Many investors in the Nigerian capital market are sulking and counting their losses. For quite a while now, the prices of shares in the market have been falling. The continuous drop in the prices of shares in a market that many have come to see as a cash cow is giving rise to fears that the market is heading for a crash.

For instance, a total of N650 billion have been lost by investors in the Nigerian Stock Exchange (NSE) in a matter of one month as the declining trend of the market indices and prices of equities continued for the fifth month on the Exchange. Market capitalisation which had a record of N12.640trillion on March 5th 2008 dropped to N10.95trillion at the end of the month of June a 13.5 per cent lose in prices and investment funds.

Similarly the market index which stood at 66,371.2 dropped to 63,016.56. In the Month of April, the market which opened with N12.047trillion further dropped to N11.491 a N556billion lose to investors or 4.6 per cent lose. The market capitalisation also suffer a drop in value from 62,606.9 at the beginning of the month to 59,440.9. In May the market opened with N11.4 trillion capitalisation but managed to rise to N11.6 trillion at the end of the month.

In the first week of June the market opened with N11.63trillion but dropped to N10.95 at the end of the week trading in which investors lost a total of N650billion.

The drop in the value of investments was due to a drop in the market capitalisation, which depreciated by 13.3 per cent from N11.93 trillion at which it opened, to close the week at N11.61 trillion. Similarly, the All-share index, also depreciated by 2.71 per cent to close the week at 58,929.02 points from 60,570.30 points at which it opened.

The drop in the market indices was as a result of major losses on the share price of blue chip companies on the NSE, with Conoil Plc recording the most share price loss, dropping by N14.15 to close at N107.45 per share, it was followed by Mobil Oil Nigeria Plc with a loss of N10.50 to close at N199.50 per share and Ecobank Transnational Incorporated dipped by N8.00 to close at N230.00 per share.

Others in the share price losers’ category include: Skye Shelter Funds N6.15, Costain (West Africa) Plc N5.81, Seven-Up Bottling Company Plc N5.74, United Bank for Africa Plc N5.35, Eterna Oil and Gas Plc N5.19, Northern Nigeria Flour Mills Plc N4.26, BankPHB Plc N3.48 among others.

Investment experts have, however, allayed the fears of investors in the market noting that the decline in activities in the market could be traced to the non-implementation of the budget and profit-taking by other investors.

But stakeholders in the market insist that the current situation in the market is a corrective one to put the market in proper shape. The market, they argue, is responding to some of the policy measures put in place by the regulators to protect the integrity of the market. Recently, the CBN stopped banks from giving loans to stock brokers, fund managers, hedge funds and individuals to buy shares.

Before now, a good number of operators in the market were engaged in margin trading taking loans from banks to buy shares to make quick gains. Some of the shares so purchased are being sold to pay back some of the recalled loans by banks. The rush to sell has resulted in the glut of shares and falling prices in the market.

Explaining the reasons for the falling prices of shares Mr. Osikomaiya Simeon, General Manager, De-Lords Securities Limited said: “There are many factors that determine the downward trend in the share prices of companies in the market. Prices of shares may go down as a result of investors’ perception of the management of a company, financial fundamentals and most especially, the theory of demand and supply. Demand and supply, in the sense that, when nobody wants to buy shares, it leads to limited demand for share, therefore, the price goes down.

“Another factor which may be responsible, may be the fact that certain investors seeing the drop in prices of shares, begin to panic, thinking that the market is heading for a crash. Such investors begin to sell off their shares, leading to a further drop in the prices of shares. There are many people selling and very few people are buying.

“The CBN’s monetary policies are not only affecting the market, they are also affecting the stockbrokers. This is because when the stockbrokers are not able to get loans, it will limit the levels of their investing in the market.

Mr Chukwudi Obiadika, Stockbroker, Adonai Securities Limited said that the withdrawal of margin facilities by banks is also affecting share prices. “It has posed a major challenge for stockbrokers. Most stockbroking houses are the major drivers of transactions in the secondary market, hence, accounting for the upward movement in the share prices.

“Most stockbroking houses whose margin facilities have expired cannot renew such because of the directive by the CBN. This has seriously hampered trading and has been one of the major reasons for the lull in trading activities and drop in share prices.

It is also important to note that stockbrokers are not the only beneficiaries of margin facilities, others are fund managers and portfolio managers. These people also account for the upward or downward movement of the market indices. This is felt from their activities of withdrawal and injection of funds in the market.

