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Re-capitalisation of market operators: To be or not to be?

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Barely 10 months ago (precisely on December 18, 2013), the board of Securities and Exchange Commission (SEC) decided to go public on the new minimum capital requirements for all categories of Capital Market Operators, noting that it is in pursuant of Section 313(6) of the Investments and Securities Act (ISA) 2007.

It was learnt that the decision on the new capital requirement was the outcome of the 73rd meeting of the board of the SEC, which took place in September 2013.

Following the amendments, the capital requirement for broker/dealer was increased from N70 million to N300 million. For broker only, the capital requirement increased from N40 million to N200 million, while for dealer it increased from N30 million to N100 million.

The minimum capital requirement for Issuing House was also increased from N150 million to N200 million, while that of Underwriter was increased from N100 million to N200 million. For a Registrar in the Nigerian capital market, the minimum capital requirement is now N150 million from N50 million, while for those in Trustees business their capital requirement was raised to N300 million from N40 million.

Furthermore, the minimum capital requirement for Rating Agency increased from N20 million to N150 million, while the capital requirement for Corporate Investment Adviser remains at N5 million. From an initial capital requirement of N500,000, every Individual Investment Adviser is expected to have at least N2 million as capital, while Fund/Portfolio Manager’s minimum capital requirement was raised from N20 million to N150 million.

Many market operators criticise the apex regulator’s decision to shore up their minimum capital base, saying that it is not what the market needs now, particularly at a time when they talk of increasing the level of literacy in the market, as well as when the ratio of capital market size to Nigeria’s GDP remains lower compared with its peers.

In addition, they believe it will have negative implication on the jobs of market operators’ employees, as well as the foreseen bubble effect on the market in the near future, saying the regulator should rather focus on how to increase the dept of the market in terms of tradable products. If the regulator insists on this, they believe it should be done using a risked-based approach.

Though, industry sources told INVESTOR that since the SEC announced the deadline for operators’ re-capitalisation, “it took us six months to get the regulator engaged and discuss the implication on the entire Nigerian economy.”

The question being asked now is whether there were indeed extensive and exhaustive consultations to address this issue, considering the wider implication on the market and the economy.

Earlier this year, Obi Adindu, communications adviser to the director-general, SEC, told INVESTOR that the SEC board’s decision was the outcome of extensive, indeed exhaustive consultations with stakeholders within and beyond the Nigerian capital market.

The apex regulator reiterated then that an enhanced capital base for Capital Market Operators (CMOs) in the Nigerian capital markets was long overdue, saying “it is an inevitable logical step in the industry reform effort being led by the SEC and which has the buy-in of all industry stakeholders.”

In a release then, SEC noted that the new capital regime was the outcome of a process that commenced in 2010, with the setting up of a technical committee chaired by a former executive commissioner, Operations at the SEC.

“The committee featured representatives of the capital market industry trade groups such as the Association of Stockbroking Houses of Nigeria (ASHON) and the Chartered Institute of Stockbrokers (CIS), as active members. The new minimum capital regime which was recently announced on the basis of a September 2013 SEC Board decision was a finalisation of the work of that industry-wide committee,” SEC had said.

Issue and matters arising

It was learnt that if SEC goes ahead with the recapitalisation, only 27 percent (about 61 firms out of 226) of the operators might not be affected, because as it is nine months down the year and the uncertainty is high for the remaining operators to raise this money in the remaining three months. Currently, there are about 226 active stockbroking firms at the NSE. On average, each of them has about 30 employees, meaning that over 5,000 jobs of employees of stockbrokers could be at risk. This is excluding others operators.

Regulators speak

Arunma Oteh, director-general, SEC, said at the third-quarter (Q3) capital market committee (CMC) meeting held last week in Lagos that the Commission will enforce December 2014 deadline given to market operators to recapitalise. Already, new market operators are entering the market with the said capital base as their minimum, she said, noting that others are making efforts at meeting the deadline.

“The new capital requirement is the outcome of rigorous process which took all factors into consideration, including and, especially the risks borne by various categories of operators. Discussions around the imperative need for both recapitalisation as well as migration to a new capital regime for operators in the Nigerian capital markets industry have been on for well over a decade. In fact, a new capital regime was proposed for the industry as far back as in 2007. The recently announced minimum capital for operators is far lower than the 2007 figures,” Adindu said, recently.

The NSE is currently sitting on the fence as this issue unfolds. For instance, a senior management staff of the NSE, said: “It is not a policy that is driven by the NSE. We have nothing to do with that. SEC is the apex regulator, ours is to implement their decisions when it gets to that level.”

According to him, “we have to take a coordinated approach to this issue. On our side, we are engaging people in the market here. The regulator is also engaging with stakeholders on this issue, but we have decided to distance ourselves on this issue.”

Market operators speak

Emeka Madubuike, chairman, Association of Stockbroking Houses of Nigeria (ASHON), said “all over the world, regulation has entered into risk-based approach when it comes to recapitalisation. If we ignore this approach, we are likely to see a bubble in the market. Stockbrokers will trade against themselves for few products because there are currently few tradable products.”

