A Future Foretold - NSE and the Challenge of Self Regulation -

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“The Regulators of the NCM i.e. the SEC and NSE are almost silent about its biggest apparent failure, just as public attention on the failure is at its greatest.”
 
 
 
 
 
 
NSE and the Challenge of Self Regulation
 
It’s often said that a country deserves the type of leaders it get. This is apt in the case of the Nigerian Stock Exchange.
 
Cutting through the chase, it is a well known fact that we have a ‘balance of terror’ situation in the market. The NSE is able to stalemate the SEC at any given point in time through a function of its history and the influence of its principals and market clout.
 
The game has been on for a while and we discussed extensively at the confidential market briefing we held on August 3, 2009 at the Moorehouse, Hotel Sofitel in the wake of the NSE Council presidency crisis.
 
The Securities & Exchange Commission’s regulatory inertia and lack of will-power, perhaps owing to the manner in which its leaders have emerged over the years (where some have performed better than others due largely to their business acumen, political leaning and individual clout) has resulted in a situation in which the Nigerian Stock Exchange, although a self-regulatory organisation can blindside the SEC.
 
The SEC has spent most almost all of its 30 years existence trying to tame the larger-than-life existence and image of the NSE. But the SEC has always ended up one step or several steps behind the Stock Exchange.
 
History testifies to the fact that the SEC will prosper as a regulatory body if it stops chasing the shadows of the NSE and faces its core functions as provided under the enabling law.
 
 
Are we truly a market and nation of laws?
 
We answer in the affirmative. We are this and much more.
 
We are a people, whom when confronted with tyranny and bad governance have worked hard to achieve changes painfully and slowly but doggedly and with conviction.
 
It is that Nigerian spirit that motivates us to believe that action will be taken by all concerned including the stakeholders for whom this report is equally available.
 
The powers of a self-regulatory organisation not limited by shares or publicly owned could be enormous in a country such as Nigeria. 
Of course, its common knowledge that self-regulation is not an easy task. From simple rules against over-speeding to obeying traffic lights to zebra crossing, and so on. 
 
Self-regulation was one of the pillars of the BASLE 2 Capital Accord that asks banks to challenge its own actions and inactions. But the events of the past two years from United States to United Kingdom, from Japan to Nigeria have shown that self-regulation of market institutions require constant regulation from the apex regulatory body, market analysts and the government.
 
 
NSE and the Market – Benefits of History
 
The challenge of self-regulation at the Nigerian Stock Exchange was borne of the preamble stated above. The NSE itself was a creation of the CBN.
 
The NSE, we believe would like to work closely with the SEC and perhaps retain some level of influence of the regulator. The NSE however operates and communicates a position that suggests it believes the SEC was hell-bent on pulling it down at all cost rather than grow and develop the capital market. It has thus dug in its heels and raise d a firewall in its relationship with the regulator.
 
This is a strong conclusion or assumption to make but the evidence all point to the same conclusions.
 
The past twenty year history of constant ‘warfare’ between the SEC and the NSE, especially during the tenures of former SEC Chiefs, Late George Akamiokhor and Mallam Suleyman Ndanusa come readily to mind. Simply put, both institutions hardly had a time of peace and quiet to handle the principal interest of investors’ protection and development.
 
The position of both the SEC and NSE as partners in progress has also been worsened by the interference of the political class, during the military heydays as well as under the current civilian democratic dispensation. 
 
The government created the SEC just like every other parastatal - with little or no infrastructure and funding to do the job. The government and its paramours coveted the shares of government institutions, poked their nose into who gets on the Council of the Stock Exchange and SEC’s Board - and practically make life miserable for the NSE, bogged down the SEC with bureaucracy and retains the levers to tele-guide it by claiming ‘due process’ and ‘regard to protocols’ to such an extent that it has almost ruined the market place.
 
The boom in the activities of the capital market since 1999 after the advent of the current political dispensation has lent credence to the fact that the government, if unchecked, is a spoil-sport.
 
  
 
NSE and Stockbrokers
 
Let the truth be told, there is a need to review this relationship from a holistic perspective.
 
