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Monday, January 24, 2022 / 11:27 AM / By Tosin Ige,
Proshare Research / Picture Credit: Nasscom
Being guidance notes around the discussion by Olufemi AWOYEMI,mni;
Chairman of Proshare at the NGX Capital Markets Conference in Transcorp Hilton,
Abuja, Nigeria on the 30th of November, 2021.
The Nigerian capital market started
the year on a mixed bag as the NGX ASI inched up by +5.32%,
while the NASD USI closed negative by -1.04% and
the FMDQ turnover also closed negative by -34.49% M-o-M
in January 2021. Over time, gains in the equity market have been moderated by
yield improvement in the fixed income market, depreciation in the exchange
rate, rising inflation, policies uncertainty, profit-taking by investors, and
poor participation of foreign portfolio investors.
However, the equity market rebounded
in Q3 2021 as the NSEASI ended the period in the positive territory with a +6.10% gain as against -2.91%
loss in Q2 2021 and -3.04% loss in Q1
2021 while the NASD USI closed the third quarter negative with a -2.89% loss as against +1.05%
gain in Q2 2021 and +1.91% gain
recorded in Q1 2021.
There has been considerable yield
improvement in the fixed income and currency market. The yield on the benchmark
10-year FGN bond has increased from 7.3% as of January 2021 to 13.98% at the
end of Q3 2021. The FMDQ market turnover was also up by +94.89% M-o-M and +70.79% Y-o-Y
in September 2021.
On the commodity space, the AFEX
commodity index (ACI) has also recorded a year-to-date improvement of 37.8% as
of August 2021.
Between 2014 and 2020, the NGX
recorded relatively lower market capitalisation compared with the FMDQ market
turnover which recorded considerably high values. The performance of the NASD
in the market has been mild (See Table 1). Analysts believe the current yield in
the Nigerian equity market is less attractive compared with yield in the fixed
income and commodity markets.
Table 1: Nigerian
Capital Market Performance
Source: NGX, FMDQ, NASD, Proshare Research.
* NGX data is Equity Market
Capitalisation
The Desired Retail Market - Issues for Consideration
Even though Nigeria has around four
million investors (with about 50,000 active investors) captured in the capital
market ecosystem, there is a surge in Ponzi Schemes in the country (See
Illustration 1).
Rather than leveraging the potentials
of the Nigerian capital market with new and innovative securities, the Ponzi
schemes market seems to be attracting investors in recent times. While this can
be attributable to "investors greed", there is a gap in products that
approximate the investment goals of changing demography.
With high risks of defaults and
little-to-no regulatory sanctions for defaulters both in the Nigerian capital
market and the Ponzi scheme markets, investors in Nigeria are getting attracted
to the Ponzi scheme markets which promise higher returns above inflation and market
returns on investments. This contributes significantly to the escalation in the
number of Ponzi Schemes and the associated high level of patronage in recent
times (See illustration 2).
Illustration 2: Profile of Recent Ponzi Schemes in Nigeria
The cumulative N69.21bn lost to Ponzi
schemes in the last 7 years represents about 1.5% of the total value of
listings (both by way of Introduction and IPO) on the NGX - the value of new
listings is approximately N4.65tn between 2015 and November 2021.
When extrapolated for the 177 Ponzi
Schemes listed above (See illustration 1), the estimated value of Ponzi
schemes in Nigeria between 2015 and November 2021 stands at N874.95bn,
representing 18.8% of the total value of new listings on the NGX. Whereas the
ratios of the Ponzi schemes to the new listings seem insignificant, it could
have a damaging effect on the capital market due to the negative perception of
the investment climate in the country.
The scandalous event is all too
important for the development of a retail investment market much needed for the
new capital market emerging - one that is shaped by the use of technology and
multiple platforms for the exchange of information and trade execution.
The development has exposed the wide
gap between our state of practice and the state of regulation on one hand. On
the other hand, it also exposed the gaps in the remedial processes for
protecting investment in products and services offered by the market and the
platforms through which they are delivered.
A more worrisome trend today is the
adoption of social media platforms by elements in the society to leverage the
names and brands of credible entities to commit fraud, scams, and Ponzi schemes
which tarnish and damage entities involved and the market at large.
