There will be transaction and advisory opportunities for lawyers who understand the securities lending business, especially in relation to documentation, now that the Finance Act has brought changes that could lead to increased activity.
Securities lending is the market practice of temporarily transferring securities, for a fee, from their holder (the lender) to another party (the borrower), with the borrower agreeing to return the securities to the lender either on-demand or at the end of the agreed loan term. It usually requires the borrower to collateralise the transaction with cash or other securities of a value equal to or greater than that of the lent securities, in order to protect the lender against counterparty credit risk.
The Nigerian Stock Exchange’s securities lending market is valued at N1.07 billion ($2.96million) according to official data by the Exchange. The NSE, in its Securities Lending Report of October 2019, said 20.78 million shares were available for lending to investors, which is a 3,307 per cent increase from the 61,435 shares available for lending in the whole of 2019.
Prior to the Finance Act, passed into law February 2020, security lending transactions were taxed based on their legal form rather than their economic substance which opened them up to the risk of multiple taxation. Now, security lending transactions will be taxed based on their economic value, and that is expected to encourage more transactions. It is also expected to be a boon for lawyers who understand the new rules and tax implications of the changes, according to Joseph Eimunjeze, of Udo Udoma & Belo-Osagie.
“It will be difficult to provide an estimate on the revenue that the Nigerian legal industry stands to make from the changes…That will depend on how the market reacts to the changes and the extent of advisory work that will be available,” Eimunjeze, a Partner in the firm’s Banking and Finance, Corporate Advisory and Tax teams said in an interview with the BusinessDay Legal Business Unit.
Role of lawyers in securities lending after Finance Act
Lawyers will be required to advise on the documentation and tax implications of the changes introduced by the Finance Act for regulated securities transactions, according to Eimunjeze.
“For example, the Act amends the Stamp Duties Act 2004 and clarifies the position in relation to certain income tax requirements, with the effect, to give a few examples, that receipts issued, securities transferred and instruments for the transfer of regulated securities by borrowers and lenders to each other, are now exempt from stamp duty,” Eimunjeze said.
This means that documents signed by parties to certain regulated securities lending transactions will no longer liable to stamp duty and will be readily admissible in evidence in civil proceedings before Nigerian courts and arbitral panels.
There are other key changes introduced by the statute, particularly in relation income taxes, which are aimed at encouraging the growth of securities lending business in Nigeria. Lawyers will be required to advise on the effect of all these changes and on the documentation for securities lending.
The Securities and Exchange Commission and the Nigeria Stock Exchange have existing rules and regulations aimed at regulating securities lending transactions in Nigeria. Thus, the legal framework has been in existence for securities lending but operators in the Nigerian capital market were unwilling to rely on these rules to engage in securities lending transactions because of the tax issues.
“Hopefully now that the tax issues have been addressed in the Finance Act, operators will need to know now how the law will be implemented and to carry out analyses on the extent of how the changes will positively encourage these types of transactions,” Eimunjeze continued, “it is still early days as a gazetted copy of the Act has not been released by the Federal Government.”
It may also be necessary for the Federal Inland Revenue Service to issue guidelines on the implementation of the provisions of the Act in relation to securities lending. Lawyers say there is also a need to create awareness on the changes in the Act and possible impact in securities lending.
Both the Securities and Exchange Commission and the Nigeria Stock Exchange (in collaboration with capital market operators such as lawyers, securities dealers etc.) have a huge role to play in this regard. There is a need to sensitize lawyers to understand the documentation for securities lending, particularly in relation to the suitability for the use of the global master securities lending agreement in the Nigerian market and whether it is necessary to have a master securities lending agreement for the Nigerian market.
According to the Financial Stability Oversight Council’s (FSOC) 2018 annual report, “the value of securities on loan globally reached a multi-year high of $2.6 trillion in the first half of 2018, with the U.S. share of global lending activity was also estimated to have reached approximately 55% in 2018. In the same period, the insurance industry had $55.6 billion in reinvested collateral for securities lending, up from $53.1 billion at year-end 2016. Approximately 37% of reinvested collateral was in cash and cash equivalents, while mortgage-backed securities and asset-backed securities made up a total of 17.5% of the collateral. In addition, securities associated with repurchase agreements (repos) and reverse repos decreased from $25.9 billion at year-end 2016 to $20.8 billion at year-end 2017.
ONYINYE UKEGBU
Onyinye Ukegbu is an Associate in the Legal Business Unit of BusinessDay
