Victor Ogiemwonyi
The recent call to consolidate the Stock Broking industry by the Director General of Securities and Exchange Commission has sparked a new debate on how best to consolidate the industry. Many analysts have agreed that the industry is fragmented and needs consolidation.
The same issues that the Banking and Insurance industries faced during pre-consolidation in 2004; are here with us. Less than 10% of the firms earn over 75% of all the fees and the Balance Sheet size of the top 10 firms are bigger than the last 40 firms. Many of the Firms are also experiencing illiquidity of one kind or the other since the meltdown started in 2008.
Some are even unable to pay salaries or meet customers’ obligations. This is a situation that if prolonged, may have a contagion effect on the industry. The collapse of the Stock-Market and the subsequent meltdown of the Economy have not helped, as the industry was thrown into crisis with the global economic meltdown.
This was compounded by the margin lending that has become a problem for everyone; particularly Stockbrokers who borrowed large amounts to leverage their portfolios.
Despite these unmistakable signals, many calls for caution in order not to make the same mistake the Banking and insurance industries did when consolidation was forced on them. The Banking industry for instance, looked for a moment to have succeeded spectacularly with its forced consolidation, but ultimately succumbed to the lack of proper planning and execution which characterised the exercise.
When mangers are forced to make a number by any means possible, they may sometimes be forced to also make up the numbers. This was the situation that gave birth to the Casino Banking that became prevalent after the 2004 consolidation that eventually lead to the dramatic failure of some of the Banks thereafter. It did not help, the only emphasis and qualification for a consolidated Bank was that they had the required N25billion.
Banks that hardly had N5billion capitalisation pre-2004, suddenly found themselves with so much money they did not know what to do with it. In that environment, Risk management was hardly a priority.
Nobody will say that consolidation in these industries were not needed, but because it was forced, the end result was also a forceful and dramatic reminder that whenever you artificially force a situation, it does not last very long for it to unravel.
The Stockbroking Industry is peculiar in many ways, first the role of Capital is at best dubious, it does not mean, because you have large capital, which makes you a better Broker. It is a knowledge business more than anything. Don’t get me wrong, I am not saying there is no need for Minimum Capital; my point is that if money is all we want, we will be better off auctioning our licenses to Alaba market traders who have all the money we will ever need.
In my opinion, what is needed is for the Securities and Exchange Commission to sit down with all stakeholders in the industry to articulate what the industry needs to grow and to set a timetable for the agreed growth targets. For instance, there is a need to know for sure how many Stockbroking Firms are there, the SEC has variously claimed that the registered Stockbrokers with it are about 300. Many in the industry query this number.
This is because, on any given day, hardly more than 120 Dealing Members participate in the in daily market. Another disputable figure is N1billion which the Regulator has said was the expected new Minimum Capital. This seems odd. What will Stockbrokers be expected to do with $6.6million as capital? Ironically, none of the jurisdictions we point to as models, have this high Capital requirement.
In a presentation made to the Senate Committee on Capital Market by the Chartered Institute of Stockbrokers they queried the basis for this astronomical rise from N70m to N1billion. They note that in other jurisdictions where Market capitalisation is far larger, the Minimum Capital requirement is far less than the N1billion ($6.6m) now required in Nigeria. Currently the Minimum Capital requirement for a seat at the New York Stock Exchange is $250,000, India is $140,000, Ghana $185,000.
They also note that Share Capital for Operators should be function specific. It would appear that Stockbroking Firms are being compared with Investment Banks in other jurisdictions that combine the roles of issuing Houses, underwriters, Portfolio Managers and Stockbroking. They warn that the policies if implemented; will shutout small investors from the Market as Stockbrokers will merely trade among themselves, because at that level of Capital, they find it unprofitable to deal with smallholders.
They insist that if the new Capital at this level is implemented, it will engender speculative trading of the few Securities available giving rise to prices that will immediately create a bubble because the prices have no relationship with the underlying Companies whose Securities are been traded. They advise that we draw lessons from the Banking industry consolidation where emphasis was on Share Capital instead of operational structure.
The assumption that a strong Banking Industry will support the Real Sector did not materialise; instead the Hugh capital raised by Banks became speculative capital in their vaults, a situation that eventually lead to the collapse of some of the Banks.
The Securities and Exchange Commission needs to note that consolidation of the industry is the goal and not the beginning. We need to realise that we have peculiar circumstances in Nigeria that needs to be taking into consideration. For a Market to exist there must be players. Arbitrarily insisting on a desired number of Stockbroking Firms will not be the way to go.
We buy our food items in Nigeria from our local Road Side Markets, while the British for instance buy their food items from Super Markets like TESCO, do we now close all our Road Markets and force all Food Sellers to open Grocery Stores and Super Markets because that is what others do in other jurisdictions?
The problem of the Capital Market is more than just Capital. We have insufficient skills sets, we have problems with Limited Securities in the Market, and we have problems with a non efficient Trading Platform, why are these not being addressed? Why is there no focus on the Primary Market?
Why is it taking so long to have an OTC Market that will serve as nursery for bringing new Companies to the Nigerian Stock Exchange? There is more to the Market that needs to be addressed than just regulating Stockbrokers.
VICTOR OGIEMWONYI is the CEO of Partnership Investment Plc in IKoyi, Lagos
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