Using shares in CSCS depository as collateral for loan


THURSDAY, 01 JULY 2010 01:09


In recent years, trading and settlement volumes especially with the Securities Settlement System (SSS) have soared, as securities markets have become an increasingly important channel for intermediating flows of funds between borrowers and lenders and as investors have managed their securities portfolios more actively.


Before the global financial crisis that eroded the value of stocks on the nation’s bourse, one of the major collateral for assessing loans from financial institutions is the use of shares in the Central Securities Clearing System (CSCS). Though, currently this trend seems to have fallen but the CSCS still believes that investors need to understand how they can use such shares in their depository as collateral for loan facility.


Not a few investors have recognised the fact that in the past, because interested parties in one way or the other never had the adequate arrangements on how to engage in this kind of deal, led to either the lender or the borrower being on the loss path.


With this in mind, coupled with other accompanying factors, early last month, at the joint workshop for capital market correspondents, Peter Adebayo Egunbiyi, general manager (operations), Central Securities Clearing System Limited said the first step is for the lender to demand from the borrower, a current statement of stock position issued to him/her/it by CSCS Limited.


According to him, the lender can confirm from CSCS, the statement of shareholding issued to a shareholder/prospective borrower by CSCS (status report) on payment of a fee of N100.00kobo. The lender must obtain from the borrower/shareholder a letter of authority to the effect that the borrower/shareholder has mandated the lender to collect the stock position on his/her/its behalf.Thirdly, a memorandum jointly, signed by the parties requesting CSCS to place a lien on specific quantity of the stock(s), should be forwarded to CSCS Limited. Also, an undated letter signed by the borrower, authorising the lender to sell the stocks in the event of default at the expiration of the loan due date, must be given to the lender upon which CSCS would act when the lender so instructs.


Egunbiyi stated: “It is essential that the Joint Memorandum be registered at the Stamp Duties Office or sworn to before a Commissioner for Oaths in any Court of Law. Note that the Joint Memorandum must have been completed on the front and reverse sides as directed thereon and explicit therefrom, before same is stamped or sworn to by Authorised Signatories of the Lender (and /or the Borrower). It is in the interest of the lender not to disburse funds until a letter advising lien placement has been received from CSCS Limited. The lender, the borrower and the stock-broking firm(s) may be required to confirm and/or consent to the lien agreement. The stock broking firm(s) in particular is required to expressly ascertain/confirm in writing that the Shareholder is the genuine owner of the stated stock(s) and that they therefore have no objection on Lien being placed on the stated stock(s) by CSCS Limited.”


Further in his explanation, he noted: “The stock broking firm (s) must write the letter as earlier referred and addressed to CSCS of which same is expected to accompany the Joint Memorandum when forwarded to CSCS limited. Any insertion/alteration on the Joint Memorandum may be a ground for rejection of the application. The draw down date and duration of the lien agreement must be specifically stated (filled out) in the Joint Memorandum.”


To CSCS, upon the receipt of the executed Joint Memorandum and after the lien processing at CSCS have been completed, the shareholding of the shareholder would be moved into a CSCS Reserved Lien Account with the interest of the lender noted. “This will be communicated to the parties, thereafter.” “The lender (and no other party) should advise CSCS to remove the lien placed on stocks en bloc when the Borrower has discharged his/her/its obligation under the contract.


The stock(s), which should be listed on the letter of instructions from the Lender, is/are moved back to the original stock-broking firm(s) from where the stock(s) was taken. When the borrower defaults and/or fails to discharge his/her/its obligation under the contract, the Lender at the expiration of the loan due-date shall: inform CSCS of the default by the Borrower and advise CSCS to remove the lien to enable sale to be effected.


With a copy of the undated letter written by the borrower to the lender further give instructions/directives to CSCS for the purpose of the release and sale of the totality of the holdings through a mandated or named stock-broking firm, which is a member of The Nigerian Stock Exchange. CSCS, if satisfied that the procedure has been complied with, will be obliged to remove the lien on the stock(s) upon such information/instructions from the Lender after the expiration of the loan due-date without recourse to the Borrower, moreso when evidence of Notice of Default from Lender to Borrower is received/sighted by CSCS Limited.


If the Debtor/Shareholder refuses to acknowledge receipt of the Notice of Default, write a letter to CSCS affirming such position/situation which may suffice for CSCS to release the stock(s) without recourse to the Debtor/Shareholder,” he stated. 





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