This highlights the absence of a
national strategy for engaging with these global platforms and their
de-linkages to our sovereign revenue models, cyber laws, data privacy and
protection rules, control of data, and more importantly, their commitment to
corporate governance in Nigeria.
This gap must be bridged by
reconstructing the regulatory framework and expanding it to cover technology
issues, traditional and social media responsibilities, obligations &
liabilities, national security concerns, and best practices within the
profession.
The Trend of Listing and Delisting in the Market
There have been a series of listing
and delisting on the Nigerian bourse in recent times.
Over ten years, from 2006 to 2016,
about 77 companies delisted from the then NSE (now NGX). Findings show that 54
of the 77 delisted companies failed to meet up with the post-listing
requirements, 12 of them delisted voluntarily while 11 others delisted due to
reforms or expansion within their sectors, which had adverse effects on their
operations (Vanguard, 2020).
From 2015 till the time of writing
this report, a total of 46 companies delisted from the Nigerian bourse. Whereas
29 were forced to delist due to failure to meet regulatory requirements, 6
delisted as a result of mergers and acquisition while 11 voluntarily delisted (See
illustration 3).
Illustration
3: Listing and Delisting in the Nigerian Bourse between 2015 and
2021
* As of November 2021
Before the crunch in the stock market
in 2008, the primary market had a series of activities with many companies
approaching the market for IPOs. Particularly, the 2005 bank recapitalization
generated a significant increase in the primary market as banks approached the
market to meet the required capital.
Statistically, from 2006 - 2010, the
market recorded about 180 different offers. The number of IPOs in the market
then was 88, and private placements were 54 while Rights Issues were 38. Unfortunately,
the number of securities decline significantly from 79 securities recorded in
2006 to 8 securities in 2010.
Between 2015 and November 2021, only
10 companies approached the primary market for listing and were successful, an
indication of a significant loss of confidence in the market as a channel for
raising capital (See Illustration 3).
Some analysts have attributed the low
level of activities at the primary market to weak macroeconomic scenarios,
persistent negative sentiments in the market, and a tense socio-political
landscape.
Policy Advocacy to Support the Development of Nigerian
Capital Market
At the basic level, the problem and
issue of the Nigerian capital market are that the capital market which in
theory should offer businesses the opportunity to raise capital for growth now
offers disincentives.
The reality of the Nigerian market is
that companies delist from the market because they are not benefiting directly
from the market. Rather, the cost of meeting the exchange requirement is high.
Intuitively, instead of enjoying the benefits of being listed-possibly in form
of tax incentives, listed companies have to pay fees to remain listed.
There is a need for structural reform
of the market to support investment, reduce the cost of transactions, and boost
investors' confidence in the market.
In terms of fiscal policy, taxation, annual budget, public-private partnership, sales of assets,
National Development Plan, and the regulations surrounding the fiscal stances
of government impact significantly on the capital market. A few advocacy
efforts are essential on fiscal policy stance.
Tax incentives can be used to enhance
the development of the Nigerian bourse. The existing situation in which listed
companies incur costs to remain on the exchange cannot promote recovery of the
market. Therefore, it is desirable to grant tax incentives to listed companies
to incentivise listed companies and new listings on the exchange.
National Budget can support the
development of the Nigerian capital market. On one hand, budget deficits can be
financed partly from the Nigerian capital market and proposed expenditures can
be directed to support listed companies. On the other hand, proper
implementation of the budget can promote macroeconomic growth and stability
which have a significant influence on the capital market.
For instance, the 2022 budget deficit
of N6.25tn can be financed partly with bond issuance to boost activities in the
capital market.
Also, a budgetary provision of direct
purchase of goods and services on listed companies has a direct effect on the
capital market, helping to boost the confidence of the companies and the market
largely. For instance, the plan by the Federal Government of Nigeria to buy
locally assembled vehicles in November 2020 in a bid to promote its policy on
the local auto industry could have been directed at supporting more listing on
the capital market.
