Lagos (INVESTADVOCATE)-InvestAdvocate in its usual manner on March 06 2013 captured a Question and Answer Session with the Board of the Securities and Exchange Commission (SEC) at a Maiden Meeting with Publishers and Chief Executive Officers of Media Organisations in Nigeria.Below are excerpts of a Q & A with Suleyman Ndanusa and Arunma Oteh, Chairman and Director General of SEC respectively:

 SEC demystifying the Market and the issue of unclaimed dividend  

 The First question is on demystifying the Market that it’s too elitist, hanging out there in the skies and we should keep it simple by creating both the product and processes that is easily accessible to an ordinary person. That’s my understanding and you are absolutely correct and we should do that and that is why even simpler platforms are being created and I’m sure you have heard that the strong platform which is the NASD platform; which is less formal and easily accessible is been created.

In the area of collective investment scheme, they can modernise the “ASUSU” scheme and so on. Fund management is being introduced; where the ordinary Nigeria can feel comfortable to put in N1000, N5000 and whatever amount.

So we are bringing the Capital Market right down to the grassroots making it simple. Again you said we should train reporters. You are also absolutely correct, it has always been my practice, when I was at SEC as the Director General, I like engaging Reporters, we contributed a lot in trying to train them, and we took them even out to International Organisation of Securities Commissions (IOSCOs) meetings so as to expose them and I’m told that those things are still being done.

You have a great combination now, you have a current DG and the former DG who was doing it before and she is doing it now. I assure you that we will do a lot more to ensure that the Market is well reported, if you don’t train and expose them to the dynamics at the highest level how do we become global players if we don’t report the Market with international standard. Also, its imperative that we engage the Press and train them. Therefore, the Board and Management of SEC will be looking at ways that we can collaborate in these areas and I’m glad we are speaking to the very seniour executives of the Media; maybe together we can workout strategies as to this regard.

As for the unclaimed dividends and incentives, in 1999 when we came on board with the new law that is the Investment and Securities Act (ISA) 1999, just like she also was confronted by the law of 2007 which requested a lot of reforms. We started creating new policies and reform agendas. If you recalled, unclaimed dividend was one of those policy initiatives as at that time, it was controversial because people didn’t understand it. The only one that they understood, we did was the current Bond Market that is still striving.

It was the same SEC that worked on the reactivation of the Bond Market in Nigeria. It was moribund; largely under Treasure Bills and once in a while you hear Federal Government coming in. For over 11 or 12years the Federal Government did not come to the Market to float any Bond because they had so much money. And so we had to set up a Market Committee chaired by Tola Mobodore on reactivating the Bond Market. I’m so proud that today we are even saying that our Bonds are carried by the Barclays and already JP Morgan are agents so you can see.

The second was the pension, it was the same SEC and I’m privileged it was during my time that I created the Pension Fund Committee for the private sectors; modernising and reforming the pension agenda which we did and the Government now found it useful and created a Fola Adeola Committee. It was our report that actually was the basis for the Fola Adeola committee; which I was a member and today we are very proud to have a very striving pension fund sector.

It was the same SEC that created the first set of code of Corporate Governance in Nigeria. We are using the Market to understand this under Atedo Peterside. Now we have had improved versions also led by SEC; even the Central Bank has also called to recognise the fact it was SEC that started that. It was in those endeavours that we created also a committee for unclaimed dividend because we felt that to improve on the governance in the Market there was a need to do something about it.

As at that time we were already fighting this out; and the small things that you see happening in Corporate Organisation if you don’t do anything about them when they are small, they will now grow and become big. Oftentimes in developing economies people don’t realise until they begin to feel the effect.

Uncliamed dividend then was N7 billion to N8 billion now it’s N60 billion. But what are the incentives? Let me just tell you what will be the incentives. When a Company that is listed on the Stock Exchange makes profit, what does profit do to that Company on the Exchange?

It attracts good positive sentiment. People want to buy from Companies that are doing well. It’s even more if that Company declares dividend because people will say they are declaring dividend; so we should buy more of their stock. The Companies capitalisation begins to appreciate and so they are seen in good light.

Now, if you check your Company’s Law, there are certain conditions. You can make profit you do not have to declare dividend, it’s not compulsory. But, you can retain everything. However, once you decide to declare that dividend there are conditions. One of the conditions that discourages declaring dividend without cash backing is implied in the law. Therefore, when you make profit and you declare dividend you must have cash with you to finance the dividend. You are not allowed to go and be borrowing and be paying dividend; because you are creating more problems in future for that Company.

