Speech by The Honourable Minister of Finance on her Visit to The NSE


Monday, February 24, 2020   /07:35 PM  / By NSE / Header Image Credit: NSE



1. The National Council and Management of the Nigerian Stock Exchange ("NSE"), the domestic and international investor community, members of the Press, other invited Guests, Distinguished Ladies and Gentlemen.


2. It is, indeed, a singular honour to deliver these remarks at this "Day at The Nigerian Stock Exchange" Event and attend the closing gong ceremony. The NSE lies at the heart of the Nigerian economy, providing securities trading services for the Nigerian capital markets ranging from offers' listings, licensing services, market data solutions to technologically enabled trading platforms.


3. Since September 1960 when The NSE was founded as the then "Lagos Stock Exchange", The NSE has been a pioneering institution, achieving numerous

"Firsts" in its history, such as:


a. Being renamed as The Nigerian Stock Exchange in December 1977 and opening trading floors in Kaduna (June 1978), Port Harcourt (April 1979), Kano (May 1989), Onitsha (February 1990), and Ibadan (August 1990) - as The NSE's operations took on a truly national footprint;


b. Launching the All Share Index ('ASI') in January 1984 which reached the 1,000 mark in September 1992, ahead of the deregulation of the Nigerian capital market in 1993. Notably, the ASI eventually hit the historical high of 66,371.20 in March 2008;


c. Transiting into the Automated Trading System ('ATS') in April 1999, which enabled the evolution from the T+14 settlement cycle to a weekly settlement

cycle, and ultimately, the T+3 settlement cycle in March 2000;


d. Pioneering increased access of Real Estate and infrastructure funds by creating the Mortgage Companies equity subsector in April 2006; admitting the first Real Estate Investment Trust ('REIT') on the Daily Official List in February 2008; and hosting the first REITs Conference in May 2017; and


e. Deepening the market for Federal Government securities from the admission of the N150bn 1st Federal Government Bond to the Official List in February 2004 and the more recent listing of the N100bn Federal Government Ijarah Sukuk in April 2018, followed by Africa's and Nigeria's first ever Sovereign N10.69bn Green Bond in July 2018.


4. It is this entrepreneurial spirit that has underscored The NSE's evolution from its inception in the 1960s to becoming one of Africa's preferred hubs to save,

access and trade in capital.


5. The NSE's history has not always been rosy: there have been "highs" during "Bull Markets", and "lows" when bearish investor sentiment prevailed. Since the global economic downturn in 2008, the All Shares Index ('ASI') trading volumes have declined from 66,371.20 in March 2008 to below 20,000 in February 2009, and again in December 2011. I understand that the ASI stood at 27,388.62 when the closing bell rang on Friday, 21st February 2020.


6. The volatility in the domestic capital markets since 2008 reflect the chequered record of Nigeria's economic growth since that time. The high economic growth rates recorded between 2008 and 2014 coincided with periods of relatively low inflation. Yet, shortly after this Administration took over, the economy went into recession. Real Gross Domestic Product ('GDP') contracted and inflation increased. But it is unclear how much of the economic growth recorded during the preceding periods of exceptionally high oil prices was truly Sustainable, Inclusive and Diversified away from our historical dependence on Oil.


7. To address this imbalance, our commitment to achieving economic diversification has been at the heart of this Administration's economic strategies under the Economic Recovery and Growth Plan ('ERGP') which Mr. President launched in April 2017. This medium-term development plan charted the trajectory for our economy to exit from recession and return to the path of Sustainable, Inclusive and Diversified growth for the benefit of all Nigerians. This Administration remains committed to maintaining this growth as we transit from the ERGP to longer-term successor socio-economic development plans.


8. And we have seen the results. Growth in Real GDP has been sustained for 11 consecutive quarters, with 2.55% recorded in the Fourth Quarter of 2019, up from 2.28% in Q3: 2019. Overall, growth was 2.27% in 2019, significantly higher than the 1.91% recorded in 2018. Inflation has been tamed from 18.72% in January 2017, to 11.02% in August 2019 and 12.13% in January 2020. This attenuation in the Consumer Price Index ('CPI') was achieved through effective fiscal, monetary and trade policy coordination.


9. Our economic aspirations for the 2020 fiscal year are anchored by the 2020 Budget. We are very grateful that our renewed partnership with the National Assembly is bearing fruits and has facilitated the passage of the 2020 Budget of N10.594 trillion on 17th December 2019 - marking the first time this Administration has had a Budget in place before the start of a fiscal year.


10. The 2020 fiscal year was also unique in terms of notable "Firsts" as Mr. President, on 13th January 2020, assented to the Finance Act, 2019 - marking the first major reform of our tax laws in a decade. Specifically, the Finance Act 2019, is focused on:


a. Promoting fiscal equity by mitigating instances of regressive taxation;


b. Reforming domestic tax laws to align with global best practices;


c. Tax incentives for investments in infrastructure and capital markets;


d. Supporting Micro, Small and Medium-sized businesses in line with our Ease of Doing Business Reforms; and


e. Raising Revenues for Government.


