The Historical Evolution of the Nigerian Capital Market -
October 31, 2011 / Author - Dr. ESOSA Bob OSAZE
From the Book: Capital Markets – African & Global by Dr. ESOSA Bob OSAZE, January 2007, Published by The Book House Company – ISBN 9789780-801922; pages 55- 63 (Chapter 4).
The origins of the Nigerian Capital Market date back to colonial times when the British Government ruling Nigeria at the time sought funds for running the local administration. Most these funds derived from agriculture, produce marketing and solid mineral mining. Discovering that these sources were inadequate to meet its growing financial obligations, the colonial administration decided to expand its revenue base by reforming the system of revenue mobilization, taxation and other payments. It also saw the need to raise funds from public sector to cover temporary shortfalls in funds availability. Hence, it found it necessary to establish a financial system by setting up the basic infrastructure for its take off pending the development of an organized private sector.
According to Odife (2000:6), the first step in this direction was to secure the necessary finance for the development of this infrastructure and long-term capital project. This it did in 1946 when it promulgated the 1946 10-year plan Local Loan Ordinance for the floatation of the first N300,000, 3% Government stock 1956/61 with its management vested on the Accountant-General.
In 1957, the government and Other Securities (Local Trustees Powers) Acts was enacted. This law specified the types of securities in which trust funds may be invested. It also clearly defined the powers and responsibilities of trustees. In addition, the colonial government set up the Professor Barback committee to examine the ways and means of fostering a share market in Nigeria. Part of the terms of reference of this committee included the possibility of establishing a capital market in Nigeria. The committee recommended, among others, the creation of facilities for dealing in shares , the establishment of rules regulating share transfer and measures for encouraging savings and issues of securities of government and other organizations.
By the end of the year (1957), the colonial administration had promulgated the General Loan and Stock Act and the Local Loan (Registered Stock and Securities) Act on the recommendations of the Barback Committee.
In 1958, the Central Bank of Nigerian was established through the Central Bank of Nigeria Act of 1958. The purpose of these various legislations was to establish the legal and infrastructural frame work for the take off of a viable securities/capital market in Nigeria. As a follow up to these laws, the colonial administration issued the first N2 million Federation of Nigeria Development Loan Stock in May 1959.
In 1959, it also enacted the Statutory Corporations (Guarantee of Loans) Act. In April 1960, the Central Bank of Nigeria issued the first Nigerian Treasury Bills which were meant to provide an avenue for the investment of short-term liquid funds in Nigeria and assist in providing government with funds pending receipt of its own revenues.
On September 15, 1960, the Lagos Stock Exchange was incorporated as a private limited liability company, limited by guarantee under the provisions of the Lagos Stock Exchange Act 1960. The Lagos Stock Exchange Act 1960 conferred monopoly powers on it members to deal in securities granted quotation on the Exchange. It also allowed the Central Bank to Deal directly in securities. On June 5, 1961, the Lagos Stock Exchange opened for business with 19 listed securities made up of 3 equities, 6 Federal Government Bonds and 10 industrial loans.
In 1961, “the National Provident Fund was established as a compulsory contributory savings scheme aimed at providing some protection to contributors at old age, invalidity or temporary loss of employment”. The enabling Act required the Fund to invest its surplus funds only in securities in Nigeria authorized by the Trustee Investment Acts of 1957 and 1962 and restricted to securities created or issued by or on behalf of the government of the federation (SEC, 1999:49). By 1962, the Exchange Control Act and Trustees Investment Act were enacted. The Capital Issues Committee was also constituted to examine and recommend the establishment of an apex monitoring institution for the growing Nigerian Capital Market. In 1966, the Borrowings by public Bodies Act was enacted. This was followed in 1968 by the Companies Decree and the Banking Decree in 1969. In 1972, the Nigerian Enterprises Promotion Decree was promulgated which was followed in 1963 by the Capital Issues Commission Decree. The Capital Issue Committee thus became the apex regulatory body for the Nigeria Capital Market. By this decree, it was empowered to determine the price and timing of new issues of securities through offer for sale or for subscription.
In 1977, the name of the Lagos Stock Exchange was changed to the Nigerian Stock Exchange by the Indigenization Decree of 1977 followed the recommendations of the Industrial Enterprises Panel (Adeosun Panel) of 1975 that branch exchanges should be established. As a result, six new trading floors of the Nigerian Stock Exchange were created in Kaduna (1978), Port Harcourt (1980), Kano (1989), Onitsha (1990) and Yola (2002). On April 1, 1978, the Securities and Exchange Decree was promulgated to replace the Capital Issues Commission and expand the scope of its activities following the recommendations of the Financial System Review Committee (Okigbo Committee) of 1976. The Committee also recommended the establishment of multiple exchanges and the approval of share allotments by the Securities and Exchange Commission. In 1978, the first state government revenue bond was floated by the defunct Bendel State of Nigeria. The N20 million 7% first Bendel State Loan was floated to finance the state’s housing development programme. On April 5, 1985, the Second-tier Securities Market (SSM) of the Nigerian Stock Exchange was established to cater for the requirements of small and medium scale enterprise.
