With more firms expected to seek equity funding and a fast-growing pool of pension funds, experts say the need to reposition the capital market and further strengthen the Nigerian Stock Exchange is imperative, SIMON EJEMBI writes

It is widely agreed among analysts that the reforms in the capital market since the financial crisis have been helpful in increasing transparency and investor confidence, thereby getting the market to play a more significant role in the economy than ever before.

At the Nigerian Stock Exchange, which is the most developed platform in the country’s capital market, it has been a story of progress in its mission to promote capital formation in Nigeria by providing issuers and investors with a responsive, fair and efficient securities market using cutting edge technology, and providing local and foreign investors access to the Nigerian securities market in an environment of strong regulatory framework and reliable trading and settlement systems.

The NSE’s Chief Executive Officer, Mr. Oscar Onyema, said, in the Exchange’s annual report for 2013, “Today, the Exchange has a more attractive portfolio of services and products, although investors maintain a strong appetite for equities. Our equities market closed the year with its strongest performance since 2008, and was the biggest contributor to revenue, accounting for 99 per cent of the value traded during the year.”

Onyema, who said the success of the cash equities market was driven by investors taking advantage of relatively undervalued stocks listed on the bourse, added, “In the past year, the Exchange facilitated the raising of N286.76bn ($1.79bn) in capital, despite admitting only three new companies to our Main Board.

“As the group works to shift business’ overreliance on bank financing, we have committed resources to setting up a structure to enable the Nigerian Stock Exchange play a bigger role in funding the growth of the real economy.”

While acknowledging the progress made at the Exchange, experts stress that the market has a long way to go in order to play a bigger role in funding the growth of the economy.

Unlike the regulatory and structural reforms, which have been mostly driven by the leadership of the Securities and Exchange Commission and the Nigerian Stock Exchange, the next phase of the Exchange’s growth, according to experts, requires collective effort.

Specific steps that have to be taken to develop a world class exchange were the focus of the 2014 Annual Business Luncheon of the Capital Market Solicitors Association, which was held in Lagos recently.

At the event, a panel comprising the Chief Executive Officer, Seplat Petroleum Development Company Plc, Mr. Austin Avuru; CEO, RMB West Africa, Mr. Michael Larbie; CEO, BGL Plc and President, Chartered Institute of Stockbrokers, Mr. Albert Okumagba; and CEO AIICO Pension Managers, Mr. Eguarekhide Longe, spoke on ways the Exchange could achieve its goals.

In his remarks, Avuru stressed that with the privatisation programme and the deepening of the private sector, the reorganisation of the Exchange was timely.

Avuru, who said confidence in the stock exchange reflected confidence in the economy of a country, said, “With the gradual withdrawal of government from the management of companies, we are beginning to see a deepening of the private sector in Nigeria. If we had begun to deepen the private sector without a credible stock exchange it would have been a horrible mismatch.”

For instance, he said the acquisition of assets in the oil and gas sector in the past five year alone amounted to over $15bn.

This, he explained, meant Nigerian companies had injected at least $15bn in acquiring oil and gas assets and power assets with the bulk of the funds borrowed.

He added, “What will naturally happen is that when these people that have injected so much money, so much debt funding into these assets begin to operate these assets and try to make money, they will necessary look for equity funding to moderate the level of debt.”

Citing the role the Exchange played when the Central Bank of Nigeria forced banks to recapitalise, the Seplat CEO said it was vital for the Exchange to be strengthened.

He said, “The stock exchange is where the banks raised most of the funds, which is probably why outside Dangote, the banks account for almost half of the stock exchange.

With the privatisation of the power firms, we expect more players from the oil and gas sector to come to the market.”

Consequently, and due to the huge funds borrowed to acquire the assets and other changes in the private sector, he stressed that the input of the stock exchange remained paramount.

To have that input, Avuru said, “It is important not just to praise those running the transformation of the capital market, it is in our own interest to ensure that this transformation and the growth that would come with it is neither jeopardised or derailed because it is in our nature in Nigeria that when we build, it is possible for the locust to come in and destroy it.

“It is important that we maintain this growth otherwise all those that are putting so much funds, especially debt funds into companies in the hope that equity will follow and all those who are putting equity funding into companies and trust SEC and the NSE that the companies have credibility would be in trouble if the right structures are not in place.”

For his part, Larbie highlighted the need to deepen the market.

While noting that the progress made in that regards so far “is very good to see”, he lamented the poor market capitalisation to GDP ratio.

He said, “I also want to put this in perspective. The market capitalisation of the stock exchange as a percentage of the GDP is only about 16 per cent to 15 per cent as compared to about a 110 per cent of market cap to GDP ratio in South Africa. In most western countries it is over 200 per cent.”

To better the situation, Larbie, who observed that most telecoms companies in the country were not listed, said there was therefore the need to boost confidence in the market and to get more companies to list.

“In summary, I think these bold and broad initiatives of the Exchange send a strong signal to potential companies that are going to list,” he said, adding that the Exchange is ready for growth.

Okumagba, who like Avuru, expressed optimism that more companies in the oil and gas segment and the distribution companies would be listed on the Exchange, said there was room for growth in terms of professionalism in the market. “What we would do is to improve the quality of the people who operate the platform by making sure that they have the requisite training,” he said.

Like Larbie, he expressed optimism that the goals of the Exchange were all achievable in the medium to long-term.

“I think it is something that we all have to sustain,” he said.

So much has been said about the need for a greater percentage of the over N4tn pension fund to be invested in equities, but Longe, who said he understood what the market wanted from the pension funds said it was important to get it right in terms of transparency first.

He said, “It is very critical to understand that the first thing about any business environment is transparency. Without transparency we are wasting our time. I think that the most important thing is that we put all these things in place. After we get the technology right and we put corporate governance in the right place, we then need to determine how we take off from where we are.”

He also said it was important to understand that ‘pension’ was not about development financing, adding that more products and more investment opportunities had to be created.

“As a pension manager, we are not supposed to go and develop products. Everybody is saying that there is N4.4tn sitting somewhere… and the fund is just put in government bonds. We need to understand that pension is not development financing,” he said.

“One of the critical things we have found in the pension industry is that the spirit is willing but the investments are not there. We are looking for blockbuster investments that fit our risk profile.”

Unfortunately for the stock market and for the economy, Longe said such investments had been hard to come across.

“My problem with all that has been developed in the stock market today is that we have put the structures in place, we are developing as we should, and we are getting there but we sometimes do not realise that it would take a while for things to gel as they should.”

Longe also said more efforts had to be made to get investors who exited the market following the financial crisis and new investors into the market as market participation was very low.

The Capital Market Committee recently disclosed that it was working on a 10-year master plan to ensure that these and other issues in the market are addressed and that the Nigerian capital market becomes the gateway to other markets.

The NSE also has its strategic plan, with Onyema saying recently, “We want to be fully demutualised, for-profit, listed with a global and local shareholder base. We want strong partnerships and co-operation with leading global exchange operators, operationally efficient, competitive, with robust infrastructure and systems. We also want to see frequent product innovation including new asset classes and data services.”

Analysts say they are hopeful the CMC master plan and other initiatives will indeed be a major boost to the market when finalised.

Punch