In this interview with PETER OBIORA, Online editor at InvestAdvocate, Barrister Bisi Iyaniwura, Investment Lawyer in Lagos Nigeria takes on issues regarding the Asset Management Corporation of Nigeria (AMCON), how the Nigerian Stock Exchange is administered, issues of Corporate Governance as regards Quoted Companies and Banks, and other matters arising. Excerpts:

On the recent activities at the Nigerian Stock Market

Let’s first start with the issue of corporate governance on the stock market. I will say I’m a little bit on the disappointed side the way the Nigerian Stock Exchange is presently administered; I will tell you it’s not in accordance with international best practice. Why I am saying this is that virtually the people in the stock exchange don’t know why they are there.

First, they are running it like a civil service initiative; whereas the NSE is just like every other stock exchange in the world and not a civil service thing. We have found out that those who are in charge now are more after themselves than the market.

The last example is about the planned data sales, let’s agree that others are doing it, must we follow in their footsteps? Don’t we have to consider where we are coming from? You see we have to look at the implication of every action we take. This is a market that is just coming out from a depressed situation and now the most important thing to be done is to win the confident of the people back. You want transparency in the market, you want the people to fell confident and say yes I am a stakeholder.

If the management want to start operating in this manner, and create an Exchange where the people don’t have access to information on what is happening and where investors don’t have confidence in what is happening, they are going to retract into their shell and if this happens, the market is going to fall again.

Also, I have noticed what I think the Honourable Minister of Trade and Investment should be very particular about, the issue of the kind of investors we have at the stock market, in my opinion they are not people who have our interest at heart and similarly, Nigeria’s central bank Governor has made allusion to that. Nigeria does not need portfolio investors at this point in time of our economy. Yes Gross Domestic Product (GDP) is going up, but is it imparting on the people? It’s not imparting on the real sector. That’s why presently, the sector is nearly dead.

The portfolio investors are bringing in what I will term “Paper Money”. They have no stake in the Nigerian economy. They are bringing paper money because Europe is saturated and Africa is a virgin. They know we have loose regulatory regime; coupled with corruption, it’s easier for them to get things done in this country. So that’s why they are here. This is what is called internationally as “Hot Money”.

Immediately Europe gets better or they have alternative means where to put their money, they are going to pullout and we will come back to point zero. Therefore, we should not think that the stock market is stabilising or is picking up, no. It’s artificial because the figures been declared are not backed by the real sector economy.

I was discussing with somebody recently, a Banker and she was telling me the problem in the banking sector and I foresee more problems in the banking industry; because the industry in Nigeria is not doing real banking. Some banks declared 100s of billions in Naira as Profit. I asked myself a question, what’s the total working capital of these Banks? What’s their Share Capital to declare 100s of billions in Naira as Profit? Compare this position with that of Citi Bank of United States (US), HSBCs and Standard Banks of this world. Do they make such Profits? They don’t. The day Citi declares about $100 billion as profit or quote some outrageous figures as profit, I’m sure that the whole of America will rise up and ask them what they are selling? Let’s ask our banks what are they selling? Banks are supposed to be intermediaries. They are supposed to be parasites on the economy; but we are getting the reverse of it here in Nigeria.

If the economy is not doing well the banks are not suppose to do well. The real sector in Nigeria is not doing well but the banks are. We should ask ourselves are they into drugs or money laundering. These are questions that the central bank should ask. There is something apparently hidden in the banking industry in Nigeria that we are yet to look at constructively.

I can’t say what exactly the total working capitals of these banks are; I don’t think is up to N500 billion. Their capitalisation is the stock market value; but what is their working capital?  So, if some are making a N100 billion profits, that means their profit margin is about 25%. Also, look at their cost, if you add their cost to it, which means there is a problem in the economy and the banking sector is a major part of the Nigeria’s economic problem; because they are not doing real banking. They are not creating employment and not financing the real sector. The CBN needs to really step up in its regulatory capacity. Assets Management Corporation of Nigeria (AMCON) is not a solution to Nigerian banking problem.

The problem and the solution is between Nigerian Deposit Insurance Corporation (NDIC) and the Central Bank of Nigeria (CBN) I was telling my colleague recently to observe the buildings some of these banks has put up as their corporate headquarters. Anywhere in the world you don’t see banks putting their money into real estate and classify such as asset. These buildings are not assets; but more of a liability. Citi Bank is not the owner of their head office building; because of the fact that they are not the owners, it’s easier for them to move on when there is a problem.

If some of these Nigerian banks run into liquidity problem today, it will take them sometime before they can sell such buildings. And that is why they find it difficult to address the issue of their liquidity due to the simple fact that what they are classifying as assets are really not in the banking industry. They have to keep pumping money to maintain these buildings. So, I’m sure the CBN knows that all these are part of the avenues of fraud in the industry, they have to earmark money for maintenance of these buildings; whereas if they are tenants, it will not cost them that much. If it becomes too expensive for them to maintain, they can move on; but because they are owners of these buildings, they cannot easily let go, they are psychologically attached.

