Capital Markets Newsletter May2009

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Monitor

International

(BMI),

report

points out, with the Lagos All-Share

A Post-Mortem of the Meltdown

Index down 27.5 per cent since January

of the Nigerian Stock Exchange:

1, (the worst performing equity index in

Are Weak Regulatory Frameworks

the world so far this year) and in

and Corrupt Officials to Blame?

addition to the 9.2 per cent drop in the

May 2009 Vol. 22: Issue #5

lost at least a third of their investment in

value of the local currency, investors one month. In fact, in March 2009, the

Barely four years after garnering global

All

Share

acclaim as a top performer, the Nigerian

depreciation.

Index

suffered

37%

Stock Exchange (NSE) has declined in dramatic fashion as to raise legitimate

Standard & Poors, an international

questions why things went horribly

rating agency, had in its report rated

wrong. Of course, much may be said

Nigeria’s economy as having slipped

about the global financial crisis and its

from “stable” to “negative” condition.

impact on emerging markets such as

Investors could not have done worse by

Nigeria. However, there are serious

investing in the Nigerian stock market.

reasons to believe that beyond the

Analysts are agreed that the stock

effects of global fiscal crisis, structural

market meltdown is fast exerting a

defects

systemic risk to the financial sector

in

Nigerian

regulatory

institutions and perhaps, corruption of

thereby

squeezing

institutions and officials charged with

expectation.

liquidity

beyond

overseeing the capital markets may have contributed

significantly

to

the

implosion of the Nigerian stock market.

Clearly, the problems at the Nigerian Stock Exchange cannot be attributed solely to the global financial crisis. The

The statistics are indeed sobering: in five

more likely scenario is that systemic

years, for example, market capitalisation

incompetence and perhaps, corruption

rose from N1.96 trillion to N13.3 trillion and

gave rise to a temporary facade of

collapsed to about N4.8 trillion by April

success which gave way to harsh

2009. In the same vein, the NSE All Share

realities as the liquidity crunch hit the

Index dropped from a high of 65,000 points

markets.

to

21,451.00.

As

the

latest

Business

©Blackfriars LLP 2009. All rights reserved. This document is for general guidance only. Definitive advice should be sought from counsel if required. Blackfriars LLP is a Nigerian law firm with a representative office in Toronto, Canada.

WWW.BLACKFRIARS-LAW.COM Taken a step further, analysts

are

SEC, Mr. Musa Al-Faki. In a culture

increasingly suggesting that the various

where public officials hang on to their

IPOs

quoted

powerful offices, Mr. Al-Faki’s hurried

companies, especially, banks in the last five

departure and immediate replacement

conducted

by

many

years may have been rigged. For example, it was not unusual for banks to organize 2 or 3 IPOs within 24 months with each IPO generally declared to be “successful”. If an

speaks volumes. Indeed,

one

prominent

IPO was as successful as members of the

editorialized

public were made to believe, why would

disengagement of the Director General

the same quoted company head back to the

of

public to raise funds within so short a time?

Commission (SEC) Mr. Musa Al-Faki is

Banks constitute 65 percent of market

a welcome development in the process

capitalisation in Nigeria. Allegations of

of

rigged accounting records for IPOs may

procedures

perhaps have elements of truth to them. On

superintending the Nigerian Capital

price manipulation, investors are said to

market.” Considering that the departure

have lost about USD900 million amidst

of the SEC helmsman is with immediate

allegations of price manipulation in two quoted companies.

dealings,

insider

dealings, and price manipulations by some quoted companies on the Nigerian Stock Exchange, the time has probably come for a rigorous post-mortem of what went wrong in the Nigerian capital markets. Serious concerns about the perceived

weakness

of

regulatory

institutions concerned with Nigerian capital markets boiled to the surface recently in the barely concealed relief expressed

by

a

Securities

sober

the and

“reported Exchange

re-evaluation

of

and

persons

of

the

effect and the Minister of Finance promptly accepted his resignation, it is

In the wake of recent disclosures of unwholesome

the

that

newspaper

the

media

and

stakeholders in the capital markets at

fair to surmise that the SEC helmsman was pushed out of office in the wake of the calamitous decline of the Nigerian capital markets. In this regard, the Securities and Exchange Commission and NSE ought to be scrutinized. As a recent newspaper editorial argued, “the principal object of the SEC Director General duty is daily supervision and development of the Nigerian capital market and that is the yardstick to measure his performance over

time.

Securities

The Act

Investments

and

empowers

the

the departure of the Director-General of ©Blackfriars LLP 2009. All rights reserved. This document is for general guidance only. Definitive advice should be sought from counsel if required. Blackfriars LLP is a Nigerian law firm with a representative office in Toronto, Canada.

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Commission, so formidably, in the

the operator (NSE) to the regulator of

regulation and enforcement of the

the market (SEC).

Securities business, oversight of venture futures

A key step in this regard is that the

exchanges that its helmsman will be

clubby attitude at both SEC and NSE

very hard put in search of excuses for

should be dismantled without further

under performance. When it mattered

delay. Similarly, the recruitment process

most, it was apparent that both the

at both SEC and NSE needs to be

Commission

revisited. A cursory survey of the SEC

capital,

commodities

and

its

and

officials

were

board of directors and management

inadequate in capacity and gravitas.”

shows a deficit in modern professional The current meltdown strongly suggests

capabilities.

that share prices could not have been manipulated without the connivance of

For further inquiries, please contact:

perhaps some officials at the regulatory institutions. Now that we know that the

Dr. Virtus Igbokwe

fundamentals of a prosperous stock

Tel:

exchange were simply not in place to

Email:

justify

Fax: +1 646 536 8978

the

attributed

phenomenal to

“profits”

investments

in

+234 802 220 4755 [email protected]

the

Nigerian Stock Exchange, more needs to be undone to unravel some of the murky transactions at the NSE and SEC in the past seven years. The

sanctimonious

Nigerian

Stock

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subhead

crisis,

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examination of the utter disrespect of

©Blackfriars LLP 2009. All rights reserved. This document is for general guidance only. Definitive advice should be sought from counsel if required. Blackfriars LLP is a Nigerian law firm with a representative office in Toronto, Canada.