COUNTRY EXPERIENCE WITH CAPITAL MARKET DEVELOPMENT: THE NIGERIAN EXPERIENCE

1. COUNTRY EXPERIENCE WITH CAPITAL MARKET DEVELOPMENT: THE NIGERIAN EXPERIENCE BY MAL. SULEYMAN A. NDANUSA DIRECTOR-GENERAL SECURITIES & EXHCNAGE COMMISSION BEING A PAPER PRESENTED AT THE FIFTY ANNUAL FINANCIAL MARKETS AND DEVELOPMENT CONFERENCE: THE FUTURE OF DOMESTIC CAPITAL MARKETS IN DEVELOPING COUNTRIES ORGANIZED BY THE WORLD BANK ON APRIL 14-16, 2003 AT WATERGATE HOTEL, WASHINGTON, D.C.

2. INTRODUCTION • This paper will discuss: • An overview of the Nigerian Capital Market • The legal and regulatory frame work • Institutional development • Market development • challenges 1

3. INTRODUCTION INTRODUCTION • OVERVIEW • Relatively small markets but • One of the leading markets in Sub-Saharan Africa • Capital Market dating back over 50 years • First public issue in 1946 • 42 years of a Stock Exchange • 24 years of Statutory regulation 2

4. CAPITAL MARKET OVERVIEW • Market Statistics at the end of March 2003 • 196 listed companies • N846.9 billion (US$ 7.0 billion) equity market capitalization • N24 billion (US$ 188.9 million) equity transactions • 10.7 percent in Stock Index growth (2002) • 14.0 percent market capitalization as % of G.D.P. (2002) • 7.9 percent turnover ratio (2002) • N61.3 billion (US$ 483 million) floated new issue (2002) • 10% withholding tax • 10.1 percent average dividend yield • 7.1 percent average P/E ratio • No capital gains tax 3

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9. CAPITAL MARKET OVERVIEW • Market trends show continued growth in most indicators • Equity market capitalization grew by 191.5 percent in local currency terms in 5 years ended 2002 • In 2002, equity market capitalization grew by over N100 billion (US$ 794 million) or 15 percent • In March 2003, equity market capitalization gained N98.2 billion (US$ 0.8 billion) over December 2002. Average index growth in 2000 to 2002 was 33.3 percent higher than inflation rate which averaged 12.6 percent in the same period. 8

10. MARKET OVERVIEW MARKET OVERVIEW • Impressive growth in equity market capitalization has been driven by • new listings • Firmer prices from positive market sentiments • Improvement in market infrastructure • Strengthened confidence • New issues recorded phenomenal growth in 2002 • 46 applications for N78 billion (US$ 619 million) were received. Of these figures, 33 new issues amounting to N61.3 billion were floated during the year. Others were still under process as at the close of 2002. 9

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12. MARKET OVERVIEW MARKET OVERVIEW In recent times, • Issuers have covered every sector including • Banking • Insurance • Oil marketing • Manufacturing • Crude oil exploration • Agricultural • Construction • Pharmaceutical • Aviation • Media • Publishing and printing • Healthcare • State governments 11

13. MARKET OVERVIEW MARKET OVERVIEW • Issue proceeds have been directed of late at: • Recapitalization • Bank branch expansion • Oil field development • Information technology • Acquisition/refurbishment of plants and machinery • Diversification • Refinancing of short term facilities • Road construction • Construction and rehabilitation of schools • Provision and rehabilitation of healthcare facilities • Provision of portable water • Provision of markets 12

14. MARKET OVERVIEW MARKET OVERVIEW • The growing preference for the capital market as a fund raising vehicle has been driven in part by: • Increased awareness of the capital market as an alternative source of funds particularly the benefits of equities which do not carry repayment obligations • High bank lending rates • Growing confidence in the Capital Market • Privatization has also impacted positively on the Capital Market: • 35 enterprises involved in the first phase (1990s) • 9 companies already sold in present phase • Utilities e.g. State telecom and power companies being prepared for sale. 13

15. LEGAL AND REGULATORY ENVIRONMENT • The Capital market is guided by an extensive securities law • Investments and Securities Act (I.S.A.) 1999 superseded • Securities and Exchange Commission Act (1988) which was a re-enactment of • Securities and Exchange Commission Act 1979 • Enactment of ISA borne out of need to correct observed weakness in previous enactments and strengthen the legal and regulatory environments. 14

16. LEGAL AND REGULATORY ENVIRONMENT LEGAL AND REGULATORY ENVIRONMENT • Objectives of the I.S.A. • Protect investors and uphold market integrity by ensuring: • Orderliness • Fairness • Efficiency • Transparency • Develop the Capital Market through such activities as • public enlightenment • New instrument development • research 15