The concerns here are as follows:
*         The absence of a transparency in the information flow through the NSE website to enable investors know what is going on, real time is not reflective of an exchange that we seek to be.
*         The NSE rules on insider trading are not available for public consumption. These rules ought to be set and reviewed by the SEC but a forward looking exchange would seize the initiative to advance an advisory to SEC on the feedback from infractions (reported and otherwise) that have been brought before it, which often is not available to the SEC.
*         There are no protections for those who speak up against the system – not to be ignored is the unwritten code at the exchange that to speak up against the DG or the exchange is a crime. We however done so over the years when considered critical without any punitive measure taken against us till now. Rather, we have enjoined a rigour in the discourse generated and thus lies the problem of perception or ‘cloud of fear’ created which needs to be removed.
*         The level of infractions in the market has grown over the years and the means of resolution has done little to promote the building of an institution as against that of personal responsibility. This is seen in the ‘role’ or ‘interference’ played by the current House of Representatives Chairman in a number of issues which suggest an overreaching of the oversight function the house has.
*         The recapitalisation of the market must now be revisited and decided upon in favour of an increased capital requirement. The arguments before was that stock broking firms did not need capital to conduct their business. The current crisis has revealed far more reasons and justification to take more than a closer look at the operational structure, capital and capacity of these firms as a vehicle of wealth creation and growth in the country. Key issues immediately come to mind:
o   Increased transparency and disclosure requirements – The annual financial statements of brokerage firms and other capital market operators are not verified, scrutinised or audited by the NSE and SEC independent examiners.
o   The stock exchange conducts visits to brokerage firms but, as we found ion the case of Transglobe and so many other firms – some of these firms do not even have audited accounts or carry qualified accounts for upwards of two to three years without any sanction being imposed on them.
o   The level of credit that can be expected to undertake must be pegged relative to their capital to stem the current situation where a stock broker took on an exposure of N88bn under whatever guise. It was simply unethical for the SEC/NSE to find themselves in a position where they could not have ascertained what was going on.
o   It is high time we democratised the operations of the stock broking business to allow individuals to trade with brokers of choice through an electronic system that guarantees the brokers their commissions.
o   The sanctions and reprimand on erring stockbrokers have been sidestepped on a number of occasions. This cannot be a good indicator of the market.
o   The role of stockbrokers in the price movements of the stocks of certain banks and quoted companies must be thoroughly investigated to identify why this continues unabated. The disclosure by the NSE in its annual accounts that the NSE has bought software to allow it track decisions, actions and trends by brokers is welcome. This should equally be made available to the SEC to create a comparative evidence platform should such allegations occur.
*         The number of brokers and their spread is not a reflection of our growth but that of our greed. The case for the promotion of an industry wide consolidation amongst firms has been made. We call on the NSE to act accordingly.
 
Self Regulation – Facing the Facts
 
All of the above notwithstanding, the Nigerian Stock Exchange has issues to face regarding its own internal self-regulation processes. The lacuna therein has been seized by the public and sometimes by the SEC to lash at the almost 50-year old stock exchange.
 
First, we must acknowledge and express our debt of gratitude for all members of management and council of the stock exchange for the great heights they have brought the market. This is no mean achievements and it would not be an attempt to rewrite history or praise-singing, if we say that the country has benefited from their industry. The NSE and its officers should be praised for surmounting all odds to have become the centre of capitalism in Nigeria, even in the face of personal adversities.
 
Yet in this achievement lies the paradox of all heroes – soon, enough they would have to fade away lest their success becomes the Achilles heels of their downfall. They do not have to do anything wrong afresh for the standards they set must be sustained and raised beyond that at which they are now tired.
 
This is the irony of life and nowhere is it truer than in this market. Longevity is not the goal, achievement and transition is the name of the game.
 
The clamour therefore for the DG, NSE exit must therefore reflect the sophistication she brought into the market for which we would hold her accountable, albeit not through a mob trial or on spurious charges.
 
Effective self-regulation in a country where lawlessness is the order of the day from top to bottom is surely a challenge. As faulty as the processes were, as weak as Ndi would admit her management and council had been in the face of political pressures and self-interest; and as humanly possible, the Nigerian Stock Exchange has grown from a market worth just N16.846million before the Civil War in 1966 to more than N12.0trillion at the peak of 2007, a period of about forty years.
 
Many issues have tried the ‘soul’ of the Nigerian Stock Exchange as an institution, but the Transcorp affair is in a class of its own. In the current matter of bank bad creditors, Transcorp Plc’s and the name of its Chairman, Professor Ndi Okereke-Onyuike has come to the fore. We dealt with this briefly in the last section but now explore it as it relates to the NSE.
 
