Stock market development: Nigeria seeks to re-invent the wheel

 

The drafters of this bill intended to give it a “carrot and the stick” appeal. Dangle the carrot and wield the stick. In reality, what I see is a carrot dangling from one end and the stick dangling from another end. There’s a disconnect. For one, the fiscal fallout is huge. According to the 2013 revenue profile, oil and gas private companies and non-oil and gas companies contribute more than N3 trillion to the national fiscus. A 30 percent tax waiver will amount to about N5 trillion over a period of five years. And there’s danger that this fiscal imbalance may trigger long-term macroeconomic instability. One of the forces behind the “feel-good” factor driving the current wave of foreign investment and inbound capital flow into Nigeria is our enviable fiscal buffers, especially our foreign reserves, which affords government the opportunity to stabilize the macroeconomics and create an environment for long-range planning and investment and its attendant downstream knock-ons in the form of jobs and poverty alleviation. For a country with a $9 billion monthly import bill, tampering with our $40 billion reserves (five months import cover) may prove dicey. The situation is made all the more precarious if analyzed within the backdrop of declining oil prices and the fact that oil accounts for more than 80 percent of foreign exchange earnings.

The bill also falls foul with the spirit of the Companies and Allied Matters Act (CAMA) that guarantees freedom of enterprise and extant legislation such as the Nigerian Investment Promotion Commission (NIPC) Act that explicitly provides guarantees to foreign investors against expropriation. Section 25 of the Act states: “No person who owns, whether wholly or in part, the capital of any enterprise shall be compelled by law to surrender his interest in the capital to any other person.”

The decision to go public and list on the stock market should be a private one driven primarily by business and economic imperatives. Availing an entity to public scrutiny and the attendant communication and compliance exigencies come at a cost.

In attempting to act, Nigeria has tempered with the orthodox Western and capitalist notion that a free society where private enterprise thrives is ultimately analogous to economic growth and prosperity. There can be no free society without free enterprises. Enterprises are vehicles through which citizens exert gainful activities that unlock value and create wealth. Business, industry and commerce must be left to their own devices. Let the forces of the free market, the forces of demand and supply, make the business case for listing on the stock exchange. Not a government-engineered legislative compulsion that seeks to alter the very template upon which a free society is posited. There’s no other way to develop the market than by market-led initiatives. In the history of the stock market, from the Great Tulip mania in the Netherlands in the 1600s to the South Sea Bubble in London, stock market innovation is a private sector led-initiative, never engineered by legislation. In fact, legislation always lags financial market innovation.

Privatization of parastatals

The NSE is in dire need of a “big ticket” listing. In Zambia, the Zambian privatization agency was actually a precursor to the Lusaka Stock Exchange (LuSE). Worthy of note is the IPO of African Explosives Limited (AEL) in which the Zambian government had a 20 percent interest and is 80 percent owned by JSE-listed outfit AECI. In September 2006, I took part in the IPO of AEL. The government opted for its sale by way of listing on the LuSE. The issue was valued at 1000 kwacha a share but the government decided to take a 30 percent cut as a way to encourage retail investors. The issue was priced at 700 kwacha a share, and was 200 percent oversubscribed. The share allotment formula was such that retail investors were given priority. Workers of the exchange, backroom staff, government functionaries, lecturers, students all subscribed and bought shares. Barely three weeks into its trading, the share had risen to about 1200 kwacha, a 70 percent rise. By December 2006, it had notched 1500 kwacha. There was a lot of excitement amongst those first-timers. Today, AEL is trading at 6800 kwacha, a 900 percent appreciation from its issue price over an eight-year period.

In 2010, the Brazilian government also favoured public listing as an alternative to privatization. The state-controlled petroleum outfit, PETROBAS, went public with a $70 billion IPO in what was considered the world’s largest ever share sale. JSE-listed SASOL, under the expanded BEE scheme, launched a massive 26-billion-rand black empowerment scheme dubbed “sasol inzalo” share scheme. Some 290,000 black South Africans bought shares under this scheme.

Nigeria’s privatization agency, the Bureau of Public Enterprise (BPE) has envisaged 52 transactions to be undertaken this year (23 definite and 29 prospective ones) for a combined total of about N750 billion. NITEL/MTEL is also on the card. Last year, 17 companies allied to the PHCN were privatized. All these transactions could easily have raked in about N2 trillion market cap to the NSE. More than the windfall, this kind of issues would have served as a trigger and created the necessary momentum and interest amongst the investing public.

All hands need to be on deck. At the macro level, government needs to create an enabling environment through increased fiscal incentivisation. At the micro level, moral suasion should be pursued

Final thoughts

There are no quick fixes. Some of the solutions are generational in nature. As generations shift, the middle class grows, financial literacy improves, with larger disposable income and discretionary savings, the market will gain traction with more and more Nigerians and Nigerian businesses.

All hands need to be on deck. At the macro level, government needs to create an enabling environment through increased fiscal incentivisation. At the micro level, moral suasion should be pursued. SEC and NSE need to continue engaging all critical stakeholders: employers’ associations, market players, chambers of commerce, manufacturers’ association, shareholders’ association, etc.

At present, according to Capital Market Commission, capital market literacy stands at 16 percent. Financial and investment literacy campaign targeting schools at all levels needs to be ramped up, including engaging key stakeholders in the curriculum design process. The momentum needs to be sustained. Lectures, conferences, seminars, workshops, road shows, competitions, exhibitions are some of the fora that could be deployed. The “catch them young” campaign should be broadened.

Awareness and sensitization campaigns thus far have mostly targeted investors under the mantra of “an educated investor is a protected investor”. There is need to lay more emphasis on supply-side initiatives, especially issuer education. Knowledge deficit exists within pockets of the business community on the role and benefits of the stock market. Improving education and involvement for management and board members in the choice of investment banking syndicate, timing, benefits and the allocation of shares to appropriate long-term investors in their stock will help emerging growth companies become better consumers of investment banking services, as well as reconnect buyers and sellers of emerging company stocks more efficiently.