Government should mainstream
Public-Private Partnership (PPP) for developing infrastructure and sale of
assets to support the capital market. PPP finances project with a combination
of equity and debt. They tend to patronise the capital market more as a
platform to raise long-term capital. Private sector participation in the market
can drive innovation and deploy considerable analytics and marketing skills to
the market.
Essentially, a good fiscal policy
creates a stable macroeconomic environment that reduces uncertainty and
encourages greater participation in the capital market, thereby improving the
performance of the market.
In terms of monetary
policy, advocacy efforts are required to drive inflation
monetary policy rate, and cash reserve ratio in the desired direction for the
growth of the capital market.
High inflation increases nominal
return on large-capitalised stocks but leads to a decline in real returns on
investment. Inflation also creates uncertainty in the future cash flows of
companies, thereby lowering the value of stocks on the market. A lower level of
inflation is desirable for the Nigerian capital market to support the stability
of listed companies as inflation disrupts the efficient resource allocation by
shrouding the signaling role of share price movement.
Changes in the benchmark interest
rate-The Monetary Policy Rate (MPR) in Nigeria tend to affect the performance
of the capital market. A high-interest rate (at 11.5% in Nigeria) has been
controlling inflation, but it is limiting capital importation and crowding out
private investment. The Nigerian capital market needs an interest rate that can
support domestic and foreign investment inflow but also curb the elevated
inflation rates.
A study by Onyeke (2016) found that
less developed capital markets like Nigerian bourse tend to find a positive
relationship between cash reserve ratio (CRR) and capital market performance.
Whereas developed capital markets such as the capital market in South Africa,
China, US have no such relationship. The prevailing situation of keeping 27.5%
of banking deposits as cash reserve ratio with the CBN cannot support credit
creation and investment by the banking sector which is a major player in the
Nigerian bourse. The CBN needs to keep the CRR lower to bolster an upsurge in
credit creation and investment which in turn positively affect the growth of
the capital market in Nigeria.
In terms of exchange rate
policy, Nigeria's exchange rate (FX) affects inflation,
investment, and causes disruptions in exports and imports, thereby influencing
companies listed on the stock exchange.
The adoption of the NAFEX rate as the official exchange rate and the
subsequent depreciation/devaluation of the naira has led to a 7.6% YTD loss in
the value of naira as of November 25, 2021.
Constant devaluation of the naira
encourages speculations in the foreign exchange market and encourages capital
flight. This hurts the Nigerian equity market-in terms of foreign direct
investment (FDI) and foreign portfolio investment (FPI) flows.
Some analysts believe such a situation
supported the negative performance of the Nigerian equity market in H1 2021
where the NGX All Share Index (ASI) posted a negative return of -5.87%.
Nigeria's exchange rate is discriminatory.
For both retail and institutional investors, discriminatory exchange rate
creates inefficiencies and non-performance of the market. Investors who have
access to the exchange rate at a lower rate have the tendency to seek
additional returns on the exchange rate by trading the base currency, thereby
creating an unofficial investment window.
On one hand, the Nigerian economy
needs a managed floating exchange rate that is stable and fair to all. On the
other hand, there is a need for exchange rates convergence to redirect international
transactions from the unofficial market to the official markets as there would
be no incentive for round-tripping and arbitrage.
In terms of capital
accounts policy, Nigeria's capital account policy has
witnessed an alternate blend of both legal and institutional policies with
market-based agenda in the past few decades.
The concern, however, is that the
oscillating flow of foreign investments in Nigeria may have supported the
disappointing growth and development of the Nigerian capital market, as there
has been a series of delisting from the market and low primary market
activities.
The total value of capital importation
into Nigeria declined to $875.62m in the second quarter of 2021 from $1,905.89m
in the first quarter of 2021. This represents a decrease of -54.06% compared to Q1 2021 and a -32.38% decrease compared to the second quarter of
2020 (NBS).
The restrictions on exchange rate
access remain the major challenge to the flow of FDI and FPI in Nigeria.
However, existing listed multinationals
such as MTN and Airtel have driven the performance of the Nigerian bourse in
recent times. For instance, in November 2021, heavy transactions in the shares
of Airtel Africa and MTN Nigeria, among others buoyed transactions on the
equities sector of the Nigerian bourse as the market maintained positive
sentiment compared to October 2021.