 
The Transcorp Affair – Case Study of Position and Reality
 
A few of our reports and comments on Transcorp and indeed the DG, NSE as far back as 2007 and up till 2008 are provided hereunder to demonstrate the point that this entity is worth a lot more dead than alive! The soul of its creation has left the vessel carrying its physical frame. A good end must be found to this ‘problem’.

The Initial Public Offering of Transnational Corporation (Nigeria ...
http://www.proshareng.com/admin/upload/reports/Transcorp%20White%20Paper%20-%20Jan%202007.pdf

 Transcorp: At What Price?
 
 Transcorp: Matters Arising

 Transcorp and Martial Law

 Transcorp Nigeria Plc. and Tom Iseghohi
http://www.proshareng.com/articles/singleNews.php?id=5

 

Understanding the SEC directives

 

The full suspension placed on the shares of the five banks viz: Afribank, Finbank, Intercontinental, Union and Oceanic) was based on precedent and designed to protect the investors. Both SEC and the NSE have almost always acted jointly to prevent a run on the shares of any quoted companies, including banks whose problems became so controversial and investigative in nature. Examples of these include: African Petroleum, Wema Bank, Cadbury, Transcorp etc. The action of the SEC to confirm the NSE full suspension on the shares of the five banks was therefore commendable.
 
Dissecting the SEC August 19 directive further however, the SEC order to the NSE directing it to suspend any member of the Council who were affected by the CBN action in the five banks pending the conclusion of investigations of allegations, raise a number of fundamental questions and issues.
 
First, the Securities & Exchange Commission (SEC) is a bystander on how the members of Council of the Stock Exchange are chosen or appointed. 
 
Under what authority therefore did the SEC order the immediate suspension of any member of the NSE Council involved in the CBN-sanctioned five banks?
 
If any member of the NSE Council is guilty of any civil or criminal matter, such individual are brought into the full extent of the applicable law in his or her personal capacity. The council, despite all its challenges and limitations comprise of the icons of our society and we should hesitate a moment when taking action.
 
For example, in the instance of the prosecution of the Late MKO Abiola on allegations of treason against the state/government of Nigeria on the matter of the botched June 12, 1993 general elections, the SEC did not call for the suspension nor removal of Chief M. K. O. Abiola, FCA who at the time was the sitting President of the NSE. In the specific case of Mr. Erastus Akingbola, the displaced Chief Executive of Intercontinental Bank, his service on the Council of the NSE was honorary and not representative of his commercial bank.
 
We acknowledge the thin line threaded here between personal and official capacity but an advisory and not a directive would have been sufficient from SEC. Indeed, the council would have, on their own, met with Erastus Akingbola and discussed on why he has to ‘step aside’ for the sake of the overall market, albeit; subject to an indictment by the court of law or in the absence of that, a letter from the CBN.
 
This advisory would and perhaps be rejected by Erastus Akingbola who may cite the recent history of the stock exchange through the election of Aliko Dangote as its president on allegations and not indictment. This was the argument made then, and echoed by most analysts who were concerned about the unnecessary heating up of the market.
 
Suffice to say at the moment that the CBN’s removal of the CEOs and executive directors of the ‘August Five’ has nothing to do with insider abuse or share price manipulation yet, one on which the SEC has full jurisdiction. 
 
The Five bank executives including Erastus Akingbola were accused of granting excessive loans, weak corporate governance and exceeding the expanded discount window. These are professional banking practice misbehaviours as alleged by their regulator. 
 
We recall that no advisory was issued by SEC on this development. Either way, the NSE should self –regulate itself here as a matter of decency. There is a limit to defending what cannot be used as a standard of conduct. Rather the NSE should seek to raise standards of decorum, conduct and responsibility.
 
 
The more cogent explanation for Erastus Akingbola’s removal and not even suspension from the council of the exchange can be located in the CBN’s rule that ‘all persons removed/sacked by the apex banking regulator for unprofessional conduct may not serve in any capacity in the financial services sector’.
 
SEC and indeed the NSE council are therefore advised to seek clarification from CBN on the basis on which its orders were given and the extent of its application beyond the immediate purpose for which it issued the order.
 
Our guess is that, if the national award bequeathed on him as well as others are not rescinded by the Federal Government yet, we should tarry a while for an advisory from the Attorney general or/and CBN on the matter.
 
The SEC’s directive of suspension could therefore have been, at best, advisory in nature, written directly to the Council of the NSE and not celebrated on the pages of the national newspapers.
 

 

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