“My advice to investors is that they should start buying, especially as the prices are going down. This is mainly because as the awareness about investing continues, the prices will begin to come up again. Investors are advised not to look at the present situation of the market, as the trend is expected to normalise sooner than expected, may be in this month of June or July. Therefore, now is the best time to buy.”

He further said: “To many people, the reason for the drop in the prices of shares is mainly because of the forces of demand and supply. They will say that investors are selling off their shares and no one is buying. Though this may be true to some extent, it is not all there is to the drop in the share prices. You might also ask why the investors are selling off their shares and why no one is buying?

Really, the major factors that may be responsible for the drop are the CBN’s policy on margin trading and the number of private placements currently going on in the country. Since the last quarter of 2007, a lot of companies have been raising funds through private placement, this has even continued till today. It is common knowledge that a number of companies – in the telecommunication, manufacturing, foods and beverages sub-sectors among others – have undertaken private placements one time or the other, while many others are still on, and this has really taken the shine off the secondary market.

“Investors now want to put their money in the private placements because of the attractiveness it offers. It is also interesting to note that the issue of returned monies and delay in issuance of certificates have really discouraged investors from patronising public offers, while the high prices of securities on the secondary market, taking into consideration the issue of price manipulation and overpricing, may have also been the major factors that are driving investors to put their money in private placement despite the attendant risks.

Most investors believe that in private placements, there are hardly any incidence of returned monies and other delays associated with public offers, hence, the increased patronage.It is believed that when the private placements cool off or when certain investors encounter bitter experiences, focus will return to the secondary market.

The stockbrokers are also affected in the drop in the prices of shares, this is because, aside from trading for investors, the stockbroking firms also trade from their own personal portfolio, where they buy shares and sell to the public. When the shares bought by the stockbrokers are not being sold, it will affect them negatively, because shares bought are expected to be sold.

Market operators also attribute the current trend to the delay in the passage of the 2008 budget which has made many institutional investors and other portfolio holders to watch the market for policy direction before investing.

Others say that the market regulators have become alive to their responsibility by effectively monitoring the market to eliminate such abuses as insider trading, preferential allotment and insisting that funds be used for purposes they were raised.

The Director-General, Securities and Exchange Commission (SEC), Mr. Musa Al-Faki, had vowed to bring sanity into the market. Piqued by mounting unclaimed dividend and Registrar arbitrariness, he introduced measures to check them. He had disclosed that the total unclaimed dividend in the capital market has hit N9.6 billion, as at end December 2007.

Al-Faki reiterated that with the introduction of e-dividend payment by the commission, it will now be possible for dividends to be remitted twenty-four hours after the declaration by the companies.

According to him, “with the e-dividend payment that was launched recently by the Commission, if a dividend is paid today or declared by a company, it can be remitted within 24 hours to reduce the problem of unclaimed dividends.”

The D-G stressed that the capital market was being positioned to make it friendly to both local and foreign investors and that more than ever before, both small and large income earners were being encouraged to take advantage of the astronomical growth of the nation’s capital market.

The SEC boss, who noted that the capital market was the engine room for the growth of the economy, said the Commission was prepared to entrench good governance, transparency and rule of law in its operations, adding that the market was an emerging one.

He, however, called for a very strong synergy between the Commission and the media , stressing that there was the need for the formation of a team if the nation must meet the set target of becoming one of the twenty largest economies in the year 2020 as well as achieve President Umaru Musa Yar’Adua’s seven-point agenda.

Al-Faki who had promised to protect investors especially depositors in banks, said the Commission was working closely with the Central Bank of Nigeria (CBN) and the Nigeria Deposit Insurance

Corporation (NDIC).

Defending the measures put in place by the Commission to sanitise the market before the Senate Committee on Capital Market, AL-Faki said: “The Federal Government in April 2007, approved new minimum capital requirements for all categories of capital market operators for the following reason:

“The need for all the sectors of the financial market to be strengthened and repositioned to cope with the emerging local and global challenges. The reforms have already been carried out in the banking, insurance and pension sectors.

He told the senators that there are too many fringe players in the market (especially stockbrokers) and records over the years confirmed that the fringe players are mainly responsible for various infractions that undermine market discipline, efficiency and competitiveness. Currently, he said “there are 246 registered brokerage firms dealing in just 213 equities on the floor of the Nigerian Stock Exchange.