It essentially diluted the listing requirements of this category of companies to encourage them to seek quotation and thereby further broaden and deepen the market. In 1987, the Nigerian Enterprises Promotion Decree 34 (Issue of non-voting equity shares) was promulgated permitting public companies quoted on the Nigerian Stock Exchange to issue through the Exchange, non-voting paid-up shares for the subscription of persons whether citizens of Nigeria or not and whether resident in Nigeria.
In 1988, the functions of the Securities and Exchange Commission were further expanded by Decree 29 of 1988 to include the review and approval of all mergers, acquisition and combinations between or among companies. In 1988 also, the Privatization and Commercialization Decree 25 was promulgated. This Decree provided for the privatization of some enterprises in which the Federal Government of Nigeria has equity interest and the commercialization of some Federal Government wholly-owned enterprises. The exercise that ensued from this Decree brought more companies to the Nigerian Stock Exchange whose shares were thus listed.
Similarly, in 1958, Debt Conversion was officially adopted by the Central Bank of Nigeria and a guideline on the debt conversion programme published. The Nigerian Deposit Insurance Corporation was also established in 1988 to monitor the performance of the banking sector and insure depositors against possible bank distress and consequent loss of funds.
In 1989, the Companies and Allied Matters Act (CAMA 1990) was enacted to regulate the incorporation, corporations and activities of all bodies in Nigeria.
Specifically, Sections 541-623 cover “dealings in the securities of companies and vests its administration on the Corporate Affairs Commission. Indeed, the CAMA, 1990 is a comprehensive securities law for the country as it deals with a wide range of issues such as invitation of the public to securities offer, registration of securities, prospectus, allotment, unit trusts, reconstructions, mergers and takeover as well as insider trading” (SEC< 1990:53).
By 1991, following the spate of large scale distress in the financial system, the Banks and Other Financial Institutions Decree 25 (BOFID), 1991was promulgated to monitor the operations of the banking and financial sector and reduce the tide of distress.
In 1991, the Interministerial Committee on the Nigerian Capital Market recommended the discontinuation of official pricing of securities as well as the establishment of more stock exchanges.
The Central Bank of Nigeria Decree of 1991 was also promulgated; this decree expanded the functions of the Central Bank granting it greater autonomy in monetary policy and repealed the Central Bank of Nigeria Act 1958.
In 1992, the first municipal bond in the Nigerian Capital was floated by the Lagos Island Local Government. The first Lagos Island Local Government Floating Rate Revenue Bond N100 million was floated to finance the Sura Shopping Complex in Lagos. The coupon rate was 24.75%.
In 1992, The Chartered Institute of Stockbrokers Decree was promulgated which granted the Institute of Stockbrokers powers to charter stockbrokers and dealers, conduct examination for brokers and genrally oversee the conduct of its members in the interest of the orderly development of the capital market.
On July 29, 1992, the Central Securities Clearing System was incorporated as the official central clearing and depository of the Nigeria Stock Exchange. The CSCS was incorporated to implement a computerized Stock Exchange Management System (SEMS) which emphasizes the immobilization of share certificate in a Central Depository.
In 1993, the federal government, through its budgets presentation, formally deregulated the capital market, thus ending the official pricing, timing and allotment of securities issues. These functions were passed on to the issuing houses to perform.
In 1993, the second Kaduna State Revenue Trust Fund (NSITF) was created by decree to replace the National Provident Fund. By this Act, the scope of activities of the National Provident Fund was expanded and the National Provident Fund Act thereby repealed.
In 1995, the Nigerian Investment Promotion Act No.16 of 1995 was enacted to guarantee the ease of transfer of funds through authorized dealers. It stipulated the funds that can be transferred out by foreign investors to include:
(a)Dividends and profits (net of taxes) attributable investments;
(b)Payment in respect of loan servicing where a foreign loan has been obtained;
(c)The remittance of proceeds (net of taxes) and other obligations in the event of a sale or liquidation of investments or any interest attributable to the investor.
In 1995, the Exchange Control Act of 1962 and the Nigerian Enterprises Promotion Decree of 1989 were abrogated to promote greater foreign investment in Nigeria. In 1995, the Nigerian Investment Promotion Council was established by Decree 16 of 1995 to promote industrial growth and development through the attraction of foreign capital and encouragement of domestic savings and investment.