So, the Company may be fine today; but the person that is investing is investing in an organisation that is strategically sick in the future; because they are borrowing more and more. But in the past we have actually investigated Companies, I have seen Companies that declared profit and went to do conversion paper to pay dividend. You think you are making the dividend today; but next year you are not sure. So, they continue to borrow and pay.

The incentive in unclaimed dividend, let me tell you, if a Company declares maybe last year N2.0 billion and this year they are declaring N5.0 billion, people applaud them for that and want to buy their stock. But now I think both the Regulators and the Market are doing better in trying to see some of those tricks.

What happens when they declare N5.0 billion they have to determine how much of it they must pay in cash; whether they are going to borrow or not.

They have to pay it; because they are very sophisticated Institutional and other investors that will be paid their money because they are vocal and must demand for it.

Also, they do a profiling of the shareholders, after declaring N5.0 billion as dividend, if they see that the noise makers and the sophisticated shareholders of the Company are to take about N2.5 billion, they will go and borrow that amount to pay. While those that are in Diaspora and their villages that are not readily available to demand their money, the Company will device all kind of reasons not to pay them. Therefore, you will have N2.5 billion of unclaimed dividend created. The reason they are doing this is that the Law requires you when you declare dividend, you have to pay, but if you do not have cash you have to borrow. It’s better to borrow N2.5 billion; instead of N5.0 billion because of the interest factor.

Therefore, in that regard they are actually using the non-payment to subsidise the fact that they have to pay cash of N5.0 billion and that is why we  proposed at that time; once you declare dividend whether you pay or not, that cash must leave your system.

Let it stand there as a critical test of whether or not you have the liquidity to justify such huge dividend, why didn’t you declare N1.0 billion dividend; why N5.0 billion. You are getting the benefit of a N5.0 billion dividend in the Market; but you are only paying N1.0 billion.

It’s not fair on the system, so there are motivations, a lot of incentives for you to look good at the Market without paying the price of liquidity. Then, we came out with a Bill to the National Assembly and it didn’t succeed; subsequently, I was tagged Mr. unclaimed dividend.

She also is been tagged with “Madam unclaimed dividend” because the dividend is rising; but we have agreed recently in a meeting with the NSE and other Stakeholders that’s an issue, even though going into the future we are using technology to make sure we do not have such massive unclaimed dividend rolling because of e-dividend. The backlog of N60 billion is a lot of money. Now, with foreign investors coming into Nigeria; even if they are getting their own dividend it’s potentially dangerous for them to invest in a Market that has a backlog of unclaimed dividend to the tune of N60 billion and we are still counting. The current Director General told us a story that she was discussing unclaimed dividend with some African Stock Exchanges and they were asking her what does that mean; because they don’t have it.

In the US some of the States have unclaimed dividend; because people die or relocate; but they found a way of ensuring that these monies were not just kept by the Companies. They had Agencies that were actually managing them so that they look for the owners. Here we don’t have those doing this, if today, you ask a Company as a Public Liability Company (PLC) all the unclaimed dividend that they have over the years, where is the cash? Let us touch it. The cash is not there, then why are you declaring new dividend. You have not paid; you can’t even say where the money is.

There are operators, we trying to do that; but sometimes ideas take time. I told her also that some of her ideas today may take about five to 10 years; she may not be there before they start getting the benefit. The same way we are back, we are recycled we are back, we are now seeing some of the step we took as staring into our faces, so basically on unclaimed dividend am happy to support that idea on unclaimed dividend. These things should have been resolved.

 EDITOR’s PICK:

“The Registrars  are feeding very fat on this business, that’s why we have so many Registrars, otherwise we should consolidate and have one or two Registrars so that they can at least make more money; but not relying on accumulated unclaimed dividend these are also incentives.”

(Suleyman Ndanusa, Chairma, Nigeria’s Securities and Exchange Commission)

 Still on training for Market Reportage

Some of the things we have been doing in terms of training, we have always as an Institution had programs for Reporters and Correspondents, but last year we decided to do it a bit different and set up what they call SEC Journalist Academy and I believe all of you approved for your staff because we were been asked by management to account for that program. What we did was to get stakeholders in the Capital Market like Lawyers, Accountants and Stockbrokers to come and talk on different issues in the Market.

We intend to have that be on the calendar of the Reporters annually, we are discussing formerly first with Richard Ikiebe Who is a Senior Fellow & Director, Center For Leadership in Journalism, School of Media and Communication at the Lagos Business School. I don’t know if I should tell you,  I was a Journalist before I left Nigeria so I think it’s a profession everybody have spent some time including those who transformed this Nation; including the likes of Azikiwe, Awolowo and other great people.

We discussed and there are suggestions from some quarters that there should be something targeted at senior people like yourselves and what we agreed in December 2012 was that in the course of this and if you have very specific feed backs for us then, we see whether we can partner with Lagos Business School to do something that is targeted around at very seniour people.