“Stockbrokers and market makers have been identified as high risk participants as many of them are entrusted with large volume of funds and control investment assets far in excess of their shareholders’ funds. Most of these firms are not well structured and lack good corporate governance practices. This poses considerable risks to the market.

Subsequent to the approval, recapitalisation guidelines were promptly issued by the Commission in August 2007.

“Since the issuance of the recapitalisation guidelines last year, about 180 stockbroking firms have forwarded their respective recapitalisation plans. While a good number of them are still in the process of compliance, there are some that have already exceeded the N1 billion mark. At the moment, the Commission has constituted an Implementation Task Force and intends to collaborate with the Nigerian Stock Exchange in order to smoothen the process.

According to him, developments in the capital market since the initiatives on new capital base have further reinforced the arguments for a higher capital base. He said: “When the minimum capital base for stockbroking houses was N70 million, the total market capitalisation (as at 2004) was N2.1 trillion, while the value of shares traded stood at N225.8 billion.

By December 2007, the market capitalisation had increased to N13.30 trillion while the value of shares traded stood at N2.08 trillion. The capital adequacy principles as laid down by the International Organisation of Securities Commissions (IOSCO) require that capital base must be sufficient to protect counter parties’ risks (including market risk) as they are vital tools in reducing systemic risks.

Thus, the new capital base was arrived at following a careful analysis of the level of risks an average stockbroker carries as well as certain weaknesses peculiar to stockbrokers in the market. Given the present size of this market and where it is expected to be in the near future, the prescribed minimum capital in our opinion fairly meets the IOSCO capital adequacy requirement which must reflect the liquidity, solvency and market settlement risks.

Also the IMF/World Bank during the Financial Sector Assessment Programme (FSAP) done on Nigeria in 2003 observed that the number of stockbroking firms in the Nigerian capital market was far in excess of what the market activities could justify, and further raised the question as to whether the Commission was sure that firms relied on legitimate market activities to survive as entities.

“The new capital base approved by government affects all categories of market operators including Issuing Houses, Trustees, Fund/Portfolio Managers, Registrars etc. It is noteworthy that it is only some stockbrokers that are complaining against it mainly because most of these firms are not properly structured and lack good corporate governance.

Consolidating these firms into bigger entities will reduce incidences of abuse and market misconduct as merging companies will ensure that proper checks are put in place. The companies would also easily pool together resources to provide the right technology and personnel that the business requires to become internationally competitive.

“The present low level of capacity in the brokerage firms is largely responsible for the lopsidedness towards transactions in equities only. Despite efforts of the regulatory authorities, it has become challenging over the years for new products such as derivatives e.g. futures and options, to be introduced in our market.

A case to further illustrate this point is the fact that for the past 14 years, the Commission could not succeed (despite several waivers and incentives) in getting the stockbrokers to establish an over-the-counter market (OTC) for trading in unlisted securities. This is mainly due to low level of capacity on their part. Well established and capitalised firms will go extra mile into research and other aspects of market development.

“An important and highly disturbing discovery was made by the Commission following an analysis conducted on the 30 most active firms in the secondary market for the period ended 30th September, 2007. It was revealed that most of the 30 firms had gearing ratios ranging from 913% to 6,698 per cent. This is an indication of their level of indebtedness in comparison to their net capital. Most of these debts were provided by banks.

When the levels of the firms’ indebtedness are compared with their respective shareholders’ funds, it is evident that these brokerage firms have no asset cover for their huge liabilities. The most disturbing finding of this analysis is the fact that the firms who had gearing ratios between 1,220 per cent to 6,698 per cent are also the most active in the secondary market.

“These high gearing ratios negate Rule 176 of the SEC Rules and Regulations which requires that “no broker or dealer shall permit his aggregate indebtedness to exceed 200 per cent of his net capital.” This, among other reasons earlier given, informed the decision to raise the minimum capital base from N70 million to N1 billion.

To further address the problem of high gearing, the Commission is working on Rules on Margin Trading. It is believed that a combination of the two will solve this problem. This also further defeats the argument that stockbrokers are mere intermediaries and carry no risk at all.

“The role of an efficient and strong financial market in this journey cannot be over-emphasised. Already, the banking, pensions and insurance sectors have gone through this process. The positive impact of these reforms is beginning to manifest

. It is, therefore, logical that the capital market which harbours most of the assets generated by the successful banking, pension and insurance reforms, is not left as a weak link. The stock market must, therefore, remain efficient and protected from systemic risks through well capitalised and highly professional securities firms.