I discovered that a lot of the banks that ran into problem before the NDIC took over had buildings; but because these buildings are not liquid assets they cannot sell them to meet up with their immediate liquidity problem.

So, AMCON is not the solution. AMCON is even actually just as the IMF have said may be a catalyst to the banking industry problem because they are encouraged to take major and bigger risks, they do not consider the quality of loan assets they are disbursing. They believe AMCON is there for them, therefore can afford to be negligent.

If AMCON must work, they should back same up with sanctions, not just by buying toxic assets. If you are buying bad debt you should sack the whole of its Board for bringing the bank into that problem. If they had done what is expected of them in the first instance, in respect to their corporate governance assessment and due diligence, they won’t have such bad assets.

EDITOR’s NOTE:

“The International Monetary Fund (IMF) late March 2013 advised the Nigerian Authorities to wind down the operations of AMCON in order to curb moral hazard and fiscal risks.

This is part of the IMF’s Executive Board Assessment and recommendation to the Country after it concluded its 2012 Article IV consultation with Nigeria”.

Your postulation that AMCON should sack the entire Board of any failed Bank

AMCON was created for a purpose, to buy bad debts, when you are buying bad debts you are also buying the underlying Securities. AMCON doesn’t have the power to manage or buy banks. The CBN acquires these banks and AMCON bought the bad debts of these banks. We have to distinguish between the bank as an entity and its shareholders. AMCON was not set up by law or by the government to buy banks; but to acquire the bad debts of banks and the underlying securities. So the question is the bad debts of the banks they have acquired, has that given them the right over those banks? It cannot be.

Let me give you an analogy, a father called his first son and said I have given you the power to take over the property in the house. He requested the son to sell all the bad properties, now does that give the son the power to acquire the whole house? It doesn’t. What is the basis upon which AMCON took over those banks? To be asked to manage a bank doesn’t mean takeover the bank; but to manage the bad debts of the bank.

If that is the issue, it means these banks have been trading in there own shares which is a criminal thing. It’s actually the NDIC that has the power to acquire banks and appoint the Board of Directors not AMCON.

NDIC is the liquidator of banks; they acquire the asset of the banks, while AMCON acquire the soft asset of the banks, which are the loans.

Why do you think the NSE is not being run in accordance with International Best Practice?

The Nigeria Stock Exchange just extended the period by which the listed companies can submit there annual accounts. It’s wrong; laws are made to be respected. Now they have granted that indulgence, next year companies will come with the same excuse and they have to grant it. If the cutoff period is April 31, what I expected all quoted companies to do is to work on that date backwards to make sure they meet up with the deadline. That’s why there are sanctions. Now that they have extended the filing date, the NSE’s Management is creating an avenue for indulgence.

A lot of banks said the CBN is the cause of this; but the CBN refuted this and said if the banks had submitted their accounts for approval as at when due, this situation will not arise. There is a schedule for everything, and we all know that 12 months make a year and if your account ends December 31 for instance, you are supposed to work back from December 31^st to submit to the CBN within 3 months, companies have to work within time limits and make sure they submit their annual accounts, everybody knows it takes an average of three weeks or one month for the CBN to approve these accounts.

Like I said earlier, this is the reason we have our work schedule, you are suppose to work back. That’s part of what I am talking about loose governance. Also, let us look at another issue, the sanctions. I have always advocated that when the sanctions are not good enough, it creates time and opportunity for the people to take the risk. I have made the recommendation, that if a person for instance is seen to have been negligent and to have made his company lose 10 Naira or to have made away with people’s money of 100 Naira, and you are saying that the sanction is that the person will pay 10 Naira, are you sure tomorrow that individual won’t go and steal 1000 Naira? But were the sanction is commensurate to the offence people will think twice. So, if somebody steals 10 Naira and the person is fined 20 Naira, people will think twice before engaging in such venture.  But because they all sit and dine together there are under the table deals; which is why they find it difficult to address these issues; and the stock market will still continue to have problems if the trend is not checked.

Let me give another example, I advised people before the last market meltdown to go and take their money out and it came to past.

Now, if I sit down and I look at what is happening in the market, what I will tell people is that returns on investment of most of the quoted companies do not reflect the actual health of these companies.

In a lot of companies if you consider the issue of corporate governance and excessiveness; like banks buying expensive Jeeps for their top executives, and the kind of salaries they pay. If those things are netted back as return on investment, investors will get more dividends by the virtue of their investments. So what you have seen now is like managing directors of banks, and other quoted companies selling companies assets to themselves at below the market price, floating companies and out sourcing jobs to themselves and not allowing best practice.

Corruption is not only in the public sector, I can tell you there are more corruption in the private sector than you have in the public sector, so if all these things are taken care of there will be a better return on investment for the investors and those are the issues and things that I expect the stock exchange and the Securities and Exchange Commission (SEC) to be looking at.

If companies declare results announcing their turnover and profit, people should ask questions. How much are these firms spending averagely? It’s like a budget, there should be a budget. For instance we have a bank with 1000 staff and the bank says its overhead is about 10 billion Naira. I want to ask, how much does that come to per staff? If these people own their business, will they run it like this?

