Strengthening Investors’ Confidence In A Volatile Market | Independent Newspapers Limited
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Strengthening Investors’ Confidence In A Volatile Market

Posted: Sep 6, 2015 at 12:02 am   /   by   /   comments (0)

By Bamidele Ogunwusi, Lagos

It is not out of place to say that the Nigerian capital market has demonstrated that it has so much potential that investors and issuers can take advantage of. In this report, our man, Bamidele Ogunwusi, examines steps being taken by regulators to boost investor’s confidence in a market that has the capacity to rejuvenate Nigeria’s economy.    



 Over the years, the market has provided funds for corporates and governments in trillions of naira in which investors have reaped high returns. In the years before the 2008 meltdown, the market was doing well with the exception of few downward experiences, but after the 2008 market downturn, the market has never been the same again as both issuers and investors are trending cautiously.

Since then, restoring investors’ confidence has been a herculean task for regulators. This has affected the new initial public offering (IPO) segment of the primary market. Companies have been reluctant to float shares for fear of under subscription by investors.

However, investors who are bidding their time to return to the market are not to be blamed.   During the market corrections of 2008, many retail investors endured losses that decimated their confidence in the capital market.

Herculean Task

Hence, convincing them to return has been a herculean task as this entails serious enlightenment and assurance of strong regulatory environment where they will feel protected. Although the Investment and Securities Act (ISA), which is the law regulating operations in the capital market makes provisions expected to protect stakeholders in the market.

But it is realised that the ISA provisions are too general in nature. As a result, the apex regulator of the market, the Securities and Exchange Commission (SEC), has also been empowered by the ISA to make rules and issue codes that will complement the provisions of the law.

In its determination to restore investors’ confidence and make the market play its role in the economic growth and development, the management of the SEC has intensified its rules making efforts.

Having received the approval of the Board of the commission, SEC under the Director General, Mounir Gwarzo, has issued new rules and codes that are expected to boost the capital market.

The regulator has just released three new rules and three codes of conduct.  The rules are on Securitation, National Investor Protection Fund (NIPF) and Trading in unlisted securities. On the other hand, the codes are for Trustees, Underwriters and Rating Agencies.

National Investor Protection Fund (NIPF)

The rules on investor protection fund are expected to attract investors back to the market very soon.  By setting up the NIPF, SEC hopes to boost investors’ confidence by assuring  them that  they will be compensated should they incure any losses due to the actions or inactions of their respective capital market operators who are not dealing members of a securities exchange or capital trade points.

The Nigerian Stock Exchange (NSE) in 2014 launched its own Investor Protection Fund for the compensation of investors who suffer losses due to malfeasance or bankruptcy of a dealing member (broker/dealer). However, the NIPF was set up to handle cases of investor losses not covered by the NSE’s investor protection fund.

The rules outline the composition of the NIPF Board, which will be chaired by the SEC DG and has the SEC Executive Commissioners and three experienced private sector persons as members. It also enjoins the SEC to provide the take-off grant for funding the NIPF. The Board of SEC has already earmarked some money as take-off grant for the fund.

Relating to the compensation of investors, the NIPF will focus largely on retail investors as the initial maximum amount of compensation has been pegged at N200, 000, subject to review by the Board of the NIPF. Additionally, the rules specify clear provisions on the governance and accountability of the NIPF mandating quarterly and annual reports to be prepared by the Board. Market observers are hopeful that these new rules will enable the prompt take-off of the NIPF with the attendant impact on investors’ confidence.


Securitisation has proven transformational for many developed countries. Securitisation is a process of raising money from the capital market by combining different financial assets to create a repackaged security sold to investors.

For example, it has revolutionised housing finance in the United States by allowing mortgages to be combined and transformed to mortgage-backed securities (MBS) that enable more and more Americans to access funds to build or buy their own homes.

Nigeria is estimated to have a housing deficit of about 17 million units and despite being Africa’s most populous country, there are less than 50,000 active mortgages in Nigeria. Efforts by government to improve access to mortgages for millions more Nigerians have culminated in the establishment of the Nigerian Mortgage Refinancing Company (NMRC). The new framework for securitization by SEC was the missing link in the on-going housing finance revolution in the country.

But with the new rules, the NMRC is expected to facilitate more mortgages by purchasing (refinancing) existing mortgages made by primary mortgage institutions. Under the new framework, NMRC can decide to pool those mortgages together through a special purpose vehicle (SPV) and create mortgage-backed securities that can be sold to investors. This raises the hope that Nigeria may well be on its ways to closing the housing deficit.