We also hosted our first essay competition for Journalists; also last year we did a variety of other things like secondary schools quiz competition. It cuts across the whole country. Whenever we do an outreach program anywhere we do a quiz competition. The reason we do a secondary school quiz competition is that usually the people in the room are adults and they feel uncomfortable doing a quiz competition and showing that they do not have the knowledge; but the young people are enthusiastic, they spend some time together learning

In addition to the young people learning, the adults also learn. We had one in Warri in November last year and we were also amazed at what the young people knew. Of course they have studied our team coaches to show that they are very well prepared. But a lot of the adult said that they learnt very much from the program. We have secondary school clubs; we want to also encourage the habit of investing collectively.

So, we hope that we can have Investment Clubs also in our universities amongst our people. We would like to do more in terms of using radio, television and print to demystify. We already had a program which we designed with CNBC titled “The Nigeria Capital Market”. That’s the program that runs monthly. I have spoken with some of you already about doing similar things on whatever mediums you have.

The Market Operators are doing some things with a number of some print media but we cannot do enough. It’s something we must keep up and so we agreed with you if you have specific ideas of things we can support; because the crafting of the law that has governed the Capital Market has always recognised that; unlike in the US were there only role is regulation, in Nigeria, our role is regulation and Market development.

So, even the crafters of the Law, understands that it’s important for our Market that everybody should come up and speak. Also, financial literacy for me is important.  In the UK, they set up a Consumer Education Centre; which is now an independent entity and they don’t just teach; they now provide advisory services.

This is the reason we are glad to have a few young people with us. So, we are on twitter, we are on facebook, we are using Nollywood and we want to do more on radio but; we are not quite ready yet. So, we want to do more. I offered some of the Television Stations; that we can work on scripts. CNBC Africa does a lot more of what comes out of South Africa; we can do more in Nigeria.

Like I said earlier, we encourage people to put there money into collective investment schemes. And we are keeping awake at night worrying about bad Fund Managers that the SEC has registered. Thus, we want people, Analysts to be visible about some of the issues they see with the Fund Managers to tighten the frame work. Its something all of us need to work together, I think it’s very useful that we raise such.

What has happened with the Risk based Supervision Regime being introduced to the Market and your view on Portfolio structure at the Nigerian Stock Exchange?

We are implementing the risk based supervision, and for the benefit of those who might not be familiar with it. Risk based supervision is something that allows you to assess an institution on the basis of nature of the risk they face. So, it’s not one side speaks all. Mr. A may be a brokerage firm and Mr. B may have a brokerage firm as well, instead of expecting them to have the capital requirement; because he is doing derivatives and his taken more risk and his doing straight execution of transactions for client he will be expecting to keep more capital to protect himself and when we are doing that;  what we have worked on is actually a review of the minimum requirement for being in this business and we will go on and approve that because we are doing risk based supervision.

On our view on the portfolio structure for the benefit of others what is being referred to; is that SEC started last year on the value of trade being devalued. Foreign investors made up 80% and Domestic investors made up 20%, by the middle of the year our calculation was 70%:30%. Now it is 56%:44%. Basically, what happened is because the foreign investors are primarily institutional investors; because they invested in various parts of the world and our Market offers more yield, they basically were wearing glasses and came back into the Market sooner than domestic investors.

And what have driven our Equities Market particularly have been retail investors. What I have been saying to people is that if you are a retail investor, the damage to you of the financial crisis that led to the downturn in Nigeria is much higher than if your profession is to manage money; then if you are managing money you manage it as an index.

If yield in America are some of the indices that you manage against and you put a little exposure to Nigeria where the yield are higher you can make more money. So it is understandable to us while the recovery in our Market were driven by foreign investors and we also recognise that its important that we have a domestic, institutional and retail base and that domestic, institutional and retail base are such that can stabilise the Market because as soon as things get better people may exit if they are foreign investors or as soon as things get worst in their country and they need to get money out they may exit. So, Retail investors stabilise your Market most.

The long history of the SEC supporting pension reform and the pension industry, the reason is that we need an institutional domestic base and what this Country did from 2004 is to have us accumulate N3.0 trillion ($20 billion) of pension money which can be invested in the Market is absolutely commendable.

We are working with the Pension Commission; they are reviewing their guidelines; because their previous guidelines meant that they were basically buying Federal Government Bonds. If you are saving money for people who are 20s and 30s for their retirement when they are 60s and 70s, you know that all of the statistics around the world that talks about which Market over the long run issue more return, everybody knows its Equities; why would you be buying Federal Government Bonds. So what PENCOM has done now is that they will be having exposure draft which some of you may have seen on there website which is basically to look at it from the asset and liability point of view and match the profile of contributors to the kind of instrument they get invested in. So, for very young people 50% of there contribution can be invested in Equities; while for the retired people is a much smaller percentage that would be fundamentally important for the Capital Market.

