The directive came when they least expected it. The market has been enjoying a good run. So, they thought no one would pay attention to them. But the Nigerian Stock Exchange(NSE) was bidding its time before striking. Wham! Like a bolt out of the blue came the order that stock brokers should recapitalise. It was a signal too that NSE changed direction this year.

 

This is not because the market capitalisation peaked from N7trillion to N8trillion few days after the New Year. In fact, much of the growth recorded on the floor of the Exchange came in the last two quarters of 2010, when the new management came on board. Instead, the change of direction lies in the directives issued to the over 150 stock broking firms to increase their capital base from N20million to N70million or face sanctions. The directives followed series of consultations between the Exchange and other stakeholders in the financial market. The directives were given penultimate Monday in Lagos.

 

Prior to this period, the Exchange has maintained silence on the issue of recapitalising its dealing members. The reason is because it has met brick wall on the issue. Firms have resisted moves to recapitalise them, by not complying with directives. In 2008, the Securities and Exchange Commission (SEC), in conjunction with the Nigerian Stock Exchange directed the firms to increase their capital base from N20million to N1billion. The two bodies thought that the firms would be able to meet the requirements for growth. But they were proved wrong. Few weeks after, the issue generated controversy in the market. Stakeholders were pitched against one another, condemning the idea. Broking firms were the first to condemn the idea. They considered the amount as too outrageous. They saw it as a big task.

 

They regarded it as a ploy to force them out of business. Questions were asked on the imposition of the N1billion recapitalisation fees, and answers were provided. In all these, anger, frustrations, and protests accompanied the directives. Incidentally, the regulators failed to achieve their objectives of ensuring that broking firms provide the capital base of N1billion. This made the regulators to reduce the recapitalisation fees to N70million. The idea failed. Years after, many firms are yet to provide the N70million. Though some firms met up with the requirements, the percentage was not encouraging.

 

While these lasted, firms adopted various strategies to survive. Many firms approached banks for margin facility. They wanted to cash in on the market’s boom to make profit. They burnt their fingers. They lost huge amount of money to the crisis. Besides, firms got involved in unwholesome practices. They used investors’ money for trading.

 

Cases abound where investors’ shares were sold without their consent. Nigerians in Diaspora were the victims. Many of them were duped by brokers. Some brokers were lucky, others were not. The recent withdrawal of licenses of some operators underscored this assertion. To restore confidence, the Exchange revisited the issue of N70million recapitalisation.

 

The Interim Administrator, Nigerian Stock Exchange, Mr Emmanuel Ikhazobor, said the firms must increase their capital base to N70million, or face sanctions. He attributed the development to the need to protect the interest of investors. Ikhazobor said investors are crucial to the growth of the market, and must be protected.

 

He said firms owed it a duty to safeguard the interest of the investors, adding that the rules put in place to defend investors would not be ignored. He said firms have been told to inject more risks to prevent abuse of investors’ funds. He observed that firms are facing liquidity problems, and are using investors’ accounts to cover up. The issues are having strong implications on the market that is recovering from shocks. Based on these, there is the need for holistic views on issues that permeated the market in recent times.

 

Paperlisation of assets

 

This is a process whereby companies prepare fake papers to meet up with recapitalisation requirements. The process involves propping up one’s assets to stay afloat. Often times, companies cook up their assets when they are about to be recapitalised. It is a criminal offence, punishable under the law. Industry observers argue that it is difficult to rule out such activities from the financial market. They reasoned that corruption permeates every sector of the economy, and that it would be difficult to say that companies are not doing that. The former General Manager, Heritage Securities Limited, Mr Tayo Bello, said the crime is being committed by many firms. Bello said paperlisation of assets has become a trend in the country.

 

” What we are having among some stock broking firms is paperlisation, and not capitalisation. That is when you cooked up papers just because you want to meet some requirements placed before you. By so doing, you are telling the world that you have bigger assets, whereas you don’t have. When that happens, one has committed a criminal offense. Any of the firms discovered to have committed that kind of crime must be charged. That would serve as a deterrent to others. Some firms will tell you that they have huge assets. Before you know what is happening, they come up with shares’ certificates that are bogus. At the end of the day, they have nothing concrete to boast of in their books. When consultants were hired to verify the accounts, they found out that their accounts are not genuine. Even the houses and shares mentioned in the books are existing. They are going about with fake papers. This implies that they are committing crimes, and must be brought to books,” he said.

 

Bello said it would be difficult for many firms to wash themselves off the allegations, based on the happenings in the market.

 

” Let me be frank with you. Everything they said about the equities trading firms listed on the floor of the Exchange is true.

 

Before Ikhazobor could come out with allegations of bogus transactions among the operators, he must have done a thorough Investigation. Before he made such statements, people must have petitioned him. What you are seeing is the outcome of the petition”, he added.

 

N1billion recapitalisation fees

 

Experts argue that fraud started in the market, with the imposition of N1billion capital base on the operators.

 

The decisions of the regulators to direct the operators to increase their capital base from N20million to N1billion, resulted In sharp practices.

 

“If you observed what happened during that period, you will realise that firms were outwitting themselves to get the money.

 

Many firms involved themselves in double dealings. Shares of investors were sold without their consent. Some firms even diverted funds that belonged to their investors into activities that are outside financial instrument transactions. The N1billion recapitalisation fees destroyed the market in the sense, that it made firms to go into activities that against the best practices of corporate governance. How can you explain a situation where by firms that cannot raise N70million, providing N1billion capital base”

 

This is quite impossible. It is a tall dream”, said an operator, who preferred anonymity”. The sources said the development has paved way for infractions among the operators, as well as weakening the confidence of investors.

 

Similarly, Bello said many investors do not know whether their shares have been sold or not since they have not access to trade alert mechanism. Trade Alert system was electronically means of informing investors about the transactions taking place on their shares.

 

“There is what I can call False Trade Alert. Through this means, you do not know the level of transactions that has been done on your shares. You opened account, and your firm does not have your numbers. When the problem starts, your firm would tell you to go to the Central Securities Clearing System (CSCS). On getting there, you meet a problem because your account is not credited with the agency. These are some of the ways through which frauds can be perpetrated”, he added.

 

Also, the President, Chartered Institute of Stockbrokers, Mr Michael Itegboje, said brokers are culpable of offenses in the market.

 

He said brokers are making people to believe that there are values in some banks’ stocks, where there is not.

 

‘ On pricing issues, I asked a question when I became president of the institute. What are the yardsticks for moving prices? Do we do a thorough analysis? It is not enough to say I order you to buy a stock at N35? Why do you buy at the price? Is it because others are buying?” he asked.

 

The outcome of CBN’s audit exercise

 

The outcome of Central Bank of Nigeria’s (CBN) audit revealed a lot of problems in the industry. Of importance is the banking sub-sector of the Nigerian Stock Exchange. The sector contributes over 50 per cent to the market capitalisation. Little wonder that the outcome of the audit exercise exposes high level of infractions among the operators. Many firms were heavily indebted to the banks in form of margin facility. This means the liquidity level of brokers was revealed to many Nigerians.

 

Analysts argue that the banking audit has shown that some broking firms do not have a solid operational capital, adding that some are surviving through fraudulent means. Added to this is the roles played by stockbrokers when banks are issuing public offers.

 

Itegboje said banks involve a lot in media hypes in issuing public offers. He said before primary offers are issued, there are lot of newspapers adverts which contain false information about the history of the banks.

 

Source: THE NATION