According to Madubuike, “the policy needs to be critically reviewed in such a way that we don’t repeat past mistakes. Any policy that should disturb the capital market should not be discussed now because the market is still a very small fraction of Nigeria’s GDP. The level of recapitalisation should be a function of the risk you carry. It is for this reason that all over the world, regulators have entered into risk-based approach to recapitalisation. Moreover, at N70 million minimum capital, ours is only about number two in the world, only behind Malaysia.”

He said: “Increasing the capital base of stockbrokers shouldn’t be a priority, rather what we need to increase is the dept of the market products, as we are not completely against recapitalisation but it should be done in a manner that will not impact negatively on the economy.

“We are talking about 16 percent level of literacy in the capital market and targeting 25 percent in near future. If you throw operators out of the market, how will you achieve this? One needs to know by way of statistics that on daily average, between 150 and 200 stockbroking firms trade. On the average, there are about 5,000 daily trades. If you talk about brokers and infraction, out of the 5,000 daily trades, how many of them are unauthorised that warrants infraction.

“It is not as if that I am making case for anyone who engaged in infraction, but the truth is that what is the significance? Already, we are at the verge of concluding efforts on crediting directly every investors’ account every sales transactions on his account. With this, the issue of infraction is over. What we should be focusing on is how to introduce more tradable products. We are not against recapitalisation, but it should be done in a manner that will not impact negatively on the economy.”

Victor Ogiemwonyi, chairman, Association of Issuing Houses of Nigeria (AIHN), had said “the apex regulator should look at recapitalisation from mergers and acquisition (M&A) perspective.”

He said: “They should look at the impact of throwing operators out of the market. We are talking about financial inclusion but forgetting there is need for skills and synergy. In a merger and acquisition scenario, a smaller firm could be used as marketing outfit or branches of a larger company. We have to learn lessons from banks, insurance companies and, recently HMOs.”

That is why the association has chosen M&A as an option for re-capitalising the stockbroking industry’ as the theme for its annual workshop which comes up today, Thursday, he said.

During his investiture as the president of Chartered Institute of Stockbrokers (CIS), Albert Okumagba vowed that the Institute would protect the interest of stockbrokers in the recapitalisation of capital market operators.

His words: “I would like to assure that the Institute will continue to play a leading role in advocacy to protect our members and their businesses, and to ensure that we operate our market with globally acceptable standards. In the front burner at this time is the issue of recapitalisation of operations of operators and demutualisation of the NSE.

“These directly impact on the lives and survival of our members. I can assure you that we are at the forefront of engagement and discussions with the regulators to ensure a decision is reached that will both benefit the market as a whole, and ensure that our members are fairly treated.”

Responding to INVESTOR enquiry on M&A as option, Adindu stated: “Of course, it is expected that this may well constitute a route to attaining the new capital minimum capital requirement. Of course, the SEC which makes a principled commitment to laissez faire economics will not wax prescriptive by mechanically inducing such marriages, rather, the expectation is that operators will interact with one another to discover and explore commonalities in cultural heritage which will conduce to or dissuade such synergy.”

On the risk of job loss in the capital markets due to new capital base, Adindu said further, “absolutely not. What the new capital regime will do is to consolidate the capital market’s resources and capacities for greater mileage through strategic realignment. It will not contract the current level of business opportunities in the market and therefore cannot compel a reduction in the personnel complement needed to service those opportunities.”

He said: “In fact, the strategic realignment will spin off job opportunities through better factor employment, since the M&A through which the markets will consolidate will enhance quality of leadership and other human capital among operator entities. This should translate to greater capacity to discern and create opportunities in the market, which should attract/employ more human capital. Enhanced capital will also enable attraction of skilled manpower by operator entities with the attendant multiplier consequences for market efficiency. What may reduce will be the number of idle CEOs who currently preside over empty shell market operator entities and who basically run around engendering market crimes and hiking regulatory cost through the resource outlay, which is necessary for market crime remediation.”

On the likelihood of market bubble, Adindu said: “The new capital will be neither cash at hand nor working capital only. It will be invested in attracting enhanced human capital, improved technology, better office set up and sundry infrastructure and as hedge against risk. Where then will the bubble arise from? The regulations guiding margin trading are in place as are other regulations which govern every facet of market conduct. In this era of stringent market enforcement, it cannot be contemplated that people will engage in the kinds of unethical behaviour which trigger bubbles and bursts without stern regulatory response.”

Whether we will likely see recapitalisation and risk-based supervision, he said: “The new capital regime advances risk-based supervision since the risk exposure of various categories of operators was the determining factor for the capital requirement proposed. What has happened is that a good number of operators are habitually underestimating the risks inherent in their operations. This is detrimental to market health since it heightens the propensity to apply investor funds to untoward purpose in addition to other misconduct.”

Iheanyi Nwachuwu