INTERVIEW: How SEC cut transaction costs to attract new capital market investors — DG

Acting Director General of the Securities and Exchange Commission, Mary Uduk.

At the end of the second quarterly meeting of the Nigerian Capital Market Committee (CMC) for the year, acting Director General, Mary Uduk, spoke in Lagos about the key resolutions during the meeting, particularly how the Commission has helped cut down on the cost of transaction to attract new investors in the market. Excerpts were sent to PREMIUM TIMES.

Q: What were the major highlights of the meeting?

UDUK: The quarterly meeting identified challenges affecting the Nigerian capital market and the solutions. In this edition, participants identified various issues that required extensive reviews and attention. They include e-annual reports, extension of forbearance for multiple share subscription, progress in e-dividend registration, constitution of committee on FinTech and the implementation of recommendations of various committees, among others.

Q: What’s the update on the implementation of the e-annual report?

UDUK: Over one year ago, the Commission spearheaded the need for the market to embrace electronic annual report distribution. The exercise was informed by three reasons.

Apart from the cost of printing, the annual reports, in many cases, get to investors very late, sometimes many months after the annual general meeting was held. So, we resolved, rather than waste such monies, it was better to distribute these reports electronically.

Again, because technology is taking over the world, wherever one is in the world, once one’s email address is known, one can receive the audited report electronically. With that the money wasted on printing annual reports will be distributed as part of dividends to shareholders.

The market was given one year to implement a pilot exercise. At the end of the one year last June, SEC conducted an impact assessment.

At the CMC, the report was considered and agreed that technology is the way to go. However, it was observed that shareholders have one or two challenges – need to intensify awareness and greater efforts to get all shareholders’ email addresses.

It was agreed that shareholders without internet connectivity would be given physical copies of the report. We believe that within the next five years, technology will continue to expand and go to remote places.

Also, registrars were enjoined to ensure that at every AGM they take a few minutes to enlighten shareholders on the benefits of electronic annual report.

Q: What about concerns about minimum operating standards in the market? Was it part of the agenda at the meeting?

UDUK: Yes! To enhance the efficiency and effectiveness of capital market operators, the Commission, two years ago, introduced a number of initiatives, including risk-based supervision.

Also, a committee was set up to come up with a minimum operating standards for capital market operators.

The recommendations of the committee submitted in its report included manpower and equipment, organizational structure, technology and effective processes.

The report was discussed and adopted at the CMC. After that, the relevant department in the Commission will work with the leadership of the trade groups and implement the recommendations. We have a minimum of two years to implement that.

One advantage we have is that the Nigeria Stock Exchange has already implemented the minimum operating standard for the stock brokers.

Now, what we are also implementing the same for the Registrars, fund managers, issuing houses, custodians and the rest of them. We will commence immediately following the adoption of the recommendations of the committee at the CMC meeting.

Q: Where is the market today on forbearance of multiple subscriptions?

UDUK: Between 2004 and 2007, during the banking and insurance sector consolidation, there were a lot of issues in the primary market. The banks and insurance companies came to the market to raise funds.

A lot of the people were coming to the capital market for the first time. They saw the capital market as where they can make a lot of money. So, a lot of them bought shares in different names.

Today, if they are not able to identify themselves properly, those shares cannot be properly captured in the system.

The Commission is asking those people to come and regularize their investments and get back their shares which are being warehoused somewhere.

SEC is not punishing anybody. All the Commission wants is for such individuals to come forward and regularize those transactions between now and December 31, 2018.

The objective is to increase liquidity in the market because the shares are just there without any trading on them.

Besides, the investors cannot claim their dividends on their investments. That increases unclaimed dividends in the system. When the people come and regularize, there will be increased trading on those shares, and they will also claim their dividends. Then, the balance of unclaimed dividends will also go down.

Q: How has the Commission’s initiatives impacted the cost of raising funds from the capital market?

UDUK: In a number of ways. What the Commission did was to look at the entire value chain holistically to find out what actually impedes issuers coming to the market.

One of those issues was transaction cost. A committee was set up to conduct a study, which observed that our market was very expensive in terms of issuance at the primary level. So, the Commission, in collaboration with other stakeholders, looked at how much the issuer coming to the market will pay?

The rule has provided a limit of 3.17 per cent for equities and 3.97 per cent for fixed Income.

