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Market reforms: The journey so far…

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  Stock market thrived between 2007 and 2008, culminating in the bubble burst in March 2008.

The rally was preceded by the banking sector consolidation that boosted the banks’ ability to play the market more aggressively. Prior to that, the stock market had reached a capitalisation of over N12.6 trillion, while the index peaked at 66,371.20, as recorded on March 3, 2008.

By January 2009, the index had plunged to less than 22,000 points, wiping off over N8 trillion (or around %) of the total capitalisation of the stock exchange within this period.

Without doubt, a vibrant capital market is essential to the growth of the economy, especially in terms of raising much-needed long-term financing for critical infrastructure, housing and manufacturing sector.

Solid economic growth in any country is closely linked to the joint development of the banking sector and the capital markets. Having recorded relative success in the banking sector reforms, there was also need to embark on a similar exercise in the Capital Market. This clearly was a recipe for embarking on wholesale reforms that would reposition the Capital Market.

SEC reforms

In the last three years, the Securities and Exchange Commission (SEC) has embarked on far reaching reforms to reposition the market. This is in line with the 32-point recommendations of the Dotun Sulaimon committee that proposed reforms of market structure and processes to position the market in line with global best practice.

This brought about strengthening regulatory framework and oversight, improving market regulations and supervision. To ensure market integrity and transparency, SEC emphasised issues of good corporate governance, firming up disclosure, transparency and accountability requirements in the marketplace and among regulated entities.

NSE reforms

The NSE Council and the new management have embarked on far reaching measures to reengineer the operations of the stock exchange.

These include re-structuring the Exchange into four major divisions, with each of the divisions except corporate affairs, having an executive director as head.

The new divisions; Market Operations and Technology; Business Development; Legal and Regulation, and Corporate Affairs are geared towards enhancing the market.

The Business Development is in charge of developing new products lines to deepen the capital market offering.

Already, the Exchange is working towards developing new products lines like Index/Exchange Traded Funds, Options and Financial Futures product lines, thereby widening scope of market offerings beyond existing Equities and Bond asset class offerings. And this will bring the total number of tradable asset classes to five within the next few years.

The NSE followed with the implementation of the market maker initiative in September last year to provide liquidity to securities through provision of bid and offer prices for stocks. Since the selected 10 firms commenced the process, we have seen a tremendous improvement in market trades and price appreciation. Equity prices movement band was also expanded to 10 percent.

The NSE closed 2012 with over 34 percent gain and is already doing close to 20 percent in 2013 already.

Government intervention

However, the greatest impact on the market was the aggregation of all the regulatory effort that culminated in the announcement by the minister of finance for bailout for some stockbroking firms.

These include the granting of forbearance to firms in order to remove the debt overhang, which was choking the market.

Other incentives include the elimination of stamp duties and VAT on stock market transaction fees.

AMCON had purchased the margin loans from banks for about N42.6 billion, but the value of the underlying assets or collateral is worth only N19.96 billion today, has been granted a N22.6 billion forbearance on margin Loans.

Good intention, harsh approach

All these are good gestures that have helped to boost the market except that some aspects may have been skewed unfavourably against stockbroking firms.

For instance, the notion of criminalising the debts is something that should have been looked into. That is precisely what the conditions attached to accessing the forbearance connotes.

Invariably, stockbrokers are being punished for issues that came up in the normal course of business, which the banks themselves ought to have borne the brunt.

Margin loans are part of the normal stock market business except that some of the banks did not do the proper thing for which the stockbroking firms are now being punished. It is commendable that many of the firms have accepted the bailout along with the conditions attached, but it is necessary we put the issues in proper perspective.

 

Victor Ogiemwonyi

Ogiemwonyi is managing director, Partnership Investment Company plc. This is an extract of his presentation at the monthly forum of the Capital Market Correspondents Association of Nigeria