It is also noteworthy that the petition does not represent the position of the majority, as the Commission has received recapitalisation plans from over 180 stockbroking firms. There are also indications that some firms have already met the new minimum capital base (33 as at December 2007) while many others have done private placements aimed at shoring up their respective capital base.

“Furthermore, foreign firms have recently commenced entry into the market to compete with the locals. It is, therefore, important that the recapitalisation exercise should be implemented as approved by the Federal Government since at the end of the exercise, the nation’s economy will be the greatest beneficiary.”

He said that the Commission in the early 1990s had allowed in-house Registrars to operate in the Nigerian capital market. However, consequent upon findings that in-house Registrars were being used to perpetrate market abuses, the Commission issued a directive that all in-house Registrars must be independent entities and must be duly incorporated at the Corporate Affairs Commission (CAC).

“Unpleasant developments in the market of recent have compelled the Commission to conduct another examination of Registrars. This led to the issuance of a circular in February 2008 directing all the “Registrars who are subsidiaries or holding companies to public companies not to manage the registers of their parent or subsidiary companies.” This was informed by the following reasons: Incidents recently investigated have revealed that the Registrars are being used as instruments of price manipulation by their parent companies.

“As subsidiary to their parent companies and maintaining their registers, the Registrars have easily succumbed to parent company directive towards perpetration of price manipulation and insider abuses. These usually happen through delays in the verification of share certificates presented for transfer purposes by stockbrokers on behalf of their clients, as well as the late release of certificates after the conclusion of public offers. Also bonus certificates are deliberately delayed for most investors while some get theirs in time and take advantage of the market price.

“Another problem identified was piece-meal despatch of dividend warrants to investors after same has been declared. Dividends are supposed to be sent to Registrars with adequate cash backing. This, however, does not happen where some companies, especially those with weak governance practices release these dividends piece-meal.

The Registrars themselves admit such unwholesome practice by the client companies (which also include parent companies) and further confessed their helplessness in dealing with the situation. The Commission had intervened in cases reported to it but had refrained from taking drastic action because of the spill-over effect on innocent investors and also the possible panic this could cause in the system.

Rule 193(2) states that “a Registrar which is a wholly owned subsidiary of an issuer (in case of public offers) shall not act as Registrar to the holding company’s public issue.” The directive to transfer parent company Register will give effect to this rule.

“There is also the need to establish the independence of the Registrars as corporate entities in terms of their operations and finances. Most of these Registrars as subsidiary companies, receive subventions from their parent companies. This erodes their independence thus making them vulnerable to abnormal requests of their parent companies.

The abolition of the in-house Registrar could improve efficiency and professionalism in service delivery among Registrars as there will be healthy competition among them.

The increasing quantum of activities and transactions in the capital market requires professionally competent personnel that have independent mind and capacity to bring into effect proactive and innovative skills, which could minimize incidences of frauds in the discharge of their responsibilities.

“Registrars are key in the sustenance of market efficiency, transparency and liquidity.

Therefore, making them independent of their parent companies could enable them carry out their responsibilities, particularly, facilitating efficient transactions in the secondary arm of the market more effectively.

The Commission also feels that the current dispensation makes the activities of Registrars to be concentrated in the Lagos area, where only those investors in the area enjoy their services at minimal cost. Investors that are living outside the Lagos area are experiencing difficulties in verifying and transferring their holdings. This has the implication of reducing the confidence of investors.

These recent steps taken by the Securities and Exchange Commission are all aimed at being proactive in stemming any risk associated with market volatility, which if allowed, could reverse the modest gains already made. Our decisions are informed by findings following painstaking investigations into the activities of stockbrokers and Registrars.

These two categories of operators are the soul of the secondary market. They could make or mar any secondary market. Activities of some of them have not only undermined market efficiency and transparency, but also have the most disturbing tendency to cause systemic crisis.

The market capitalisation which is now over N14 trillion harbours assets from banking, insurance and the pension sectors. Therefore, any problem in the stock market could also spread to the entire financial market. This is what the Commission as the apex regulator of the Nigerian capital market is all out to prevent. We earnestly seek the encouragement and support of the Senate to enable the Commission carry out its functions as enshrined in the Investments and Securities Act.