17. LEGAL AND REGULATORY ENVIRONMENT LEGAL AND REGULATORY ENVIRONMENT • The ISA empowers the Securities And Exchange Commission to among others: • Register investment and securities businesses; • Register all securities to be offered to the public for sale or subscription; • Register Stock exchanges; commodities exchanges and capital trade points; • Register clearing and settlement companies, custodians and depositories; • Register all operators in the market and capital market consultants • Register securities traded on the exchanges • Regulate mergers, acquisitions and all forms of business combination • Regulate collective investment schemes including pension funds and venture capital 16

18. LEGAL AND REGULATORY ENVIRONMENT LEGAL AND REGULATORY ENVIRONMENT • Apart from registration, the SEC also regulates the Capital Market through • Surveillance • Inspection • Enforcement • Rule making 17

19. LEGAL AND REGULATORY ENVIRONMENT LEGAL AND REGULATORY ENVIRONMENT • The ISA gives the SEC ample powers to promote and maintain the integrity of the Capital Market. It prohibits such activities as: • Market rigging • Market manipulations • False trading • Insider dealing • Use of fraudulent means to induce dealings in securities • Inclusion of false or misleading statements in a material particular 18

20. LEGAL AND REGULATORY ENVIRONMENT LEGALAND REGULATORY ENVIRONMENT • Enforcement machinery • Administrative Proceedings Committee • Quasi judicial adjudicates on major breaches • Committee of the Board of the Commission • Industry groups attend proceeding as observers • Criminal cases outside its jurisdiction – referred to the Attorney-General or the Police 19

21. LEGAL AND REGULATORY ENVIRONMENT LEGAL AND REGULATORY ENVIRONMENT • The decisions of the Administrative Proceeding Committee can be appealed at the Investments and Securities Tribunal (IST). The IST has: • The status of a Federal High Court; • Nine members with a Chairman who must be a legal practitioner with 15 years post call experience and knowledge of Capital Market • Power to adjudicate on all types of disputes in the Capital Market • Appeals of its judgments can only be entertained by the Appeal Court. 20

22. INSTITUTIONAL DEVELOPMENT INSTITUTIONAL DEVELOPMENT • Nigeria has a good number and variety of Capital Market institutions • Stock exchanges • Issuing houses • Stockbrokers • Registrars • Underwriters • Trustees • Fund/portfolio managers • Rating agencies • Investment advisers • Clearing and settlement company 21

23. INSTITUTIONAL DEVELOPMENT INSTITUTIONAL DEVELOPMENT • Introduction of Universal Banking in 2002 has: • Encouraged banks to engage in Capital Market activities • Enlarged underwriting capacity of the market • Enhanced competition • Should promote efficiency, but • Big bank players may crowd-out small non-bank players 22

24. INSTITUTIONAL DEVELOPMENT INSTITUTIONAL DEVELOPMENT • The Stock Exchange has • A fully automated trading system • An E-business platform • A T+3 clearing and settlement cycle • Been test running remote trading for eventual introduction • Most operators are fully automated • SEC has achieved a good level of automation but still enhancing its IT capacity for a more effective market oversight 23

25. INSTITUTIONAL DEVELOPMENT INSTITUTIONAL DEVELOPMENT • The Nigerian Capital Market is preponderantly an equity market • Over 95 percent of trading volume and market capitalization are equities • The bulk of new issues is equity • Instruments mainly straight equities and bonds • The derivative instrument is Trading in rights • An industry committee currently examining possibility of introducing new instrument 24

26. COLLECTIVE INVESTMENT SCHEMES • Active collective investment sector emerging • 17 authorized unit trust schemes in existence • 13 of the schemes are active • 4 of the active schemes are specialized • 5 of the schemes are memorandum listed on the NSE • No Pension Fund Manager yet registered • 2 venture capital companies registered (not collective investment) 25

27. INDUSTRY COMMITTEES INDUSTRY COMMITTEES • Industry committee are sometimes made use of to examine and report on specific aspects of the market. Such committees have included: • Bond committee • Corporate governance committee • Unclaimed dividend committee • The following standing committees are presently in existence • Rules • Disclosure • Enforcement • New products 26

28. MARKET DEVELOPMENT MARKET DEVELOPMENT • Market Development has taken the following forms: • Enlightenment of • The public • The judiciary • Policy makers • Legislators • Establishment of capital market studies in a University • Capital market essay competition • Policy initiatives • Publications • Research • Media campaign 26

29. CHALLENGES • Funding of the Commission • Government appreciation of the importance of capital market in economic development • Corporate governance • Reactivation of the bond market • Improving investors’ participation in the capital market • Unclaimed dividends resolution • More participation of indigenous firms in the market • Introduction of fiscal Incentive to deepen the market 27

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