11. In terms of raising revenues, you are all aware that the Finance Act, 2019 increased the rate of VAT from 5% to 7.5% with effect from 1st February 2020. Given the recent revenue challenges faced by the government, we were compelled to take this step to ensure increased funding for critical expenditures on health, education and infrastructure programmes.


12. However, I would like to highlight some of the capital market reforms and tax incentives enacted by the Finance Act, 2019 for regulated Real Estate Investment Trusts ('REITs') and Securities Lending Transactions. Finance Act, 2019 Incentives for Real Estate Investment Trusts ('REITs')


13. REITs are special purpose vehicles ('SPVs') that serve as holding entities for investors' interests in large commercial or residential real estate projects. REITs may take the form of Companies or Trusts in many jurisdictions.


14. In Nigeria, the Securities and Exchange Commission ('SEC') regulates Trust REITs, Unit Trust REITs and Corporate (or Equity) REITs.


15. However, as Trusts do not have an independent corporate personality, Trust REITs cannot leverage their landed assets to raise the significant amount of debt capital required for most large-scale real estate developments.


16. Unit Trust REITs are hybrid REITs that benefit from some tax incentives under the Companies Income Tax Act but are generally not as attractive as Equity REITs that are incorporated as companies, as the SEC limits the amount of debt capital that unincorporated REITs can raise to protect investors.


17. Corporate or Equity REITs are the optimal form of REITs in most jurisdictions, as the Project SPVs holding the title to the landed property are ring-fenced from each other to protect them from insolvency events or defective land titles. The Intermediate SPVs holding the Project SPVs are, themselves, held by the Holding Company or Parent SPV, which issues shares and other securities to investors, usually through a stock exchange, like The NSE.


18. Prior to the Finance Act, 2019, Equity REITs that were structured as Groups of Companies, were subject to multiple layers of taxation. Every time the Project SPVs paid dividends to the Intermediate SPVs, and ultimately to the Holding Company or Parent SPV, the FIRS could apply an "Excess Dividend Tax" rule to subject the redistributed dividends, at each and every corporate level, to Companies Income Tax at 30%. So, while Corporate or Equity REITs were the most optimal type of REITs for raising debt capital or ring-fencing projects from insolvency events or defective land titles, the multiple corporate taxation was a major disincentive to using this type of corporate structure for REITs.


19. Market research indicates that there are only a handful of successfully completed REITs listings on The NSE, including:


a. The Skye Shelter REITs which was an Equity REIT listed in February 2008

for N2bn;


b. The Union Homes Hybrid Unit Trust REIT that was listed in July 2010 for

N12bn; and


c. The UPDC REIT that was also an Equity REIT listed in July 2013 for N26.7bn.


20. Given the need to accelerate reforms to attract the capital available for real estate development across the Continent, we have worked very closely with the SEC, industry groups and the Capital Markets Master Plan Implementation Council ('CAMMIC'), for several years, to reform our tax laws.


21. As a result, the Finance Act, 2019 eliminates the multiple taxation of SEC-regulated REITs that are structured as Groups of Companies, by taxing the rents and dividends distributed through Equity / Corporate REITs just twice -


a. Firstly, at the bottom, when the rents are paid by tenants at the Project SPV or Intermediate Holding Company level; and


b. Secondly, at the top, once the ultimate dividends are paid to the ultimate shareholders of the Parent or Holding Company.


22. The Finance Act, 2019 eliminates the multiple corporate taxation under the "Excess Dividend Tax" rule - but only for approved REITs duly regulated by the SEC. As your financial advisers and tax consultants unbundle the technical details of reforms of the Finance Act, 2019 for REITs, we expect to see:


a. A significant increase in REITs listed on The NSE;


b. Higher flows of debt and equity capital being deployed in large-scale commercial, residential and other real estate projects nationwide; and


c. The attendant multiplier effects from job creation, wealth aggregation, deepening capital markets and increased socio-economic development.


23. As you consider your prospective investments in REITs and multi-billion-Naira real estate projects under the new tax rules, we will be providing further information through Stakeholder Implementation Workshops that will hold across the six geopolitical zones, over the next few weeks and months.


Finance Act, 2019 Incentives for Regulated Securities Lending Transactions


24. The Finance Act, 2019 also provides targeted tax incentives for SEC-regulated Securities Lending Transactions, which are often called "Stock Loans". A Stock Loan occurs when a long-term Holder (for example, a Pension Fund or other Institutional Investor) of a Share creates a secondary income stream for itself by lending its Share, for a short period to Brokers who are building portfolios of such Shares for their Clients.


