BY PETER EGWUATU & NKIRU NNOROM

The reforms and tighter regulations introduced  in the Nigerian capital market continued in the year 2013 leading to improvement in market activities, with the equities and bond markets on the upsurge when compared to the preceding year.

During the year, the apex capital market regulator, Securities and Exchange Commission, SEC, the Nigerian Stock Exchange, NSE, Chartered Institute of Stockbrokers, CIS, Association of Stockbroking Houses of Nigeria, ASHON, Issuing Houses, Custodians, Central Securities Clearing System, CSCS, Registrars and other stakeholders in the capital market collaborated and assiduously worked hard to push the market higher and restore some level of confidence.

The Capital Market Committee (CMC) retreat is another avenue where various stakeholders in the market met to brainstorm and address issues that affect the market. This year’s retreat came with a lot of improvement as shareholders otherwise known as retail investors were carried along. However, there were still some levels of skepticism, especially with the local retail investor, who are yet to fully embrace the market having burnt their fingers during the time of the global recession and stock market crash in 2009.

The Equities Market
Over the year, the management of the NSE took some initiatives to put the market back on track, which triggered appreciable growth in the twin market indices. In 2013, therefore, the equities market consolidated the appreciation of 2012 and continues to be among the best performing markets in the world. Year-to-date (YTD), the All Share Index, ASI, of the NSE appreciated by 43.28 percent, outperforming 35 percent it did in 2012.

This thereby helped to retain the Nigerian stock market amongst the top ten performing exchanges. Opening the year at 28,078.81 bps, it rose to close at 40,231.68 bps as at the close of transactions on Friday, December 27, 2013. Also, the NSE’s market capitaliastion rose by 43.47 percent from N8.974 trillion it started the year at to close at N12.875 trillion as at close of trading on Friday, December 27, 2013.

The NSE’s equities market capitalization had reached an all-time high of about N12.85 trillion in June and a bearish run triggered later when companies started declaring dividends and bonuses, coupled with announcement by the US Federal Reserves of planned tightening of liquidity, which eroded some of the gains made in the market. The equities market equally saw a boost as an organised Over-the-Counter, OTC, platform, sponsored by the National Association of Securities Dealers (NASD) was launched to enable the transparent and regulated trading of unlisted securities.

Within the year the NSE commenced transaction on the new trading engine, X-Gen. There was also the launch of Alternative Securities Market, ASEM, a specialized board for listing small and mid-sized companies with high growth potential, as part of efforts to achieve the its $1 trillion marks by 2016. Before the re-launch of the ASEM window, the NSE had appointed 14 companies as Designated Advisers, DAs, for the companies interested in listing on ASEM.

The DAs would be available to provide professional advisory services to the mid-size companies before and after their listing. During the year, NSE kicked off retail bond trading to offer investors room for portfolio diversification. There was also the introduction of fixed income market making, while six security firms were selected to offer market making services in that capacity.

Delisting and New Listing
Only two companies listed within the year, while a total of seven companies were delisted from the Daily Official list. Among the companies that listed were Infinity Trust Mortgage Bank Plc and Computer Warehouse Group. Afroil Plc, Pinnacle Point Plc, West Africa Aluminum Plc and Nigeria Wire Plc were delisted for continuous non-compliance with post-listing requirements, while Poly Products Nig. Plc delisted voluntarily due to harsh business operating environment. Bagco Bag Plc was delisted following its merger with Flourmill Nig. Plc, while Crusader Nig. Plc also delisted as a result of its merger with Custodian & Allied Insurance Plc.

The Bond Market
In April 2013, the Nigerian domestic bond market got a huge boost following the inclusion of Nigeria’s sovereign bonds in Barclay’s Emerging Market Bond Index, in addition to its admission into the JP Morgan local currency bond index in October 2012. This puts the local currency bond market within the radar of foreign investors, who year-to-date, have invested an estimated $5.4 billion in Nigerian bonds.

In September 2012, prior to the admission of FGN Bonds to any international bond index, foreign investors’ holding of Nigerian bonds was approximately $1.2billion. The state government and corporate segments of the bond market have benefited from a favourable environment, reformed issuance procedures and renewed interest from investors to tap into the bond market.

The  International Finance Corporation (IFC) did  issued its first N12 billion ‘Naija Bond’ in February this year and has approached the SEC for naira-denominated Medium-term Notes (MTN) programme of $1 billion. The African Development Bank (ADB) has equally filed for the approval of an MTN-programme worth $1.5 billion, with the SEC.

This year also saw the successful launching of the Financial Market Dealers Quotation (FMDQ) platform, which is expected to make over-the-counter (OTC) bond trading easier and more efficient. This is not only revolutionary both for the primary bond market and the secondary market, but will also improve the level of sophistication of the sovereign bond market and accelerate the development of a derivatives market to enhance risk management.

New Products
Within the year under review, the capital market witnessed the issuance of Nigeria’s first Sukuk bond by Osun State government following the approval of Sukuk rules by the SEC. The Sukuk is an important product capable of attracting capital from the Gulf countries and from the Muslim population of Nigeria, who many believe constitute about half of Nigeria’s 170 million people.

The SEC also within the year approved an Exchange Traded Fund (ETF) based on the NSE-30 that will soon join the New Gold as the two ETFs tradable on the floor of the NSE. The
Collective Investment Schemes (CIS) industry continues to grow with current net asset value (NAV) of about $1 billion.

Establishment of committees on 10 year master plans
During the third quarter CMC meeting, the SEC set up three important committees to develop 10-year master plans that will be monitored at least quarterly by the market wide CMC. The deliverables of the three committees are a master plan for the entire capital market, one for Islamic finance and another for financial literacy.

SEC’ investor education and market capacity
The capital market community led by the SEC continued to value the contributions of stakeholders to the progress of the market and it interacted with stakeholder groups to strengthen its relationships. Within the year, the SEC held meetings with shareholder associations, quarterly CMC meetings in Lagos, as well as investor education programmes that include a National Capital Market Quiz Competition, sponsorship of the monthly ‘Eye on Nigeria’s Capital Market’, the Market Outreach . In a bid to raise capacity within the market and support other sectors of the commission usually embark on advocacy programmes such as the Infrastructure Roundtable.

New Rules
The SEC within the year under review made new rules to boost equity, as well as on Securities Lending and Short Selling and Introduction of Market Making: A key challenge facing the market is liquidity, illiquid markets are unable to perform the important role of price discovery and capital allocation functions of a market efficiently.

To help boost liquidity and enhance confidence in the market, the commission introduced rules guiding securities lending and consequently permitted short selling to herald the introduction of market making, which is already increasing liquidity in the market. Short selling is important not just for its impact on liquidity, but also from a risk management perspective, it helps brokers and other investors to hedge their positions.

New Capital Base and Technological Transformation
The SEC had noted that broker-dealers, custodians, trustees, registrars and other market operators need to be strong, independent bodies with sound internal practices. For example, a broker needs to have clearly delineated front, middle and back offices in addition to a minimum technology standard. Clearly, the commission stated that the current minimum capital requirement of N70 million can no longer guarantee that broking firms have all these in place.

Consequently, the Board of the SEC recently approved new minimum capital requirements for all categories of market operators. The commission identified technology as an important enabler in the smooth functioning of modern financial market, hence the need to increase the capital base. However, there have been some reservations by some market operators over the recent hike in capital base.

For instance, the Chartered Institute of Stockbrokers (CIS) and ASHON have faulted the newly increased capital base for capital  market operators by the SEC, saying it was ill timed and uncalled for at this moment in time that the market is experiencing recovering from the global meltdown.