On March 19, 1996, the Federal Government of Nigeria appointed the panel on the Review of the Nigerian Capital Market (The Odife Panel). Members of the Panel included Chief Dennis Odife (Chairman), Otunba A. O. Ogunde, Dr. Ahmed Abdullahi, Alhaji Baba Danbappa, Prince Lekan Fadina (Members), Mr. O. G. Abiose and Mrs M. A. Lashmann (Secretaries). The terms of reference of the Panel were:
To review the history, structure, conduct and performance of the Nigerian Capital Market and its contributions to the Nigerian economic development;
To examine the objectives for the establishment of the Nigerian Capital Market and their continued relevance to Nigeria’s contemporary and prospective needs and aspirations, and make appropriate recommendations;
To anticipate the likely direction of evolution of the Nigerian economy in the next century and project how the capital market should develop to respond to the needs of the economy;
To analytically examine the present state of the Nigerian Capital Market and formulate a concise framework geared towards the creation of a conductive atmosphere for the orderly growth and development of the Market;
To access the continued adequacy of the structure, law , institutions and overall framework of the capital marketing in the light of the evolution of the Nigerian economy and of recent developments in the money market, as well as of the needs of the economy as the nation is approaching the twenty-first century;
To indentify and itemize all laws and regulations prescribing the conduct of capital market activities and institutions, and to assess their continued relevance;
To codify all laws and regulations prescribing capital market activities, behavior and institutions into one comprehensive law applicable to all;
To recommend measures to strengthen the laws, structures, the institutions and the frame work (including manpower training) of the capital market to make it more responsive to the needs of all economic units, be they at the federal, state, local government or village level;
To examine the structure of the Nigerian Stock Exchange and its branches and their adequacy in the context of the Federal Government Privatization Programme and policy of ensuring widespread shareholding, and make appropriate recommendations;
To review the role of regulatory and or supervisory agencies and the adequacy of the regulatory/supervisory oversight process, including the number and adequacy of the self regulatory organizations established for the purpose;
To recommend, it the light of the findings above, precautionary measures to be put in place and appropriate steps to be taken to ensure that Nigerian Capital Market functions optimally henceforth and that it becomes continuously alive to the needs of both local and foreign investors;
To consider the desirability or otherwise of setting up an appropriate informal judicial forum within the capital market for the prompt determination of any questions, dispute or controversy that may arise between the institutions in the Nigerian Capital Market, inter se, or market operators generally;
To make suggestions and recommend appropriate incentives necessary to be injected from time to time by any government of the Federation into the Nigerian Capital Market to ensure the attainment of the targeted growth indices between investments and capital market development; and
To recommend such other actions as may be considered desirable at this stage having regard to the present policy thrust of the federal government in the sphere of capital market development.
The panel concluded its assignment and submitted its final report dated September 24, 1996 to the Honourable Minister of Finance on Thursday October 10, 1996. The report of the Panel culminated in the promulgation of the Investment and Securities Act 1999.
On June 26, 1996, the African Capital Market Forum was formally launched in Accra, Ghana to:
Promote the establishment of formal capital market in Africa;
Accelerate the development of existing markets;
Promote cooperation among African Capital Market Institution; and
Provide a forum for the exchange of ideas among African Capital Market Institutions.
On June 17, 1998, the Abuja Stock Exchange (ASE) was incorporated as a Public Limited Liability Company as the second bourse in Nigeria after the Nigerian Stock Exchange.
On July 13, 1998, Rights Issues were permitted for trading as the first derivative instrument in the Nigerian Stock Market.
The Investment and Securities Act No.45, 1995 was promulgated into law with a commencement date of May 26, 1999. The Act repealed the Securities and Exchange Commission Decree of 1998, the Lagos Stock Exchange Act of 1960, the Nigerian Enterprise Promotion (Issues of Non-Voting Equity Shares) Decree of 1990, Part XVII of the Companies and Allied Matters Act of 1990, Sections 3(d) of the capital Gains Act and Section 21 (2) of the Nigerian Investment Promotion Decree of 1995. The Act became the basic legislation guiding the conduct and operations of the Nigerian Capital Market.
On April 1999, the Automatic Trading System was introduced in the Nigerian Stock Market to replace the open outcry method. The Automated Trading System is a security trading arrangement whereby transactions on the stock exchange are achieved through a network of computers operating on-line, real-time, automatically. This increased settlement efficiency from T+2 weeks to T+3 days.
In 1998, the first foreign stock, M-NET Supersport of South Africa, was listed on the Nigerian Stock Exchange.
In 2000, the Edo State Government issued N1 billion 7 years floating rate bond to finance its Ogba Riverside Housing Project. The initial size of the bond was N5000 million but it was oversubscribed by 103% which led to the absorption of the excess through the issuance of a supplementary prospectus. The 2000/06 bond bore a 21% coupon rate.
In 2000, the Delta State Government raised n3.5 billion from the capital market being the first tranche of a projected N5 billion 7-year floating rate bond. The proceeds were used to fund a water supply scheme in Warri/Effurun, provision of educational facilities in all the local government councils of the state, rehabilitation of twelve general and central hospitals and the development of modern markets in Effurum and Ughelli: The 16.50% coupon bond was 101.74% subscribed.
In May, 2001, The Nigerian Stock Exchange (NSE) all-share index crossed the 10,000 point mark, ending the month of 10,153.8. On May 2, 2001, the Abuja Stock Exchange began operation as a floorless, electronically-driven exchange with a fully automated order-driven screen-based trading system. The Abuja Stock Exchange opened for operation on May 2, 2001 with four companies listed on a Permission-To-Trade (PTT) basis. These were FSB International Bank Plc, Inland Bank Nigerian Plc, Ashaka Cement Exchange.