25. As Shares are fungible, the Client can return an equivalent Share of the same company, through its Broker, to the Share's Lender, at the end of the Stock Loan. To guarantee that the Share will be returned at the end of the Stock Loan, Pension Funds and Long-term Institutional Investors require Brokers, and their Clients, to put up Cash Collateral that is equivalent to the value of the Shares lent.


26. At the end of the Stock Loan, the Broker returns the lent Share from its Client to the Pension Fund or Long-term Institutional Investor (that is, the Lender) and this Lender returns the Cash Collateral to the Client, through its Broker.


27. From an economic point of view, the:


a. Risk-adverse Pension Fund or Long-term Institutional Investor earns Securities Lending Fees from 'renting out' its Share for the duration of the Stock Loan;


b. Risk-seeking Client is able to fulfil an Order Book of that particular type of Share to be exposed to the security's underlying capital appreciation; and


c. Broker earns its fees from facilitating the Stock Loan.


28. At the end of Stock Loan (which normally lasts less than a year), the:


a. Pension Fund or Long-term Institutional Investor gets its Share back, together with the Securities Lending Fees that it has earned;


b. Client obtains its Cash Collateral back, net of any 'mark-to-market' adjustments for rises or falls in the value of the Share that was lent; and


c. Broker has earned its brokerage fees.


29. Through the secondary and tertiary trading that Stock Loans facilitate, stock exchanges across the world have been able to deepen their trading volumes, leverage passive holdings of Shares by Pension Funds or Long-term Institutional Investors, and catalyse their capital markets. For instance, I understand that the Johannesburg Stock Exchange was able to use Securities Lending, derivatives trading and other capital market reforms to grow from share trading volumes of 2,500 trades per day in 2000, to up to 700,000 trades per day in recent times. In this way, Securities Lending Transactions support the growth and development of the world's leading stock markets.


30. To protect parties such as the Clients, Pension Funds and Long-term Institutional Shareholders from the insolvency of their market counterparties,

or even the intermediary Brokers, each Stock Loan is treated, in law, as an Outright Sale of the Share, with a legal obligation to Repurchase an equivalent

Share, at the end of the Stock Loan.


31. As our tax laws generally follow the legal form of a Stock Loan, there would normally be tax liabilities arising from each step in the transaction, even though this is economically, NOT an Sale of the Share, but rather a Stock Loan that is structured as an Outright Sale, with a legal obligation to Repurchase the Share, at the end of the transaction.


32. The Finance Act, 2019 simply allows the FIRS to ignore the tax liabilities arising from the intermediate steps of a Stock Loan, and only tax the counterparties'

income at the end of the Stock Loan, or the counterparties' gains or losses in the event of the insolvency of any of the counterparties during the Stock Loan.


33. Now that our tax laws are consistent with the SEC's regulations for Securities Lending Transactions, we expect to see increased growth in secondary and tertiary trading in Shares on The NSE. Your Brokers and Tax Advisers may provide you with further technical details and advice, when planning yourprospective Securities Lending Transactions. We will also provide greater information, analyses and technical support on these issues during the forthcoming Stakeholder Implementation Workshops on the Finance Act, 2019.


Closing Thoughts


34. In my remarks, I have highlighted just a few of the targeted tax incentives in the Finance Act, 2019 for the Nigerian capital markets. As you may clearly discern, the tax incentives for SEC-regulated REITs, only provide benefits AFTER the investors have:


a. Built their Malls, Hotels, Office Complexes, Airports, Seaports or LogisticParks - thereby creating jobs and fostering economic development; and


b. Earned and distributed dividends from their rents and profits to investors.


35. Similarly, the counterparties in SEC-regulated Securities Lending Transactions only obtain the tax exemptions AFTER they have successfully completed their Stock Loans and Repurchases, without any insolvency events.


36. Going forward, we are committed to moving away from blunt and expensive fiscal incentives - like Import Duty Waivers or lengthy Tax Holidays - that reward investors merely for their INTENTION to invest. Rather, we will design, and implement targeted and more efficient fiscal incentives that reward investors AFTER they have kept their promises to invest, create jobs, deepen our capital markets, and abide by applicable rules and regulations.


37. Our fiscal reforms will increasingly complement our trade and monetary policies. We have made tremendous progress in the effort to create a conducive business environment for all investors. Our target is to move the Nigeria into the top 100 on the 2020 World Bank's Doing Business Rankings. It is our expectation that this enabling business environment will spur the industry, innovation and investment that our people, world over, are renowned for and accelerate our industrialisation in the light manufacturing, agro-processing, petrochemicals and construction sectors, which seek capital for investment from The NSE.


38. In closing, I invite the Private Sector to partner with us to ensure that our fiscal, trade and monetary policies, as well as our developmental programmes and projects, succeed in unlocking the latent potential of our people and our other natural endowments, in line with our developmental aspirations under the ERGP and successor economic plans.


39. I thank you most sincerely for your kind invitation and attention.


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