NSE Post Takeover: A Journey Through Time

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Friday, September 18, 2020  05:16 AM / by Proshare Research/ Header Image Credit:  EcoGraphics


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Introduction

"The four most dangerous words in investing are: 'This time it's different'".-American-British Investor, Sir John Templeton

 

Nigeria's Stock Market has been a fluid drama of colorful and not-so-exciting characters. Indeed, ranging from the boisterous yet cerebral Alpha-female, Ndi Okereke-Onyiuke, Ph.D., former Director-General of the Nigerian Stock Exchange (NSE) to the famously taciturn and introverted but equally intelligent Oscar Onyema, the current Chief Executive Officer (CEO) of the Exchange, the country's equity house has seen its fair share of turning tables. In the last twenty years, Nigeria's premier equity trading floor has been a theatre of the illusive bumping against the drama of the prospective.

 

Okereke-Onyiuke engineered (even if haltingly) the digital migration of the Exchange from the old open outcry system to the smarter computer terminal architecture that the Exchange parades today. The difference between the old and new trading culture is that the trading 'floor' of yesterday has since given way to the trading 'space' of today, which is a digital framework spanning tens of stock trading (debt and equity) offices across the country. Stockbrokers now stay in their offices to carry out client orders remotely, as distant trading transactions have become the new normal. However, beyond digital remote trading, the new managers at the Exchange have added a few gizmos to spice up activities and hopefully grow market volume and capitalization. Some of the smart features of the new market regime include, but are not limited to, the following:

 

  • The reclassification of equity segments with the introduction of the premium board, the NSE 30, NSE 50 and a series of other indices from third party professionals
  • The introduction of market-makers to provide daily trading liquidity
  • The development of a Growth Board to take over from the old second tier-listing segment called ASeM. 
  • The promotion of the listing of government debt instruments. In the last decade, the Exchange appears to have lagged behind other markets such as the FMDQ with private and public debt asset growth being relatively low.

 

A review of the transition from the period before the administration of Mr. Oscar Onyema and since Onyema's ascent to the position of CEO of the Exchange provides context for reviewing the performance of the stock market since 2010. The matter is less that of assessing individual performance as it is one of measuring market growth or lack of it.  


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A Yen for Numbers

One of the most important assessments of the Nigerian stock market is its numbers. Between 2010 and 2019, the market's equities capitalization has grown from N7.91trn in 2010 to N12.67trn in 2019 or what amounts to compound annual growth of 5.64%. Compared to an average gross domestic product (GDP) growth of 8.01% in 2010 and 2.25% in 2019, the Exchange's performance has not been stellar. But the market had appeared to have done much better in traded public and private debt as debt capitalization rose to N12.92trn (N15.83trn as of August 2020), no figures are available for 2010 as market trading in government instruments was thin and far and between.

 

The total value of equities traded in 2010 was N797.55bn as against N962.65bn in 2019, or what represents a straight-line growth of 20.70% or what amounted to compound annual growth of 2.11% over the last decade.  The average daily market turnover of equities in 2010 was N3.23bn as against 3.95bn in N2019 suggesting that daily traded value a decade ago was only 22.3%% or a fifth lower than last year.

 

The stock market has had a difficult decade between 2010 and 2020. Turnover velocity for equities dipped from 12.51% in 2010 to 7.55% in 2019, representing a decline of 4.96%. The reduction in velocity reflected a gradual rise in investor interest in public sector traded debt instruments such as treasury bills and treasury bonds and the gradual shift of local and foreign direct investors (FDIs) from equities to the fixed income market. The swing explains why by 2019 the value of bond capitalization on the NSE squared up with the size of its equity capitalization even though the bond market was almost non-existent in 2010. As of August 11, 2020, the NSE bond market was at N15.83trn as against the FMDQ market value of N30.19trn and the equity market value of N12.98trn.

 

A sour point in the 2010-2020 decade of market development has been the tumbling of newly listed equities. New equity issues slumped from 31 in 2010 to 17 in 2019. Despite the growth in trading activities on the NSE in the last decade, corporations have been wary of raising fresh capital from the market and diluting existing shareholder interest by way of an Initial Public Offer (IPO) or by a Rights Offer (which would retain existing shareholder equity interest but increase the number of shares in issue).

 

The NSE has not been a preferred point for raising fresh capital because corporations have favored short-term forward financing plans which are funded by money market arrangements that are faster and involve no equity raise costs or a commitment to higher earnings that compensate investors for equity growth.