We must start insisting now that a director of a bank or any quoted company must have substantial interest in the company so that if that company is run down, the person will know that he or she is also going down.

Again, there must be a minimum period given to directors of companies before they can sell their shares. The companies that did Private Placement, when they list, their directors should not be allowed to sell more than 25% of their shares in that company within the first 5 years then; another 25% in another 5 years. Regulators should make sure that in another 15 years or thereabout, they own a minimum of so much. This will ensure that they will not run down the company. However, if they can sell, what most of them do is that they sellout when the share price is high and they make their profit and leave.

You will discover that when these companies were been listed, the directors have for instance 20% and in another 2 years they may have less than 5% with this trend they now have nothing at stake in the company. These are the issues that should come into corporate governance because what is left is that there are just professional managers and not investors managers; which is the reason they don’t have the interest of the company at heart. A man who has nothing at stake does not care what happens. It’s a very simple thing. If I don’t have shares in a company, it doesn’t matter to me if the company is properly run or not. In the event of the collapse of the company, they immediately withdraw and move to another place. We should start looking at this issue from a very pragmatic perspective.

The NSE being a Monopoly

Let me give you an example of the way things run in Nigeria, let’s look at NIPOST, they will tell you their revenue increased by 100% over the year, but the question you should ask yourself is what is the value of the increase in revenue?. Is it due to an increase in their customer services or an increase in the number of customers they are serving? NIPOST recently increased there charges meanwhile this is an organisation that once encouraged people to take more of post  office boxes, tomorrow they will say revenue has gone up due to inflation and increase in cost of their services; but not because of increase in the number of people patronising them.

The NSE is still a monopoly that’s why we need more Exchanges, even the Stockbrokers find it difficult to talk to the people in the Board of the NSE, and meanwhile the Stockbrokers are the owners of the Nigerian Stock Exchange. Now when the owner find it difficult to talk to his own employee there is a problem or is it because they don’t have an alternative where they can move to.

The Abuja Securities & Commodities Exchange

Yes, the Abuja Securities & Commodities Exchange, was suppose to be Abuja Stock Exchange, but just because of politics that’s why they turned it into a Commodities Exchange and it’s not working in my opinion. I even told them from the beginning that it might not work with the way it was planned. But we actually need an alternate stock exchange. It’s not only in Nigeria that it’s happening.

Anything that promotes monopoly does not bring good quality. If there is an alternative and the cost of listing on it is cheaper, a lot of companies will go and list on it. If they have better governance capacity I will rather go there even if the money is higher. If am sure of the transparency, I will go there. How many stock exchanges do you have in the US? What is the population of Nigeria? Why should we have only one stock exchange? Look if I have a company and the requirement for listing is less than what we have at the NSE and I have the capacity, won’t I go to that one if it’s cheaper for me? Why must we have only one Exchange and don’t have an alternative. It doesn’t make sense. And the NSE is seen as the hallmark of private sector investment. And private sector investment is all about competition, so why are they afraid of competition?

FACTS CHECK:

“The Abuja Securities and Commodities Exchange (ASCE) is one of the two principal stock exchanges in Nigeria. It is located in Abuja, the country’s capital, and it was founded in 1998.

The ASCE is primarily involved with the trading of commodities such as maize, sorghum and millet, as opposed to trading in securities such as bonds and company stock.”

(Source: Wikipedia)

Still on the planned data sales

Like I said earlier there is a difference in a commercial transaction and a non commercial transaction. Once you are selling a product, the laws and regulations that deals with commerce automatically becomes applicable either expressly or implied by implication.

On the implied, I will tell you the terms for a commercial transaction are that what product you are selling is fit for use. There is an implied implication. So, if the Nigeria Stock Exchange now starts selling data then that data is implied to be fit for that purpose and must be relied on for the reason which it’s intended. If you send me a product you cannot put a disclaimer.

Is like a lawyer, if I write an article and it’s been published for free I can put a disclaimer that this article is not or does not guarantee or is not alternative to a legal advice. You are advised to consult a lawyer. But if you commission me to say Bisi Iyaniwura do a legal opinion on a certain matter and I do that, if I put a disclaimer, will you pay me? You will not pay me because what you are paying for is my professionalism.

You can as well go to the market and get anybody to do it and put a disclaimer. These are some of the issues the NSE should look at. A commercial transaction is strictly a commercial transaction. And in law there is an implication that what is intended is a legal relationship. Once money exchange hands it’s intended that a legal relationship is implied and expected to follow from it.

So, if you sell me a product and I say the product is not good, my friend you are in trouble. I can sue you for it. It’s like walking into a car showroom and dealers assure you the car you want is a 6 capacity engine and you buy the car and take it home only to find out that it’s actually a 4 capacity engine. You have a right to sue the person. The NSE management has to think very well on what are the implications and what they intend to achieve as regards the subject.

They can be more transparent in the way they do things. It’s a market. The NSE is like every market. The normal market you see outside does not have a door so why must the NSE want to create one for its own market. They should look at the definition of a market. It’s a public place where people meet to buy and sell.

END