24 July 2016, Lagos – The Director-General, Securities and Exchange Commission (SEC), Mr. Mounir Gwarzo, spoke with IFEANYI ONUBA on the challenges facing the capital market and efforts to restore the confidence of retail investors in the stock market.
It has been over a year now since you were appointed as the Director-General of SEC; what have you done differently to reposition the capital market?
I was very lucky when I started as the acting director-general of the commission. Lucky in the sense that the capital market committee had come together for a period of nine months to develop a very robust capital market master plan. The master plan has over 100 initiatives for implementation within a 10-year timeframe.
What gave rise to the creation of the master plan was what we experienced in the market in 2008 to 2010 when the stock market crashed. So, driven by SEC, we were able to get the best brains in this market and we set up three different committees
The first one was to holistically look at the entire market and come up with a plan. The second committee was to look at financial literacy and how to educate people in terms of financial inclusion and investment in the market.
The third committee looked at the non-interest finance as a new product in the market. Before then, we had looked at the experiences of other countries. You will recall that in the 90’s, there was the Asian capital market crash and countries such as India and Malaysia had to come up with their respective master plans.
Malaysia had a very robust master plan that ran between 2000 and 2010 with phenomenal results. Because of the success story of what was seen in Malaysia, the best brains in our capital market came together and prepared the master plan which largely made my job easier.
Other people could have gone the other way to jettison the master plan, considering the fact that the thinking behind the plan was done by my predecessor. Ordinarily, the typical Nigerian would say this plan was not initiated by me and let me also set up my own committee but I didn’t do that. That is why when we came on board, we informed the market that our only agenda is to implement the master plan and that is what we have been doing.
So, given that I have been a player in the market for quite a while, I also had a fair idea of what to do and that made my job a little bit easier.
The level of retail investors in the capital market is still low. What is responsible for this?
That was caused by the crash of 2008 to 2010 when some people sold their assets and some went to the extent of selling their houses, jewelleries and cows to invest in the capital market because at that time when you invest; within a short period of time, say two to three weeks, you would achieve returns of up to 20 to 30 per cent. And because of that, people got their fingers burnt when the market went through a painful correction. People lost a lot of money and the natural thing for them is to move back and now say look, ‘I’m not going to be in this market.’
So this largely contributed to the exit of the retail investors from the market.
What has the commission done so far to increase the level of participation of retail investors?
Within the master plan, there is an emphasis to bring back the retail investors. As such, what we are currently doing is quite different from the practice in the past where retail investors would be approached via several enlightenment programmes and be asked to come and invest in the market. But due to our experience, we identified some key concerns of the retail investors.
If you speak to the retail investor, he will tell you that he has been investing in this market and has not collected his dividend for the last five or 10 years. And if you ask why he hasn’t collected his dividend, he will reply that the dividend warrant has become stale and he doesn’t know anywhere to revalidate it because you can only revalidate by approaching a registrar and 80 to 90 per cent of registrars are located in Lagos and how many of them can afford to travel to Lagos and spend days and even when they go, how sure are they that the warrant will be revalidated?
Secondly, the retail investor will tell you that he has changed his address and he was not able to get his dividend warrant when it was sent. Thirdly, the retail investor will tell you that why he has not been collecting his dividend is because sometimes, the cost of transportation to go and collect the dividend warrant is higher than the actual dividend.
So certainly, because the retail investor had not been getting the benefits from the market, he felt there was no need to come back.
Another aspect that the retail investor complain about is that once he gives a mandate to a broker to sell his shares and those shares are sold, there is usually delay in the remittance of the proceeds. Sometimes, he doesn’t even get anything out of it. We have received a lot of complains from retail investors.
Also, another area of concern for the retail investor is the herculean task to get their shares verified because once he gets his certificate, he has to go to the broker, complete all the necessary documents and send it to the registrar for verification but sadly, this takes a long period of time – like six months or even a year – before this certificate is verified.
Therefore, because of our realisation of those concerns, what we did was to begin to address each and every one of them. So, for instance, for the electronic dividend, we had an excellent collaboration with the Central Bank of Nigeria and the Nigerian Interbank Settlement System so that they can provide us with the Bank Verification Number platform.
We have not achieved much progress because our target last year was to ensure that by the end of this year, one million Nigerians must have registered for the electronic dividend. Sadly, the major parties are not helping matters. We have scheduled an all parties meeting to look at all the issues.
So, one of the things we have been on the vanguard of in the last one year is to encourage retail investors to hook into the e-dividend mandate form so that they can be collecting their dividend electronically and once they can collect their dividend, on that basis, the issue of changing addresses and not getting their dividend warrants will now be a thing of the past.
