themselves from the Nigerian market, but this is the absolute essence of the efficiency of a dual listing and the benefit it brings to both the issuers and the investors.
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Are investors excited knowing that this gives them the opportunity to gain direct exposures to Nigerian companies?
I believe investors are excited. I’ve attended various Africa investor conferences in London, and they are really the Nigeria show. Everyone is looking at what is happening here in Nigeria – the rebasing of the economy, the institutions are stable, there are sound fundamentals and a sound legal framework. And so, I think that as the pipeline develops with more companies coming to the market with equity issuances or bond issuances, you will see very strong interests.
The Nigerian authorities have also sought to make a number of improvements in the regulatory framework and the Exchange itself has also done some work in Corporate Governance for example, and down here, there is a very clear ambition to make sure that Nigeria is benchmarked against the world’s best, and is meeting international standards. That is a positive.
There is a lot of talk about current turbulence, oil price and the currency, but the Nigerian economy is much more than oil price. It is broadly balanced. There will always market volatility up and down, but as in a lot of other exchanges, we are here for the long term, and we see this as one of the most exciting opportunities around the world.
Can you give a brief description of the new clearing mechanism that has been developed for the NSE to geo-simultaneously function with the London Stock Exchange? How is this unique, and what is the value in this system?
Previously, you would have two share registers and two central depositories that would effectively not be speaking with each other. So, when you had trades, trades will have to essentially dematerialise in one venue and rematerialise in the other venue. In London, you can’t directly list a share from an overseas venue, you have to list what is known as Depository Interest. You would have to create this interest and it will go into the settlement system in London, and that takes time. Previously, that would have taken up to 20 days for the complete settlement system.
What we have created now is a very simple system where the Central depository has a position on the register of the company itself within the share register. That creates a much more simplified process. However, to do that, we needed to ensure that there was a recognition of the laws of trust here in Nigeria with the UK, and that there was a recognition of titles so that beneficial share owners are recognised within this entire mechanism. Both of those two things allow for the seamless trading to happen. It is slightly complicated but it has completely streamlined and brought down the processing time to a settlement period which is meeting international standards.
Getting the settlement infrastructure right is fundamental to ensuring the smooth operation of the dual listing, and we have demonstrated that. The hard work in the case of Seplat will hopefully make it much easier for others to achieve something similar.
Will this mechanism be of any relevance to the debt market, for corporate bonds, commercial papers, government bonds and treasury bills?
The settlements system that we have developed is primarily for the equity market, but we have one of the largest debt markets in the world, and Nigerian companies list their debt issuance there. Access Bank is one of them. There are a number of others. We believe that just as there are investors very interested in the equity markets, there is huge opportunity to raise fixed income funding from the UK markets as well. We have been doing a lot of creative things lately. While we were signing the agreement with the NSE, back in London, the International Finance Corporation launched its first Indian-Rupee bond, that is, bonds denominated in Indian Rupees. They were listing it in London, and they were using those funds to invest in infrastructure projects with the government of India. Something similar has been done with the Renminbi in London. The UK government issued a Renminbi bond as well. So we have become a real hub for fixed income or international players in global markets, and also those who want to do new things, both corporates and governments.
Can this be extended to Nigeria? For instance, there has been talk about Diaspora bonds where Nigerians living in the UK can invest in FGN Bonds as retail investors. Perhaps, plans will be accelerated towards that purpose.
That is the exciting opportunity. The London Stock Exchange Group also owns the Italian Stock Exchange, and in the Italian markets, we have the largest European retail fixed income platform, so we have a lot of experience in making fixed income issues available to retail participants whether it is the diaspora communities or the retail market. But that is a huge growth opportunity that is untapped. There is much more to come.
On the government bond side, we operate a very liquid government bond market called the MTX, so there are opportunities for governments globally to be able to trade on that platform. It gives a lot of access and additional liquidity for fixed income products such as government securities.
Can we see some custom-made fixed income products targeted at Nigeria, or Nigerians in the Diaspora?
The ultimate decision is for the Nigerian stakeholders and authorities. We are equipped to advise governments on their debt issuance strategy. What I would say is that capital markets in Nigeria have a lot of potential. At the moment, it is focused on equity markets, and that is right because that is the core product, and you want to get more listings. But an economy of Nigeria’s size, which has companies with global reaches like the Nigerian companies, your economy and companies will want to access all forms of capital – fixed income, derivative products for hedging purposes, and experimental products with the retail market. That will come with time. It is for Nigeria to decide when and how it will happen.
Another challenge we have is supporting financing for small companies. It something we at the London stock exchange feel very passionately about. We have put a lot of effort into finding creative ways to support the very small companies – the start-ups, the entrepreneurs with new ideas that are looking to raise capital. We support them pre listing, with our elite program which is neutral between the different types of capital raising and we also have a range of initiatives to help them raise capital. In Nigeria, the potential for that is huge because there are hundreds of thousands of small companies which are the engines of growth. They will want to access different forms of capital.
After Seplat, are there other companies in the pipelines waiting to dual list?
The pipeline is very strong, and it is a cross of all sectors of the Nigerian economy, so it is not purely reflective of what is happening in the oil and gas sector. The companies in the pipeline are also very reflective of the growth in Nigeria’s middle class, and in the retail sector which is booming. So, we are seeing everything from ecommerce types of tech opportunities, we are also seeing some of the global banking / financial services types of industries. We are also seeing new more innovative African style businesses looking to raise capital. A lot of these businesses are initially going to be hugely capital intensive. And one of the key factors is that the Nigerian markets, even though it has a certain amount of depth, it possibly doesn’t have the same expertise in being able to accurately value those equity stocks. So, working with the LSE, it is going to be possible to bring these companies to market to take advantage of the deep pocket of capital there and the international institutional pools outside. The pipeline is very strong.
Any definite companies?
I don’t think it is appropriate for companies to let you know if they have made such a decision.
Any key milestones to target?
Milestones will be to raise the profile of the Nigerian capital markets and Nigerian companies in the international markets where London is the hub, and it will be great to see some of the companies in the pipeline being able to step forward and raise capital on the main board of the Nigerian Stock Exchange and that of London.
The Nigerian markets in the short term seems pretty bad, are investors optimistic about Nigeria at this point?
Markets go up and down. It is important for the authorities, the exchanges and the investors to think long term, and to see through market volatility. Markets have a tendency to overreact both when they go up, and when they go down. One thing is clear, the Nigerian story is very strong, and the fundamental Nigerian economy is very strong, it is much more than an oil economy. I think that in three to five years, companies here will be big players on the global scene, as they are already starting to be.
Don’t forget that at the moment, there is only a fraction of global capital that actually accesses the Nigerian equity markets, both directly and through companies that are listed on international exchanges. However, there is a huge demand for Nigerian stocks outside of those circles that currently access them. What we are trying to do in partnership with the Nigerian Stock Exchange is to get Nigerian equity stocks much closer to those pots of capital that demand them. That exercise will supersede any volatility we are seeing in the markets and the demand will hopefully filter through into the economy, and we will see the types of growth rates in the capital markets matching the growth rates that we see in the economy. It is the natural consequence of what we are doing.
So, we are very excited to be here, and we welcome the support of both governments for our work. This is a collaborative partnership which brings together everyone in the ecosystem, both in London and in Nigeria.