There is the need to remove all
restrictions on international transactions related to the movement of capital
to aid return on investment and innovation. This will sustain the listing of
existing multinationals and attract new listings on the Nigerian bourse.
In terms of investment
schemes, the menace of scams, fraud, and Ponzi schemes
continue to prey on the desire of Nigerians to have investment schemes that
work for them.
Given the clear threat to the Nigerian
capital market's decorum and harmony, a few advocacy points are essential here.
The need for an overarching
architecture to aggregate the delivery of investment services in the country
using social media and other platforms must be addressed through a joint
resolution of the SEC (and its relevant trade groups including the CIIA), NSE,
CIS, NITDA, CBN, FTAN, CAC, and the NSA office.
There is a unique opportunity for regulatory reforms
in the Securities and Exchange Commission (SEC), Central Bank of Nigeria (CBN),
National Information Technology Development Agency (NITDA), and other relevant
agencies beyond the tokenism that has defined the expected collaboration that
existed thus far. There is the need to institutionalise the required synergy
required to deliver on the investor protection, consumer protection, and data
privacy mandates that unify all agencies.
Meanwhile, no platform operating in
Nigeria should allow the use of the word investment without SEC approval.
Social Media platforms identified as not being vigilant, acting within set
timelines, and complying with the extant rules of engagement should be subject
to extreme fines over and above the cost of such losses as will be determined
by the regulators and the courts as may be.
Applicability
and Viability of Special Purpose Acquisition Companies (SPACs) in the Nigerian
Capital Markets
The awareness of the applicability and
viability of the Special Purpose Acquisition Companies (SPACs) has grown in
recent times across the globe. SPACs (also called the blank check companies)
are companies that have no commercial operations but were formed to raise
capital through an initial public offering (IPO) for acquiring or merging with
an existing company.
In the US, there has been an increase
in the number of listings through the SPACs, with booming IPO markets. In 2020,
about 247 SPACs were created with $80 billion invested and $98.5 billion
investment raised from 331 SPACs in the first five months of 2021.
In Europe, there have been a few SPACs
within the last few years. Europe has lagged behind the US deal with just 12
SPAC IPOs worth $3.9 billion from January to May 2021. Nonetheless, the number
of deals has grown significantly in Europe, comparing January to May 2021 with
the corresponding period of 2020, with $496 million investment across 4 SPACs
in 2020 and $3.9 billion investment across 12 SPACs in 2021 (Deloitte, 2021).
The difference between the performance
of SPACs in the US capital market and the European capital market has been
attributed to the deeper capital markets in the US. The US capital market
regulatory framework gave investors significant control over the SPAC
acquisition. The current regulation in many European countries does not give
such control to investors.
In Asia, there is currently a
significant increase in the number of companies in China and across Asia
considering SPACs, as investors try to mitigate some of the challenges of the
conventional IPOs.
In Africa, SPAC has been adopted by
two African issuers but listed on foreign markets. In the first half of 2021, a
South African SPAC issuer-The African Gold Acquisition Corporation went public
on the New York Stock Exchange. The PHP Ventures Acquisition Corp also raised
over $50 million in Africa through SPAC listed on the Nasdaq stock exchange.
There are few SPACs in African due to the lack of strong capital markets.
In Nigeria, whereas the regulatory framework needed for the applicability of SPACs
in Nigeria has been drafted, uncertainty trail the applicability of SPACs in
the Nigerian capital markets. On the 13th of July 2020, the Nigerian Stock
Exchange published its Draft Rules for Listing of Securities issued by Special
Purpose Acquisition Companies in Nigeria. Although this may seem to have
prepared Nigeria for the adoption of SPAC, less oversight capacity by the
regulator on the Nigerian Exchange implies that a bit more time is required to
review the adaptability required for its adoption.
Benefits and Limitations of SPACs
Special Purpose Acquisition Companies (SPACs) offer significant benefits for investors and companies that are considering being publicly listed. "SPACs typically use the funds they raised to acquire an existing, but the privately held, company. Then, they merge with the target, which allows the target to go public while avoiding the much longer IPO process".
