Several rules have been applied to several issues by The Nigerian Stock Exchange (NSE) in recent times but the implementation of new rules on illegal sale of shares is seen as one that would in no small way eliminate cases of fraud in the Nigerian course.
It has been established over the years that for any economy to grow in the modern era, the capital market play a major role as it is known to be a major driver of development through its unequal activities in wealth formation and funding of long term projects.
According to Moses Ampka, a financial expert, the potential of the capital market cannot be over emphasised, adding that major countries of the world are as good as the performance of their capital market.
However, the hidden potential of the markets could only be unleashed for maximum impact that will induce economic growth if good corporate governance is entrenched among players in the stock exchanges.
This is because the degree to which corporations observe basic principles of good corporate governance is an important factor for investment decision.
However, in Nigeria, lapses in adherence to these principles have contributed majorly to crisis in the Nigerian Stock Exchange (NSE) even as most countries have recovered from the global financial meltdown.
Over the years, many stock brokers and other quoted companies have been violating this important obligation, thereby keeping investors in the dark about their financial health among others.
Many ignorant investors have burnt their fingers by investing in some of the dormant companies, which do not furnish the market with their financials.
A report on shares fraud by the NSE between January 2012 and June 2015 revealed that 31 firms were investigated for unauthorised sale of shares.
The study indicated that all the firms and officials were allegedly indicted by the disciplinary committee for unauthorised sale of investors’ shares while some others were also accused for issuance of dud cheques, impersonation and illegal conversion of dividend warrants.
Market infractions being committed at the Nigerian stock market due to weak corporate governance practices, have to a large extent slowed down market development when compared to other emerging markets.
The NSE had blamed most market infractions on low capitalised brokers.
The Chief Executive Officer, NSE, Mr. Oscar Onyema, said at a forum that there was the need to place a high barrier to entry, adding that minimum requirement would increase professionalism and make the market to become globally competitive.
“It is the smaller brokers that commit most of the infractions because they are not robust enough to do the business. This is economically non-viable due to its low scale and pricing power.
“We benchmark ourselves against other Exchanges and we discovered we have low market concentration, low retail penetration and low institutional flows because of fragmented broker as against other markets that have the participation of global players,” he said.
Onyema explained then that among 307 licenced dealing members, only 235 are active, noting that there was a disproportionate amount of broker per dollar amount of capitalisation in Nigeria.
This, according to him, has made the market become unattractive to big players and limited the size of the market. Onyema said that 50-100 firms were ideal for the nation’s capital market.
Head of Broker Dealer Regulation, the NSE, Mr. Olufemi Shobanjo, had also said that the NSE in exercising its regulatory authority over dealing member firms shall continue to use the utmost care and diligence.
He noted that the NSE was keen to entrench the required catalysts to stimulate and build a healthy and well regulated market so as to stimulate increasing levels of investor confidence in the market.
It was therefore not surprising that the Exchange and the apex market regulator – the Securities and Exchange Commission (SEC) – have either stepped up to wield the big stick by penalising some companies for market infractions or initiated various measures to tame the menace, one of which is to commence implementation of new rules on illegal sale of shares.
The NSE recently began the implementation of new rules to guard against unethical practices by stockbrokers. This became necessary as part of efforts by the Exchange to reinforce protection mechanism and also to ensure that operating rules is effective to serve as deterrents to market abuse.
In a notice obtained from the NSE’s website, the newly amended rules are aimed at tightening the noose on unauthorised sale and transfer of shares by unscrupulous stockbroking firms and traders.
The Exchange added that the NSE could withdraw the dealing licence of any erring stockbroking firm and trader as well as impose fines of not less than N1 million on any offender. According to the rules, no dealing member shall sell or transfer any securities without the authorisation of the owner.
“A dealing member that has sold or transferred any securities without the authorisation of the owner shall not be permitted to keep any benefits accruing from such transaction, including but not limited to bonuses, rights, commissions, cash dividends, capital appreciation, and any profit accruing there-from whatsoever,” the rules stated.
It explained further that any dealing member that sells or transfers securities without the authorisation of the owner shall be required to buy back the securities along with any accrued benefits within 14 business days.
Besides, “Where the unauthorised sale transaction is worth N5 million and below in value, the erring stock broking firm will be liable to pay a fine of N1 million or three times the value of the sale or transfer, whichever is higher and N5,000 for every day from the day on which the dealing member is required to buy back the securities by the Exchange until the day the dealing member completes buying back the shares for the owner.
“Where the illegal sale transaction is higher than N5 million in value or the dealing member has engaged in such unauthorised sale, or transfer of securities on a previous occasion, it shall have its dealing license withdrawn by the council of the Exchange and shall in addition be liable to pay a fine of N5 million or three times the value of the sale or transfer, whichever is higher and N5,000 for every day from the day of the sanction until the day the dealing member completes buying back the shares for the owner,” it added.
Some market operators were of the view that new rules would prevent illegal sale of investors’ stock and other market infractions.
Managing Director, Crane Securities Limited, Mr. Mike Eze, said the new rule is a step in a right direction, adding that with the direct cash settlement, the initiative should spur better performance in the market.
He noted that investors would be able to get value for their stock sales directly in their banks. According to him, some undue delays from firms would have been eliminated.
Also, he said that it would facilitate building of further confidence in the capital market. Eze said the action of the NSE would boost investors’ confidence in the market because it is sending a signal that the NSE’s management understands the need for investors to get value for their investment.
He said introduction of the new rules and the direct cash settlement are some of the ways, which the Exchange is using to tell the investing public that they really want to revive confidence in the market.
The Crane Securities Limited boss added that the action would encourage investors to take informed position on equities. A founding member of Nigeria Shareholders Solidarity Association and one of the leading shareholders’ activists, Alhaji Gbadebo Olatokunbo, said the initiative is a signal that it is no longer business as usual.
“The action is great and it shows that the NSE management is alive to its responsibilities. Besides, it is a signal to the brokers in particular and the capital market in general that it is no longer business as usual. We must always abide by the rules,” he said.
As the market grows, especially in terms of the nature, variety of players, in transactions size and activities, regulatory vigilance must also grow. The bigger the market gets, the more real the scope for efficiency.