Ahead of Dec 31 CMO Recapitalisation Deadline: What can the market expect?

Proshare

Tuesday, November 25, 2014 9.43AM / Sriram Sekhar /smartadvisors

The Securities and Exchange Commission (SEC) gave capital market operators a deadline of 31st December for shoring up their capital base. This has lead to a spate of activity and mulling over M&A options for various capital market operators in a bid to meet the much higher capital requirements.



However, various participants in the market are trying to get some leeway from the SEC in  turn, and the different associations such as the Association of Stockbroking Houses of Nigeria (ASHON), Association of Issuing Houses of Nigeria (AIHN) and the Chartered Institute of Stockbrokers (CIS), have been lobbying to amend certain clauses in the recapitalization plan.

 

The two most sought after amendments are:

  Restructuring of the capital requirements on a risk-based level; and

  Possible extension of the January 1, 2015 takeoff date for the new capital base

 

There is a very real possibility that due to the new significantly increased capital base, the number of participants in the capital market will drop on the back of more mergers. The ‘Soludo effect’ is most likely going to be seen in this space, i.e. When the Central Bank of Nigeria (CBN) Governor, Professor Charles Soludo recapitalized banks and the number of banks reduced from more than 80 to less than 25.

 

The other point to note that only 20% of the brokers constitute over 80% of the turnover in the NSE, which means that any consolidation within this group will have far reaching effect on the markets, and this is the group that is most likely to acquire smaller brokers to shore up the capital base.

 

Since the new rules are currently not based on the turnover by the member, this is likely to be one of the key areas of dissent, given the disparity in the volumes of business handled. We believe that the larger brokers will acquire the smaller ones in a bid to increase client base, as well as shore up their capital.

 

This bodes well for the retail investor, since with fewer brokers vying for the investment dollars, the service quality, costs, research, etc. are likely to be better. In our view this is a positive step forward for strengthening the market and ensuring that the money of retail investors is in safe hands.

 

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