Recapitalisation of capital market operators: Beyond the deadline

06 September 2015, Lagos – With the deadline on the recapitalisation of capital market operators expiring at the end of this month, the question posed by capital market watchers who spoke with Olaseni Durojaye is: will the Securities and Exchange Commission (SEC) announce further extension or implement the new policy?

Nigeria Stock Exchange.

Nigeria Stock Exchange.

The directive by the Securities and Exchange Commission (SEC) to raise the minimum capital base of Capital Market Operators (CMOs) has continued to generate divergent reactions among analysts and players in the sector.

Some capital market analysts who bore their minds on the trends in the market explained that the new minimum capital base would reflect the shareholders’ fund of a market participant at any point in time going forward. They added that the goal of the exercise was to enhance the level of confidence in the Nigerian capital market and boost the capacity of market operators to undertake bigger deals.

The apex capital market regulator had increased the minimum capital base for brokers/dealers from the current N70 million to N300 million, representing a 329 per cent increase.  A broker, who currently operates with a capital base of N40 million will now be required to have N200 million, representing an increase of 400 per cent. The minimum capital base for dealers increased by 233 per cent from N30 million to N100 million.

Besides the attendant drama and the rush to recapitalise among operators, insinuations to the effect that the September deadline may be shifted again has come to the fore leading the management of the SEC to reiterate its commitment to the well-advertised deadline. One analyst told THISDAY that speculations on another extension may have been fueled by SEC’s recent extension of the deadline for CMOs considering reclassification of functions, reduction of functions or merger and acquisition in view of the capitalisation exercise to August 31, 2015. The extension was announced in a circular dated August 18 and obtained from the website of SEC.

The circular read in part “The Securities and Exchange Commission has granted an extension on the notification of intention by Capital Market Operators (CMOs) considering reclassification of function, reduction of functions or merger/acquisition in view of the recapitalization exercise, till August 31, 2015.

“CMOs should note that conversion/migration to any of the options is not automatic as routine regulatory requirements must be fulfilled,” the circular stated.that SEC had on December 19, 2013 issued a new capital requirement for capital market operators with December 31, 2014 as deadline. However, in December 2014, the apex capital market regulator extended the deadline to September 30 2015 in a move that industry watchers claimed was due to pressure and protests by some stockbrokers.  In calling for the extension at the time, some market operators had reportedly argued that the bearish nature of the market affected their ability to comply with the deadline. SEC had baulked and extended the deadline to September 30 after considering the prevailing market and economic situation.

No Going Back

However, Director-General of SEC, Mounir Gwarzo, foreclosed any further extension when he told THISDAY in an interview that there was no going back on the September 30 deadline.

He had said, “At the last CMC meeting we informed the market we will keep to our deadline and the market agreed. So, SEC is not going to move away from that deadline. September 30 deadline is sacrosanct. We are ready to support the market wherever they require our assistance,” Gwarzo stated in the interview.

Responding to THISDAY enquiry, Chief Executive of Eczellon Capital Limited, Diekola Onaolapo, stated that the recapitalisation was long overdue and thus a welcome development. He also expressed confidence that the SEC will keep to the deadline though he raised concerns on the handling of the process by the commission.

“The new capital requirements set by SEC is not only a welcome development, but it is a move long overdue since the crash of the stock market in 2008/2009. Like any recapitalisation exercise, it’s likely to present opportunities for consolidation in the Nigerian capital market. A strong capital market in Nigeria will play an important role in deepening the emerging economy of Nigeria and West Africa,” Diekola stated.

However, another operator who spoke to THISDAY on condition of anonymity held that “Unlike the banking and the insurance sub-sectors which require risk capital to carry on their functions, capital market operators hardly require large capital to function. Trading on behalf of clients or performing advisory functions doesn’t require any capital, except they are involved in underwriting which is seldom the function of stockbroking firms.

“It therefore appears that apart from reducing the number of stockbroking firms, it is unclear what the impact of the exercise will be. Of course, some people may argue that large capital will put the stockbroking firms in good standing financially to be able to do proprietary trading and also earn enough income to cover their expenses, and thus reduce brokers’ propensity to defraud. However, it is not clear if this will work,” he contended.


But THISDAY findings revealed that many operators may not be able to raise the new minimum capital base leading some analysts to predict that the industry may witness mergers and a scale down of services by some of the affected operators. Another analyst told THISDAY that it was unlikely that the industry will witness acquisition of some of the weak stockbroking firms arguing that “The way it looks, a significant number of firms should meet the requirement. They only need to be humble enough to accept a scaled-down function and attach themselves to a broker/dealer. In such cases, they will still have control of their firms but operate under terms and conditions as agreed with the principal (broker/dealer). In the event of not meeting up with the capital requirement, only those firms with strong value proposition would be acquired by any top 10 firms. By what I see in the market, only a few firms outside of the top 10 have strong value to propose to the big ones. However, they may be able to team up with peers to meet the requirement,” the analyst stated on condition of anonymity.

According to the analyst, some of the likely challenges that the consolidation may throw up will be in the area of integrating the activities of merging parties. He stated that some roles that are duplicated may have to be cut-off while the determination of what platform – name, brand, technology platform etc. to use going forward would require objective decision making adding that this usually results in serious debate and if not well handled, could cause serious problems except in cases of complete take-over or acquisition.

“The merger of two or more firms is likely to create roles duplication; hence redundancy. As experienced in the banks, insurance companies and Pension Funds Administrators (PFA), industry consolidation always come with its attendant costs which unfortunately include job rationalisation. Depending on how the recapitalisation plays out, it most likely would add to unemployment” he concluded.

But Onaolapo maintained that the process will boost the scale of the remaining or surviving players and enhance their ability to on board larger transactions and deals due to increased balance sheet size. According to him, “By the end of the process, we are likely to have more focused and grounded capital market operators well positioned to tap into emerging and growth opportunities in the Nigerian economy, as most capital market operators are presently too small and weak players. Thus, the larger economy is likely to feel the impact of capital market activities with fewer more focused participants than the current nearly over fragmented nature of the capital market structure,” he stated.

Grey Areas

However, it was not all praises for SEC from Onaolapo as he pointed out some grey areas that SEC needed to address so that the whole exercise would not be trailed by issues and controversies after the process come to an end.  In his words: “First, the Commission need to clearly enlighten the investing public and market observers of the framework it has put in place that will allow a seamless transfer of accounts from firms that may not meet the minimum capital requirement to the surviving entities, post recapitalization. This is critical as it has the tendency to adversely impact trust and confidence of the investing public should there be challenges with the transfer of customer’s account from a failed entity to any of the surviving companies post recapitalization. Secondly, the Commission (SEC) must ensure it puts in place a robust monitoring framework to check or verify the sources of the various funds that will be injected into the capital base of the market operators.

This is largely to checkmate possible corporate governance issues that may arise.

“Thirdly, while an enhanced capital base is necessary to entrench the trust and confidence the Commission seeks to boost in the capital market, a sufficient approach would entail the promotion of adequate risk management framework in the capital market.

The absence of this could likely see capital market operators depleting their shareholders’ funds by engaging in very risky adventures or projects.
In all, we believe SEC would stick to its deadline this time and seek other creative ways of enhancing trust and sustainability of the capital market aside from raising capital base of market participants,” he stated.



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