Lastly, investors gain access to an
asset class that may help aid the diversification of their portfolios,
outperform the market, and still receive dividends in the absence of
unfavourable economic conditions.
Policy Advocacy for Creating Awareness about SPACs
From a policy advocacy perspective,
Nigerian capital market operators should hold panel discussion sessions and
sensitization programmes for businesses in Nigeria to mainstream the
flexibility, viability, and efficiency
of the SPACs route for going public.
In principle, SPACs offer higher
flexibility for companies to go public than those offered by the private equity
deal. Analysts have also estimated that selling to SPACs can add up to 20% to
the sale price compared to typical private equity deals. This can be
established or refuted in the case of Nigeria through stakeholders' advocacy and
research.
From the regulatory standpoint, SEC
should host meetings and public enlightenment on SPACs to highlight the
provisions of the drafted SPAC regulations and procedures in Nigeria and also
invite feedbacks on additional regulatory actions, especially on how to resolve
conflicts of interests and disclosure issues- when an investor does not
appreciate the effects and the risks of the SPAC structure and the sponsor's
position.
The Draft Rules for SPAC in Nigeria is
a welcome development in the capital market.
But there is a need for further exposition and domestication to generate buy-in among local and foreign companies needed to deepen the Nigerian capital market. Specifically, policy advocacy must focus on:
Kindly send comments to research@proshareng.com
Related Links - Memos to the Market and Advocacy
Interventions
1.
VIDEO: Market Review: The FG Should
Provide More Incentives for Capital Market Development
2.
VIDEO: Innovative Regulations, Way Forward for The Nigerian
Capital Market
4.
MTN Nigeria Plc
Market Memorandum - Proshare, May 2019
5.
Jumia: Understanding
the Strategy, Numbers and Pain - Proshare, May 2019
6. Memo to The Market: The Oando Corporate Journey
- at the Regulators Gate Proshare, By Olufemi Awoyemi, 22 Nov 2017
7. Memo to The Market - The NSE Oscar Onyema
Foundation and Corporate Governance - Proshare, By Olufemi Awoyemi, 20 Aug 2018
8. Swift Correction of Honest Mistakes Helps Build
Institutional Corporate Governance - Proshare, By Olufemi Awoyemi, 05 Sept 2018
9.
Leadership, Change and Corporate Transformation
- The Nigerian Experience ... - Proshare - Proshare, By Olufemi Awoyemi, Nov
07, 2017
10. Memo to the Market: Reappointing Arunma Oteh as
DG, SEC - Proshare, 31 Dec 2014
11.
Where Nigeria got it Wrong -
Proshare, Olufemi Awoyemi, 01 Dec 2014
15. Fundamental Considerations for Capital Market
Reforms in Nigeria ... -
Proshare, 06 Sept 2010
17. The Bull in the China Shop - A New Paradigm in
the Banking Sector (analysis of the SLS Intervention) ... -
Proshare, 21 Aug 2009
19. Memo to the Market - The Proshare Transcorp
White Paper - 200763 - Proshare, 14 Jan 2007
References
1. Assessing primary market's
readiness for IPOs in 2020 - The Guardian, By Helen Oji, 23 Dec 2019
3.
36 firms delisted from stock
market in five years - Punch, By Femi Asu, 15 June 2021
4.
Nigerian Capital Markets Update - PwC, Sept 2021
5.
Special Purpose Acquisition Company (SPAC) - Investopedia,
By Julie Young, 16 Oct 2021
6.
The SPACs Boom: Europe Picks up
the Pace (PDF) - Deloitte, By Tomas Heredia, Javier Galiano, and Mayrin
Garcia 14 Jul 2021
7.
Africa-focused SPAC seeks to
raise over $50 mn on Nasdaq - The Capital
Quest, By Vivek Sinha, 8 June 2021
8.
SPACs:
Coming-to-a-Stock-Exchange-near-You - BusinessDay, By Okafor Endurance, 15 April 2021
9.
SPACs as Engines for Public
Ownership and Growth - Coronation Research, 14 June 2021
10. SPACs- a Viable Alternative to
an IPO? -
The Guardian, By Abisola Odeinde, 29 Sept 2020
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