The new rules will properly define the procedures and framework for asset-backed securities (ABS). Companies, ranging from banks to infrastructure companies, can issue securities on the back of their receivables thereby enabling them to fund their operations. Nigerian banks should be particularly delighted with the new framework as they can join their counterparts from the developed markets in exploiting securitisation to improve their lending capacity instead of the overreliance on deposits.

Securitisation offers potential new capital to finance critical infrastructure and other project finance needs, it reduces funding costs, reduces asset-liability mismatch and enables efficient transfer of risks.

Trading of Unlisted Securities

The new rules will apply to all trading activities in the securities of unlisted public limited companies. Before now, the shares of unlisted public companies were traded in a non-transparent manner through personal contacts with the company secretaries and registrars. The near absence of regulatory oversight over these trades negatively impacts the liquidity of such securities and distorts appropriate price discovery.

However, those days are over with the new rules that prohibit trading or transfer of securities of an unlisted public company except through the platform of a registered securities exchange established for the purpose of facilitating over-the-counter (OTC) trading of securities. Already, SEC has  licensed two trading platforms to facilitate OTC trading and transfer of unlisted securities.

One of the platforms, NASD Plc, (equity securities) sponsored by the National Association of Securities Dealers and the FMDQ OTC, owned by the Financial Markets Dealers Association, focuses mainly on the trading of debt securities.

By approving the two OTC platforms, the SEC has set the stage for enhanced price discovery, improved transparency, increased liquidity and a welcome expansion of its regulatory perimeter.

Since it started operations about a year and half ago, the NASD has only admitted 17 securities. But there are an estimated 90,000 public limited companies currently registered by the Corporate Affairs Commission (CAC).

The rules are expected to see an unprecedented increase in the level of activities on the NASD. This is expected because the new rules make anyone who facilitates the trading in unlisted securities of public companies outside a SEC-registered OTC platform liable to stiff penalties.

Part of the rules reads: “Any unlisted public company, director, company secretary, registrar, broker/dealer or such other persons who facilitate the buying, selling or transfers of the securities of an unlisted public company otherwise than through the platform of a duly registered securities exchange, shall be liable to a penalty of not less than N100, 000 in the first instance and not more than N5, 000 for every day of default.”

Codes for Underwriters, Trustees, Rating Agencies

The codes of conduct to guide the operations of Underwriters and Trustees in the Nigerian capital market are expected to eliminate areas of ambiguity in the roles and responsibilities of market operators performing both functions. This is in a bid to promote market fairness and integrity. In addition to detailed provisions outlined in the Investments and Securities Act (ISA) and the SEC Rules and Regulations, SEC is issuing these specific codes to guide these important functions as they relate to investors, issuers and other market operators.

Underwriters, who play very critical functions in the primary market, are expected to maintain high standards of integrity, and fairness in all their dealings with clients and in the conduct of their business. According to some of the provisions in the code of conduct for Underwriters (CCU), they must also always ensure that their personnel act in an ethical manner in all dealings with the issuer.

The codes also cover other important issues of concern to investors and the industry including conflicts of interest, adequate disclosure as well as prohibition of unfair competition among underwriters. Some of its provisions aim to safeguard non-public information obtained by staff of an underwriter in order to forestall effects on price movement.

Regarding the codes of Trustees (CCT), they will tackle critical areas not explicitly covered in the existing SEC rules. For example, it specifies obligations of the Trustee to the participants of a Trust and mandates it to ensure proper oversight of the fund manager and custodians

Special attention is paid to investor protection as Trustees are mandated to set up structures to ensure that the funds for collective investment schemes and sinking funds accounts of different issuers are not co-mingled. This will enhance effective management of the funds while promoting transparency and accountability.

In the code of conduct for Rating Agencies, SEC has addressed the need for proper regulation of rating agencies in order to protect investors and other users of rating reports.

From the onset of the global financial crisis that began in 2008, the role of rating agencies has come under increasing scrutiny. In view of the kind of impact organisations that issue rating opinions could have on the systemic stability of the entire financial system, SEC developed the new code for all registered rating agencies.

The code is expected to enhance the integrity of the rating process as it establishes clear procedures to manage conflicts of interest, improve disclosures and transparency as well as introduce measures to manage conflicts of interest.

The provisions of the code are aimed at ensuring the independence of a rating agency while enabling it to avoid conflicts of interest.

For example, a rating agency is mandated to make adequate disclosures where any of its clients makes up to 10 percent of its annual revenue. A rating agency is equally prohibited from rating its shareholder and must prohibit its analysts from making proposals or recommendations regarding the design of structured finance products rated by the same agency.

In an efficient market, information is everything. The Code is expected to strengthen disclosure and availability of reliable information to investors, issuers and other market participants. A rating agency is enjoined within the new rules to disclose its methodology on a prominent position on its website.