Weary of Investing in the Capital Market?

Iam sure that the title of this write-up would raise a lot of eye-brows, with many wondering why anyone would be talking about investing in the capital market at a time when the nation’s economy is in a most fragile state and the capital market seems to be at an all -time low. The rationale behind this topic is quite simple. The stock market in Nigeria just like in any other jurisdiction is cyclical as there are bullish and bearish trends. Another motivation for writing this article is the outcome of the discussions at the 2015 Capital Market Solicitors’ Association (CMSA) Annual Business Luncheon themed “Making the Nigerian Capital Market a Catalyst for Change”. CMSA is an independent self-regulatory body of Solicitors and Commercial Law firms engaged in capital market practice in Nigeria. Discussions at the flagship event centered around liquidity of the market, taxation and the role of relevant stakeholders.

It struck me at the end of the deliberations, that there is an obvious need to improve the regulatory standards within this industry. The importance of investor confidence as a key determinant of capital market growth must be acknowledged. Several shareholders have had not too pleasant experiences while investing on the local exchange. Some have paid for shares without receiving certificates or dividends subsequently declared. Others have been shortchanged in terms of purchase price by their stockbrokers possibly because they had no clue as to how to use the information provided by the Price List of Traded Symbols. Not a few companies lack governance standards. In the case of dematerialised holdings, mind-boggling scams have been reported occasionally. The realisation that the confidence that both foreign and local investors have in the Nigerian Stock Market has waned greatly over the years makes this piece of literature relevant.

The Nigerian Stock Exchange (NSE) has grown over time and as at 31st December 2013 had about 200 companies listed on it. The Exchange is a full member of the World Federation of Exchanges, having received a unanimous vote for admission into the global umbrella for operators of regulated securities exchanges. The instruments traded on the bourse include debt instruments such as sovereign, state, municipal and corporate bonds as well as debentures, equities, preference shares and derivatives. Despite the basket of securities available, there is still a case for broadening the options. The efforts made so far must be recognised as the NSE continuously strives to remain internationally competitive by benchmarking its operations against the US, London and Johannesburg Stock Exchanges.

The NSE plays host to a wide range of companies from various sectors of the economy. It is important for prospective investors to play safe in terms of industry performance. The food and beverage sector, breweries and the construction sector are currently relatively safe havens. In times past, the banking industry and the oil and gas sector were the toast of investors but the economic realities have changed that. Any investor looking to buy securities is doing so with a view to make profit and therefore expects some degree of investment security and a reasonable return on investment. Capital Market regulators as well as the operators must understand that investors have a choice, particularly the foreign ones. There must be clearly defined incentives to make the Nigerian capital market a preferred option because there is no stressing the fact that portfolio investment boosts economic growth and becomes even more relevant in times of dwindling resources. The capital inflow through this organised platform is presently below anticipation for several reasons, significant among which are regulatory concerns, dispute resolution challenges, market volatility and integrity. These concerns are not unique to any market but are worsened in the case of countries with weak legal frameworks. The BGL story is one of the instances of regulatory lapses.The prevailing unstable exchange rate regime has added to the list of challenges.

In order to remain competitive, the NSE must first and foremost be demutualised. In this context, demutualisation has been described as the term that denotes the change in the legal status of a stock exchange from a mutual association to a company limited by shares. The exchange is through this process transformed from a one-time not-for -profit, membership-owned organisation to a profit making, shareholder owned entity. The concept provides an opportunity to unlock the net worth of a stock exchange, though the realisation of the value will ultimately depend on it being listed. Media reports show that the idea to demutualise the Nigerian Stock Exchange was first mooted in 2002. The demutualisation process if effectively implemented will improve governance standards, broaden market access and ultimately attract international strategic partnerships.

Another very important criteria for rating any stock market is the extent to which information is made available to investors. Shareholders require adequate and up to date information because this provides the basis for investment decision making and portfolio monitoring. The rules relating to returns exist but the penalties for non-compliance are not strictly enforced. I doubt if all companies quoted are rendering quarterly, half-yearly and yearly reports as and when due. A central information repository from which investors can freely access information should be developed. It is noteworthy that the 2015 Rulebook of the NSE provides for improved disclosure standards. The supervisory body should be congratulated for being pro-active in this regard. Insider dealing is frowned at because it defeats the principle of a fair and orderly market. Adequate deterrents must therefore be put in place to avoid such market distortions.

It is believed that trading activities on the stock market will be increased if investors have access to good quality advice. Sadly, many are guilty of ignoring the counsel or recommendation which comes with all public offers, to consult their advisers before taking investment decisions. There is a need for improved awareness on the benefits of investing in securities. It must be noted that transaction advisers have a great role to play in strengthening market confidence. Accordingly, capital market players, including but not limited to lawyers, stockbrokers, issuing houses, portfolio managers, trustees, market makers and accountants should always remain above board. The likes of Bernard Madoff and our own Peter Ololo have through their fraudulent activities impacted negatively on investor confidence. Self-imposed rules may be needed to maintain high standards of professional ethics.

Furthermore, the importance of the financial sector of any nation in general and the stock market particularly cannot be over-emphasised. This is because the exchange maintains share indices which serve as indicators of general economic trends. Stock Exchanges apart from being primary and secondary market investment hubs create local and international investment opportunities, raise capital for governments and businesses, mobilise savings for investments and facilitate company growth. It is an undoubtable fact that deeper capital market operations will provide indigenous companies with opportunities for capital formation, business opportunities for foreign entities and create wealth platforms for domestic investors.

Conclusively, the desire for the NSE to remain internationally competitive and become a preferred investment platform must be prioritised. This can be better ensured by encouraging the constructive engagement of all relevant stakeholders, including transaction advisers as well as establishing a balanced regulatory and legal framework. The last few months have been characterised with budget presentation at the Federal and State levels. Individuals and institutions are also not left out of the planning process. It will be beneficial to see a large number of corporations as well as individuals locally and in diaspora dedicating a significant proportion of their resources to stock market investments. The time value of money makes capital market investments worth the while. My arms are folded patiently waiting for such regulated influx as I believe strongly in the importance of the capital market.