 

The stock market over the past decade has been sustained principally by foreign investor interest as the gradual weakening of the naira and the fall in equity prices has engineered hidden-value opportunities above those in competing frontier markets (FMs). The high trade-influence of foreign investors between 2010 and 2020 contrasted sharply with the heavy domestic investor participation in the market between 2000 and 2009. The 2000-2009 period saw a dynamic market transition spearheaded by Okereke-Onyiuke who insisted that digital migration was necessary to build market robustness and create the fidelity required to encourage foreign investors to put money on the table. The former DG's power-nudge involved foreign roadshows and networking trips which involved local equity brokers amplifying investment conference dockets.

 

The effort of Okekere-Onyiuke and her team was somewhat successful as the upward growth of the All Shares Index (ASI) was noticeable but muted. However, the ASI dipped by -52.06% Y-o-Y in 2008 and -25.84% Y-o-Y in 2009 (the twilight of the Okereke-Onyiuke era). But by 2010 things had taken a turn for the better as the market bounced right back up Y-0-Y by +18.93%, with a further leap of +35.45% in 2012. By 2013 the ASI growth rate had inched forward by a further +11.72 to +47.17%. Between 2014 and 2017, with a wobbly global economy, the Index uncharacteristically caved by -16.14% in 2014, -17.36% in 2015 and -6.17% in 2016, a reflection of the implosion of global commodity and equity trades as international financial markets went into a free fall. By 2017 the global economy had steadied itself with a rebound dragging the local ASI up as the economy witnessed a reprieve before dipping again between 2018 and 2019 with the Index slumping by -14.60% (see chart 1).

 

Chart 1: NSE ASI Growth Y-o-Y 2008-2019 

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Source: Nigerian Stock Exchange (NSE), Proshare Research 

 

In terms of market capitalization, the Exchange has catapulted upwards in the last fifteen years with the steeper part of the climb occurring between 2011 and 2019 under Oscar Onyema compared to the dip and upward reversal under the last three years of the ten-year tenor of Ndi Okereke-Onyiuke (see chart 2).

 

Chart 2: NSE Market Capitalization 2008-2019 

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Source: NSE, Proshare Research 


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New Belly Fires

The impact of the NSE's roadshows and aggressive marketing, however, got muddied by the increasing political engagement of the erstwhile DG. While Okereke-Onyiuke was attempting to push market growth she also got caught up in domestic and foreign politics which created different levels of professional conflicts watering-down the clinical-edge of her leadership of the Exchange. By 2011, a new board of the NSE was inaugurated which swept the Okereke-Onyiuke era out and brought in a new set of younger officials at the Exchange with a different type of fire in their bellies. Okereke-Onyiuke was removed as DG of the NSE in August 2010. Before joining the NSE Onyema was the Chief Administrative Officer and Senior Vice President NYSE MKT LLC, USA.

 

Onyema commenced duty as the new Exchange boss on April 4, 2011, nine months after the Aruma Oteh-led Securities and Exchange Commission (SEC) nudged the Okereke-Onyiuke administration aside in a brazen move to allegedly clean up the NSE and reduce its political partisanship and what Oteh alleged before a House of Representatives Committee of the Capital Market as fiscal recklessness. According to Oteh at the time "The extent and nature of the market abuses carried out between 2006 and 2008 are the primary reasons for the continuation of the investor apathy that we see today,".


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The Oteh Blitz

Oteh listed some financial and ethical infractions under the Okereke-Onyiuke leadership of the NSE. The alleged issues involved, but were not limited to the following:  

 

  • The NSE bought a yacht for N37m and wrote down the full value of the acquisition within one year with the narration on the regulator's books being a gift for long service during its 2008 staff send forth awards without identifying the beneficiary of the boat. 
  • The purchase of 165 Rolex wristwatches for awardees of the 2008 long service ceremony of which only 73 watches were allegedly presented to awardees while the remaining 92 watches were allegedly unaccounted for. The watches said to have been unaccounted for were worth N99.5m.
  • The transactions were claimed to have been routed through accounts of senior officers of the Exchange or companies associated with these officers. Also, according to House of representative's records, Oteh claimed that "In 2009, several billions of the year 2008 operational surpluses were distributed to the Council members and employees of the Exchange in violation of Capital market and SEC rules". 
  • Oteh noted further alleged infractions of corporate governance, according to her "Other notable fraudulent transactions include the reclassification of the sum of N1.3billion originally expended on business travels. Of this sum, N953million was reclassified under "Software Upgrade" and subsequently expended as against being capitalized. There were other cases of such unethical accounting practices".
  • The then SEC DG insisted that the NSE management of the time

 

But Oteh herself was not without baggage. She had a running battle with the House Committee on Capital markets, accusing the Committee of asking for oversight gratification while the Committee in turn laid allegations of financial recklessness against the erstwhile SEC DG (citing as an example the fact that the DG spent N850,000 in a day on food). Ndi Okereke-Onyiuke the ousted the NSE DG also kicked up dust accusing Oteh of highhandedness, bias, and financial profligacy.