The issue of dividend being stale and you need to revalidate will also not be there. The issue of moving from point A to B which would cost you more money will also become a thing of the past and that is why we are also passionate about this.
Let me also state that this is not something that would be done within six months or one year. It is a process that will take a long time and that is why SEC is not deterred and we are committed to continue with the vanguard and we are sure that once we are able to raise the participation of retail investors from two per cent to, say, five per cent in the next five to ten years, it will certainly be a major game changer in our market.
You spoke about complaints by retail investors about non-remittance of share sales proceeds. How has the commission been able to address this problem?
What we did on the issue of delay in remittance of proceeds is that we mandated every stock-broking firm from January this year to jointly implement what we call the Direct Cash Settlement system whereby proceeds of sale of shares are paid directly to clients. Once you have the details of the clients in terms of their account numbers and other particulars, then you have to remit sale proceeds to the clients’ accounts through the DCS.
So the era whereby cash is paid into the account of the broker before such money is paid into the client’s account by the broker will be a thing of the past. Except where a client specifically instructs the stockbroker not to remit the funds to him/her, the proceeds of shares sold must be remitted to the client’s account. By doing this, we know that it will address some of the concerns by the retail investors.
Another area we have worked on is to ensure that the entire certificates with registrars are being transmitted to Central Securities Clearing System to ensure that the entire shares of the market have been dematerialised. We have instructed every registrar to do that and I am happy to say that as at the last count, 98.4 per cent of shares in this market have been dematerialised and it is now easier for investors to sell their shares and get their payments on time.
How was the commission able to resolve some of the challenges experienced during the e-dividend campaign?
We were involved in direct engagement with investors through road shows and a lot of public awareness programmes. At the first instance, the retail investors were supposed to pay N100 for the registration but SEC decided to pay for that cost. After that, we did an impact assessment and about four months ago only about 4,800 retail investors have hooked up to the e-dividend mandate.
Some concerns were raised because of the payment of N100 and so SEC also within its limited resources decided to underwrite the cost of registration and we extended it up to September 2016 for free registration.
So, we have been having massive public enlightenment programmes. It’s an advocacy that we have to continue and it may take us one or two years but SEC is committed to that advocacy because we need to address some of the concerns of retail investors and we need to bring back retail investors to the market.
There are a lot of multinational companies that are yet to list their shares on the stock market and many people have expressed concern over this development. What is responsible for this?
It is one of the initiatives that we have for this year. We believe that companies that have been operating in our country for quite a while should be able to list in our market. By listing, they will increase the breadth and depth of the market. They will also be able to pay appropriate tax to government; they will also be able to do better and employ more Nigerians and Nigerians will benefit from some of the benefits they have been deriving.
We believe they ought to be listed but we don’t subscribe to the idea that they must be compelled because if you compel them to list, they can decide tomorrow to delist.
So, we think government can come up with various initiatives that can make companies to be listed. For instance, government can say that if it is going to give a contract of X amount, that contract of X amount can only be given to a company that is listed.
Secondly, government can also say that if it’s going to give a contract and there are two companies, one is listed and the other is not; by the time you are doing the evaluation of the contract, government can inform the Bureau of Public Procurement that 10 per cent or 15 per cent or 20 per cent should be given to a company that is listed. These are some of the initiatives that government can come up with.
Another very important point is that historically, companies that were listed in Nigeria were through various government initiatives similar to what obtains in India and Malaysia. In Nigeria, over 90 per cent of companies that are listed on the Nigerian Stock Exchange are listed by virtue of different government initiatives.
But some of the companies have expressed concerns about the difficult listing requirements. What is being done to simplify the process of listing?
Some of the concerns that the companies have raised have also been addressed. One, they normally say that the rigorous listing requirements of the NSE are not favourable but now we have other platforms such as the National Association of Securities Dealers and we are saying that if you don’t want to list on the main board of the NSE, then go to the NASD. If you don’t want to list under NASD, go to Financial Market Dealers Exchange. So in essence, SEC has provided different platforms with different listing requirements where companies can list their shares.
Therefore, we do not see any excuse why companies will not list their shares. One of the areas that we are going to be focusing on significantly among our initiatives is for those companies that were privatised by government and yet to be listed while there is a clause that requires them to be listed after a period of years. We will be having a meeting with the Bureau of Public Enterprises very soon to see how we can collaborate with them.
The stock exchange has even gone as far as amending some of its rules. In the past, you can’t be listed if you don’t have track record of profitability for a certain number of years but now even if you don’t have that track record, the stock exchange can look at your turnover and allow your company, after satisfying other requirements, to be listed. So, there are lots of flexibilities and options and we are also ready to look at certain concessions in terms of fees.
We are also saying that you can be listed without having to raise capital from the market. So, there are a lot of options for companies if they are really serious and committed to be listed in the market. We are ready to relax some requirements within our purview.
