Medium term fiscal framework and the Capital Market -2

Last week, the first part of this series ended abruptly midway into the title SOURCE OF CHEAP FUNDS. The rest would make no sense published; so permit me to start the section all over. Dele.

SOURCE OF CHEAP FUNDS Over the years under review, the capital market had constituted a major source of capital for companies and had mostly served them well – until the abuses started to undermine the NSE and until the global financial melt-down of 2008/8 finally exposed the fraudulent nature of many of the transactions on the Stock Exchange.

But, before the collapse, the NSE was the envy of the world because for years investment on the exchange yielded better than global average of returns to investors. Domestic and global portfolio investments and autonomous funds drifted into the Nigerian capital market fuelling a bubble which was later to prove fatal to the system.

When the end was approaching, as investors were warned in the VANGUARD, it started with the withdrawal, in one week of $3 billion in portfolio investments across the board.

Central to this unprecedented growth in the NSE and, perhaps in Africa or even the developing world was the DG-NSE – Dr Ndidi-Onyiuke. She could rightly take most of the credit for the spectacular growth over ten years; she would also have to accept the blame for the mismanagement, deliberate or inadvertent, which have combined to turn the NSE into a basket case – universally.

Yet, a vibrant capital market is indispensable for any country with ambition for rapid growth – especially, the quixotic quest for top 20 by the year 2020.

All the talk about Public/Private Alliance would turn out to be nothing but empty air without a vibrant capital market. Nobody funds $250 billion power plants by withdrawing cash from his account at the bank. Right now, the Nigerian Stock Exchange, which represents the core of the capital market is in shambles.

From the time this series was conceived to the time you will read it, the Nigerian Stock exchange would have shed several hundreds of billion naira. And the end is not in sight.

CAPITAL MARKET 2008 AND NOW (SELECTED FIRMS)

The year 2008 was, by all measures, our finest year. It was the year most share prices reached their peak. The banking sector was the most capitalized and based on what we later discovered were false annual reports and accounts, pointed to a brighter future for investors.

The year also represented the beginning of the end, not only for many of the banks, but for other quoted companies and shareholders. The chart below tells the gruesome story.

Note: Intercontinental and Oceanic have since been swallowed by other banks; the fate of, once reliable Union Bank is in the balance. Between them, the Chief Executive Officers, CEOs, of these banks won more awards as Bankers of the Year and their banks received more encomiums than most others from “experts”; Professor Soludo also won the award as Banker of the year; but not from us at UniJanakara.

We knew a great swindle was underway – long before others spotted it. In a way, that tells the whole story of Nigeria’s capital market. It became a racket organized for the benefit of a few insiders – many of them National Honours award winners. The millions who were lured into the market after consolidation are still licking their wounds.

The plummeting bank shares prices have several ramifications for the nation’s economy than can be discussed here. The most important being that bank shares which were once readily accepted as collateral by creditors, are now unacceptable – even by the banks themselves.

Credit, it needs not be restated, is the lubricant of any economy. With each slide downwards in bank share prices available credit to the economy shrinks. Personal and business loans are reduced and aggregate demand for goods and services drop.

Right now, investors in the Nigerian Stock Exchange are sitting on trillions of shares which cannot be traded or leveraged for economic advantage. Yet, unless the turmoil in the capital market is checked, the promises contained in the 2012 budget and the Medium Term Fiscal Framework, MTFF, will never be realized.

THE WAY FORWARD Sacking the DG-NSE, even if justified, only begs the question. The rot in the capital market is so deep that one scape-goat offered as sacrifice will not solve the problem. Certainly, a situation where a company, Transcorp International, whose Chairman was the Director General of the NSE, and which failed to meet all the requirements for listing, points to a wider disregard for regulations than most people would suppose.

When the CEO of an institution blatantly violated the basic regulations, a clear message is sent down the entire organization for individuals to engage in sharp practices. The original investors in Transcorp, including former President Obasanjo pain N0.50 per share, to float the company.

The shares were later offered to the public at N7.50. Each of the original shareholders became a paper multimillionaire on that deal (or scam) alone. Despite being granted questionable permission to acquire public property at “sweetheart prices”, it still failed to meet several requirements for listing on the exchange. Yet it was listed. DG-NSE was the Chairman of Transcorp. A more blatant abuse of power will be more difficult to imagine.

Only a total break with the past, after a deep probe of the activities of some of our biggest investors, especially the Board members, and imposition of stiff punishments will convince investors that all is well.

Poser: why is it that some of the same people who were on the boards of the banks which failed the shareholders were at the same time on the board of the Nigerian Stock Exchange?

One was Chairman simultaneously of a leading bank and the NSE. Did the allegations of AP share price manipulation represent an isolated case or did it reveal a more pervasive fraud perpetrated by insiders against others?

What was the purpose of FACTS BEHIND FIGURES, which some of us consider invitation to insider trading and empowering a few against the majority of shareholders.

The NSE was a racket; and in some respects, remains a fraud perpetrated by the few against the many. Most investors are unlikely to return for a long time –until confidence is restored. So how will NTFF s work without a vibrant NSE?

LAST LINE: $1.76b in PTDF account was drawn down to $142.5m in a short time. More than money spent on “fuel subsidy” for the period. Who did it? No Wikileaks stuff. Read DeleLeaks. Just N5,000