What the Commission did was to look at the entire costs and agree on how to reduce the cost, to incentivize issuers to come to the market. At the end the cost of equities was reduced from 3.17 per cent to 2.21per cent and Fixed Income from 3.97 per cent to 2.38 per cent.

It was a pilot for one year, after which an impact assessment was done to see how it will impact the market.

Today, we have started to see the impact. Issuers are coming. They are happy these transaction costs have been reduced. It’s a value chain. At the end of one year, the Commission will decide if we can move forward or make amendments.

Q: MTN initial public offer has been on for some time. How long will it take to approve the company’s decision to come to the market?

UDUK: Let MTN file the application first. The day they inform the public they have filed, watch what the SEC will do. It is not what is being bandied on the pages of newspapers. I will make an exception and allow the press to come and monitor. That’s how serious we view everything surrounding MTN and other filings. As far as we know, MTN is still a private company. Until it converts to a public company and then file application with SEC, that is when the matter should be focused on us. Again, one has to consider documentation.

The National Association of Securities Dealers (NASD) was created for unlisted securities. SEC has been working with the group to develop rules on trading in securities. SEC has also collaborated with the Corporate Affairs Commission (CAC) on this. We have an arrangement where they open their portals to us to see companies that have not opened up their shares to the Commission on the issue of unlisted securities.

SEC has an interface with CAC. That essentially is because these public liability companies (about 17,000 of them), we need to liaise with other regulators to check if their securities are registered with SEC when they bring annual returns.

We have also issued a circular and given December 31 as deadline for all companies that ought to have registered their securities and have not done so. We can decide either to extend it or not. The law provides that they register their securities,

Q: Recently The Financial Markets Dealers Quotation (FMDQ) shareholders approved the removal of OTC from its name. Can explain the significance of this decision?

UDUK: FMDQ’s change of name has not changed what the platform is for. An OTC is an over-the-counter market where bilateral transactions take place.

With technology and speed, there is a very thin line between trading on an exchange and call over the counter. The name change has not changed the functions or nature of the FMDQ as an exchange.

Q: In the run up to the 2019 elections, what measures have the Commission considered to prevent the adverse reaction of the market?

UDUK: Irrespective of measures the Commission puts in place, the market will react to activities in the system, whether positively or negatively.

In 2008, during the meltdown, the market reacted to the global situation. Therefore, you should be alarmed if something happens during the 2019 election and the market does not react.

Q: Can you talk about the financial literacy timeline, particularly when the Capital Market Studies is coming into the schools’ curriculum?

UDUK: SEC has been working with the National Education Research and Development Council (NERDC) on the curriculum. We will soon begin to see traction in respect of Capital Market Studies Coming into curriculum of schools.

Q: What is the average time for application review in the market?

UDUK: We desire to review applications within the shortest possible time. Possibly, within 48 and 72 hours, we want to give approval. But, there are other factors to consider.

For instance, the documents filed have to be complete. There are other issues to look at. If a company is supposed to file six documents and it files only three, it is incomplete filing.

Those documents not filed are what will make the Commission not able to review the main document. Therefore, if they are not all filed at the same time, the company will be requested to do so. Most times it takes substantial time to do so.

When you now open the offer documents, one will find a lot of mis-statements, incorrect information that would need to be clarified so as not to mislead investors. Those are some of the issues that make the Commission not to be able to give specific timelines within which an application can be reviewed.

We have been working with the various stakeholders and now we are engaging the solicitors as well.

The Commission is doing IT-related things for companies to be able to file electronically. Then, we will review electronically so that it can be fast-tracked. We are trying to reduce paper work as much as possible so that everyone reviews at the same time electronically and close the gap or totally shorten it.

Q: Could you speak on some of the Commission’s achievements in the last quarter?

UDUK: Within the quarter under review, the Nigerian capital market recorded some achievements in various segments of its operations. These include aggressive use of various social media platforms to boost financial literacy campaigns on creation and deployment of a one minute Financial Literacy video on YouTube; renovation of five warehouses by the Nigerian Commodities Exchange (NCX) in preparation for commodities trading, and conclusion of about 30 cases at the Investment and Securities Tribunal (IST) from a backlog of over 50 cases.

Also, we commenced modalities for the introduction of the Investments and Securities Tribunal Law Reports; implementation of the recommendations of the Commodities Trading Ecosystem in phases, from 2018 to 2025, and increase in the number of shareholders who have mandated their accounts for E-Dividend payments to 2.55million.

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