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e-Payment will address problem of unclaimed, missing dividends – Oteh

By BusinessNews Staff on March 2, 2014

The Director-General, Securities and Exchange Commission, and Chairperson, Africa/Middle East Regional Committee of the International Organisation of Securities and Exchange Commissions, Ms. Arunma Oteh, talks about critical issues in the Nigerian capital market in this interview with SIMON EJEMBI

African capital markets are beginning to gain greater visibility globally. Where does Nigeria stand in the scheme of things?

The interest in the African capital markets is very much driven by the interest in the opportunities that Africa has to offer. Africa has been growing faster than the global average. It is the second fastest growing continent after Asia, and it has six or seven of the fastest growing economies. It is also because it is underserved in terms of infrastructure and the provision of goods and services to the large population. Africa’s population is youthful; actually 50 per cent are women, 75 per cent are young people. You are seeing rising income and a growing middle class. For a lot of investors, the African capital markets provide an opportunity for them to partake in investment opportunity that provides huge returns. If you take what happened in the telecoms sector in the last 10 years, for example, Nigeria went from 450,000 telephone lines to more than 140,000,000 telephone lines. Anybody who invested in the telecoms space 10 years ago would have done extremely well today. Similarly, whether it is consumer goods, retail, infrastructure or the natural resources such as oil and gas and other minerals, the capital market has really provided an opportunity for people.

The second thing is better regulation across Africa. Many of us (regulators) are members of the International Organisation of Securities Commission and we have principles which we abide by. The regulators are really playing their role in terms of ensuring that the markets have the highest level of integrity comparable to markets in other parts of the world. So, the two main reasons are the investment opportunities and the quality of regulation.

There is also the variety of products available. The markets have greater depth than they had in the past. We are not where we should be but today, you can invest through equity, the bond market, mutual funds and you have non-interest capital market products. There are diverse ways in which you can invest. There is also more efficiency in investing because a number of our markets are leveraging technology better. In some cases, you can even do trading on smartphones and mobile phones.

What are the major challenges the capital market is facing?

For us, the stock market today does not represent Nigeria’s economy. We don’t have companies in the utilities that are listed. We believe that the privatisation programme that President Goodluck Jonathan has been leading should ultimately lead to the power companies coming to the market to raise capital. We feel also that the transformational agenda on agriculture should enable a number of agro businesses to list. The agro businesses that have listed have done very well, whether it is Okomu (Oil Plc) or Presco Plc. There is the potential for companies like Olam and other agro businesses that have not yet listed to come to the market. In the telecoms sector, the companies have done very well in the last 10 years and I think that Nigerians expect that the companies will list and they too as Nigerians can partake in the success. So, listing is important and it is a challenge a number of African markets face.

The second challenge is market depth, breadth and liquidity. Liquidity is important because it is the barometer of how easily you can enter the market and how easily you can exit, and if you can’t easily exit, you will be afraid to enter. That is why liquidity is very important. In Nigeria, for example, on a good day, the daily ticket size is about $30m, in Turkey, one stockbroker could do about $2m to $3m. You can see the scale of what we need to improve liquidity. Now, liquidity has improved significantly because of some of the steps we have taken. One of them is approving the Exchange’s programme of market making, so that you have designated market participants that are able to trade in specific securities.

In addition to market making, we approved rules on short selling. We approved rules on securities lending and that has also boosted liquidity. Liquidity is one; risk management and strong institutions are also important.

Today, we don’t have market participants that are of the same size with the ones in the developed markets. And if you are small, you will think small and will not be able to generate the level of business that you should generate. For that reason, SEC has focused on strengthening itself, the Exchange and other market participants. So, our clearing and settlement organisation, the Central Securities Clearing System, has gone through significant changes to strengthen it. We are also raising the minimum capital requirement for all categories of operators, fund managers, registers, broker dealers, issuing houses, essentially so that institutions can be strong enough to respond to markets that have the potential to be much larger.

The introduction of over-the-counter platforms is also something that we are very proud of. The risk management, for me, is very critical because if you have a risk management culture, you will be able to predict and prepare for the varieties of uncertainty that happen in the market. For example, what is happening with respect to tapering of quantitative stimulus in the United States is affecting the markets globally, starting with emerging markets. If you have got a risk management culture, you will be more prepared to respond to tapering.

Why are companies not coming to list despite your campaign?

Listing is not what happens overnight; nothing is holding the companies back. There is a process – there are listing requirements that you need to meet. One of the big issues is that, in 2010, on the recommendation of the different regulators and the market participants, the President accepted that we would move to International Financial Reporting Standard, and the requirement is that beginning from 2012, as a listed company, you have to report under IFRS. If you are not ready as a company, what you will do is to focus on transition to IFRS before you list. Secondly, there was an unprecedented decline in our market following the global financial crisis. If you want to do an Initial Public Offer, basically, you are setting a price at which others can participate in your company. What you would like to do as a promoter is to get the highest price possible. So, a number of the promoters have waited for the valuation to come back to the level that they feel comfortable with before they offer their companies for IPO. What we’ve seen is that now, more people are certain that valuation is more like what they will like to see because we had our market rise by 35 per cent in 2012 and by 47 per cent last year. Now, they feel comfortable with the valuation that they will get.

The other thing is that the process of listing takes time. They need to meet other requirements; make their submissions to SEC and to the Exchange; get their approval and come to the market. My view is that this year, we’ll probably see a number of important companies come to the market. As for the privatised entities, they have only just been handed over to the private sector. I suspect that what the companies are doing is to put their house in order, determine how they will raise funds – some of them have already raised funds from banks. As they start to invest to revamp some of what they have acquired, they will need to get additional capital, but there is a limit to the leverage that they will have. They will need equity capital. Some of them will also like to divest and do other things with it; so, coming to the market is a veritable option.

Is there any plan to review the listing requirements?

But one of the achievements of SEC and the Exchange is actually a review of the listing requirements. At the beginning of 2012, SEC approved new listing requirements. Your required record of profitability is a three-year track record. And in many cases, for example, in the exploration and production sector, you could decide, if you are a green field project and you don’t have a track record, that the feasibility study for your project, along with some review of the promoter or technical partner could be considered as an alternative to a track record. So, we’ve already revamped the listing requirements and that is why a number of companies today are looking at listing. Some of those privatised companies would not have been able to come to the market in the past because of the five-year requirement of profitability. But today, they can come to the market.

Similarly, the revamp of the second tier and third tier market and collapsing them into the Alternative Securities Market with specific requirement, with nominated advisers that can handhold you through the listing process and even after you’ve listed is clearly something that did not exist before. So, we have already taken those decisions.

Despite several reforms over the years, investors, especially retail investors, do not get their dividends. What are you doing about this?

With respect to dividend payment, our view is that in the era that we are in the world, we clearly need to move towards e-dividend. We’ve taken a number of steps. One of them is the collaboration with the central bank. In 2010, we were told that a number of commercial banks did not accept dividends to be paid into savings accounts. And in collaboration with the central bank, we were able to resolve that. But ultimately, I think we should move to a model where there is dematerialisation. There is electronic payment of dividend because that will resolve challenges such a late delivery, unclaimed or missing dividends.

SEC’s focus has been on protecting the retail investor. I think one of the challenges we faced prior to 2010 was that people were lured into investing in things they were not familiar with. If you do not understand the benefits and risk of investing, it just does not make sense to do so. And that’s why we‘ve also been keen to promote mutual funds, which allow you to diversify your risk as a retail investor, but also allow you to benefit from the expertise of a regulated registered fund manager.

[Punch]

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