 

But Oteh's adversaries were not external alone, Commissioners within the SEC had no sympathy for the DG, accusing her of authoritarian inclinations with no room for collegiate dialogue. According to Charles Udora, one of the SEC Commissioners who gave testimony at the Ibrahim El-Sudi-led House Committee meeting, "we seem to have a regulatory comatose".

 

It was clear from testimonies of SEC staff that Oteh allegedly operated outside the in-house operating procedures and frameworks and may have run her office with consultants from the private sector, thereby estranging long-serving SEC management staff. In her remarks at the House Committee inquiry Daisey Ekineh, who had briefly acted as DG and had spent 30 years at SEC noted that "the way forward is that we should meet more face to face rather than doing email and text messages. The head should be respected, and the head should respect others". She concluded by noting that "In the past, I'm sorry to say this; we worked very much as a team. The trust is no more there".

 

Oteh's era as SEC DG was a tale of the good, the bad, and everything in-between. It was a period of high-octane emotions, institutional dysfunction and at times surprising brilliance. Oteh superintended a new mindset in frontier capital market oversight with a progressive outlook but with a management style that was poor on emotional intelligence, an Achilles heel that quickly created internal institutional tension. 


The Gwarzo Quagmire 

African Development Bank's (AfDB's) former treasurer's exit from SEC in 2015 gave way for a new period of capital market oversight disruption as the new administration of Dr. Mounir Gwarzo became as emotionally-troubled and administratively-weakened as the preceding Oteh regime. The new management started by "weeding out" perceived "Oteh-loyalist" and redefined institutional priorities, thereby truncating the previous management's market development plans while at the same time kicking a dent in the market's regulatory momentum.  

 

Indeed, while attempting to stabilize operations in the new arrangement, the freshly appointed DG was quick to be hit by a barrage of pointed accusations that bordered on alleged nepotism, tribalism, and favoritism in addition to supposed imprudent financial spending. The allegations led to his suspension as the DG of the Commission and his replacement with acting DG, Ms. Mary Uduk. But after a hard-fought legal battle, Gwarzo was reinstated to his previous position. Nevertheless, by this time SEC's management bus had left the tube station with a new acting DG firmly planted.  To compensate the Gwarzo, erstwhile SEC boss, the Presidency in its wisdom decided to allow Gwarzo to retire with all the benefits of a past-serving SEC DG. The President was also appointed as permanent DG of the Commission, Mr. Lamido Yuguda.

 

The high stakes drama played out at SEC had consequences for the pace and direction of the growth of the local stock market. The market suffered from regulatory gaps and tripwires that hobbled its growth between 2015 and 2019 as a result of fuzzy oversight. The modest regulatory improvements seen in recent times have been under the short-lived administration of Uduk who established a steady rapport with different market stakeholders and rebuilt the traditional official camaraderie that prevailed at Commission.

 

Each SEC boss brought a specific style and mindset to the Commission but for vision and deliberate execution Oteh would rank highest, but for regulatory stability and steady market advancement, Uduk showed superior social sensitivity and understanding of the art of execution to push towards better market rule-development and corporate monitoring than her predecessors.

 

So, is the period before 2010 different from where the capital market is today? It depends on which side of the fence you prefer to sit. From the perspective of SEC, a significant amount of drama had been stripped from the regulatory governance playbook but with that had also disappeared the passion for change and innovation. Oteh for all her run-ins with staff and legislators had a clear intent to upgrade the oversight function of the regulator and stay on top of the changing market development curve. The nuances of evolving practice changes in oversight were well tracked by the erstwhile DG. Nevertheless, administrative puritans would perhaps prefer the stability and team-driven administration of Acting DG Mary Uduk, who brought a temperate yet effective personality to the governance table and slowly but steadily provided templates for new market administration, but not without a few missteps of her own like the high-handed intervention in the discipline of Oando Plc. on alleged corporate reporting infractions.

 

Concerning the NSE, recent data shows that the equity values listed on the Exchange had been on a steady upswing in the broad sweep of the market's contemporary history. It appears that Onyema has been able to superintend a secondary market growth that has been mild but sustained, the business of primary issues in both bonds and equities, however, has been less impressive.

 

So, is this time different? Maybe so, but as much as things appear to have changed, quite a few things have stayed the same. 


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Downloadable Versions of NSE Ten Years After Takeover Report (PDF)

1.      Executive Summary: NSE Ten Years After a Takeover: The Good, The Bad and Undecided Sep 16, 2020

2.     Full ReportNSE Ten Years After a Takeover: The Good, The Bad and Undecided Sep 16, 2020


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1.      NSE Ten Years After a Takeover: The Good, The Bad and Undecided


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