Once a company is listed, it is certainly going to pay its accurate corporate tax. Records show that 60 per cent of taxes that corporations pay in Nigeria are paid by listed companies. So, even in terms of commitment to generate money which this administration is focusing on, it can be achieved when these companies are listed on the stock exchange.
There are arguments that unclaimed dividend should not have a 12-year timeline and that it should be left without expiration. What is your take on this?
I also share that view. Dividend should be in perpetuity. What is important is that an investor should be able to show evidence that the dividend belongs to him or her after 13 or 15 years. Everywhere in the world, dividend is paid in perpetuity but the provision of the Companies and Allied Matters Act states that once dividend is declared and not claimed after 12 years, it becomes statute barred.
We think it should not be. There must be a framework by which people can claim their dividend and one of the options is that we need to amend the provision of CAMA and already, SEC and the capital market committee have set up a market-wide committee comprising of very experienced and knowledgeable lawyers in Nigeria to look at some of these laws. Part of the law that would be looked at is CAMA and the part where we will need to amend CAMA is the section that talks about unclaimed dividend.
The Senate and the House of Representatives are ready to support the capital market. They have been calling us to find out if there are laws that require amendments so that they could pass these laws. SEC and other capital market operators are very keen on this and we hope that before the end of this year, those committees that we set up to look at these laws would have finished their jobs so that we would now begin to engage the parliament for the laws to be amended.
There is no way we will achieve the growth of this market if some of these laws are not amended.
Despite all the initiatives that you have highlighted, we have not seen the much-needed recovery in the capital market. Why is this so?
You know the economy is not in the best of shapes because of its decline in both first and second quarters of 2016 which clearly signals recession period, and the capital market could not be an exception. The International Monetary Fund had released its world economic report which shows that the Nigeria’s economy would contract in 2016 due to foreign currency shortages arising from lower oil receipts, low power generation and weak investor confidence. The global market is also experiencing difficulties and other stock markets have even gone down more than the Nigerian stock market.
Since both oil and commodity prices have gone down, and 80 to 90 per cent of the companies listed on the stock exchanges have their activities related to either the oil or commodity prices, it is obvious that this would certainly be reflected in the performance of these companies.
It’s a phase the entire world is going through and I believe that within a short while, we will see things getting better, more especially since the present administration is doing all it can to bring back the economy into proper shape.
People should also bear in mind that it is not a market that will always be going up; it will go up and go down because it reflects the state of the economy.
What is your message for those investors who are still sceptical about returning to the market after getting their fingers burnt during the stock market meltdown of 2008?
They should keep faith because some of the lapses we had in 2008 have now been addressed. The regulators – CBN, SEC and the NSE – have realised some of their mistakes and they are being addressed.
Secondly, the operators have realised where they went wrong and they are now extra-cautious and investors now will not jump at any type of offers because they will also be very cautious about investing in any type of stocks especially those not listed on an exchange.
Although they burnt their fingers, they should keep faith because the philosophy we have in the market is that the best time to enter the market is when share prices are low because one day, the price will rise to appreciable level.
Since the beginning of this year, we have not been seeing new listings such as public offers and rights issues among others. What is responsible for this?
Again, it’s the state of the economy. We are also very worried why we have not been getting those offers. We are trying to engage the companies and we are also discussing with operators to go back to the drawing boards.
We are lazy because we like to issue state bonds because it is easy to sell. But we need to go back to the era where operators will just pick a particular company and do an extensive analysis of the performance of the company and its potential and approach its management with a presentation that this is where it should be in the future. We don’t do that now but only few investment companies do that.
This year has been very dull both in public offering and rights issue and it’s just a reflection of the economy because the companies are not doing too well and so they have to be very cautions of incurring additional cost.
What phase are we now in the implementation of the 10-year capital market master plan?
We are in the second year now and you know it’s a 10-year plan and every year we sit down and come up with several initiatives.
Last year, we looked at e-dividend, direct cash settlement, recapitalisation of capital market operators, dematerialisation, and operationalising our National Investor Protection Fund.
We have also launched the corporate governance scorecard, which will ensure that companies do very well. So apart from assessing a company through its financial standing, you can also access it through its compliance with corporate governance scorecard.
This year, one key initiative in the master plan is to ensure that the master plan has ownership in the legislature, executive and judiciary arms of government.
We have capital market master plan implementation council chaired by one of the most experienced and respected stockbrokers to provide advocacy. The council has visited the Vice President, Ministers of Finance, Trade and Investment and Budget and Planning for the Federal Government to take ownership of the master plan, and the visits have been very successful. We had also engaged the judiciary in February this year and we co-partnered with the parliament to organise a two-day programme on capital market.