Insurance Companies all over the world have investible Assets that are invested the Capital Market. We have been working with the National Insurance Commission (NAICOM); we are doing supervision with them because we want them to transform the Insurance Sector in Nigeria. If you notice they have come out with a number reforms on compulsory insurance, for instance, micro insurance, food insurance, non-interest type insurance (Islamic type insurance) as a way of improving the investible Assets that comes from the Insurance Industry; because that will also support our Market.

The benefit of us promoting Collectives Investment Scheme is that the ordinary retail investors don’t only diversify there risk benefits from professional experts, but, also institutionalise our Market. This is because those Fund Managers becomes institution investors and influence Corporate Governance in Companies because one of the things we found is that institutional investors have been careful not to say anything about some of the Corporate Governance challenges that we have seen in the Market. So, we agreed that we must have a domestic base. In the US after the crisis 40% of Americans have Mutual Funds; but in Nigeria its .001%. This is about 168,000 people out of 168 million people; so encouraging the saving and investment culture for us will also help to address more Nigerians participating in the Market.

Clarify the relationship between the SEC and NSE

It’s through what you say and write. People know that during Ndanusa’s time, there was a lot of emphasis on people understanding first the importance of an Apex Regulator and why that Apex Regulator must be supported; but people didn’t listen.

And then we had the crisis that hit us the way it did in 2008 and 2009 because it wasn’t just about the Exchange and SEC, this Market was under-regulated because people didn’t listen like I said earlier. Sometimes God gives you a real example so that you can understand the Prophet. Therefore, in year 2010, we had to take the decision that we took and I can say that after three (3) years few people asked whether we reported to the Nigeria Stock Exchange (NSE).

We are happy to report that we had a very good relationship with the Exchange. There is an understanding that we are the Statutory Regulator, we are the Apex Regulator, but the comparison with the Central Bank of Nigeria (CBN) is interesting. The Central Bank regulates 19 Banks today, but because their issues are systemically important, sometimes people forget. We regulate 2,000 Operators, 200 Companies, 19,000 Public Companies, because if you ever list the Security that is supposed to be traded and you are a Public Company, it’s automatically regulated by the SEC.

The scope of what we do is that those listed Companies of course include most of the 19 Banks. Therefore, the scope of responsibility is wider, but it’s also something all over the world that everybody understands better. I think it’s a journey, and there is a greater understanding of the important role of the SEC, of the Capital Market. One of the things that this Nation is suffering from is the absence of medium and long term finance. If you do not have a well regulated Capital Market you cannot offer the medium and long term finance.

That’s why we are called a developing country, because in most developing countries, the Banking Sector is much more visible as they develop. The Capital Market become even more important, so its work in progress for the Nation, but I think its also dependent on the Media to try and create a better understanding for the role of the Capital Market, the role of the Apex Regulator and NSE.

Stock Exchange is called the Self Regulatory Organisation; because they regulate specific numbers, while they call us the Statutory Regulator because we regulate Exchanges, we regulate those Operators those are the differences. Also, It’s a terminology that is used all over the world. Stock Exchanges are more visible symbols, because everyday you see the bell being rung to open or to close the Market.

When you hear more of us, it’s because we have taken an enforcement action. There maybe a cultural issue for our country because when someone has done wrong and you take an enforcement action people come and beg you even though the person new the whole truth.

I think we also need to build a culture of people understanding regulation and I think what happened to us in 2008 and 2009 was some lesson about the consequences of not doing something about it.

The Stock Exchange is working on improving the regulatory information that is available. So, they would announce shortly an Issuers Portal that will make information available to everybody at the same time and we are also working on some of the initiatives which we will announce later.

Has the issue of SEC budget and the National Assembly resolved?

On the budget issue we believe it’s an issue that is above us, it’s an issue between the Legislature and the Executive. When we were called upon to provide information about what the constitution says, what the law says, we will do that. You know we have already been asked. So I think like other Agencies everyone have been waiting for the budget to be signed we are not any different from any other Agencies as it stands but we have provided all of the information that we have been asked to provide as regards the subject matter.

As far as we are concerned, we have a well articulated budget which has been transmitted to our principal and of course what happened to the budget is now going to be based on the outcome of an ongoing discussion; but we believe and we are quite confident that this Market is well too important for us to play with and eventually I know that SEC must have a budget to run on; but if we don’t, we all know the implications.

End

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