Merger, Acquisition As Options For Disqualified Cmos

To achieve more growth in the capital market, the 24 operators recently delisted should explore the options of merger or acquisition, Chris Ugwu reports.

As the capital market community receives the final list of market operators that scaled the hurdle of recapitalisation, some market analysts believe that the initiative has become necessary for the stock market to operate in line with global best practice. Even at that, some others also feel that the recapitalisation was being speedily pursued to deny some operators the right to key into demutualisation process currently on the front burner.

However, whichever way the pendulum may swing, stock markets all over the world, including Nigeria, expect minimum standard for operators, who wish to maintain operating certificate.

Reasons for recapitalisation

Given the ongoing transformation in the capital market with increased volume of transactions, the board of the Securities and Exchange Commission, pursuant to Section 313(6) of the Investments and Securities Act (ISA) 2007, approved the new minimum capital requirements for all categories of capital market operators.

Following the amendments, the capital requirement for broker/ dealer was increased from N70 million to N300 million. For broker only, the capital requirement was increased from N40 million to N200 million, while for dealer, it was raised from N30 million to N100 million.

The minimum capital requirement for Issuing House also increased from N150 million to N200 million; while that of underwriters went up from N100 million to N200 million. For a registrar in the Nigerian capital market, the minimum capital requirement rose to N150 million from N50 million; while for those in trustees business, the capital requirement was raised to N300million from N40 million.

Furthermore, the minimum capital requirement for rating agencies was increased from N20 million to N150 million; while the capital requirement for corporate investment advisers remains at N5 million.

From an initial capital requirement of N500,000, every individual investment adviser is expected to have at least N2 million as capital; while fund/portfolio manager’s minimum capital requirement has been raised from N20 million to N150 million.

The development has received public outcry as most operators faulted the move, suggesting that the stock broking firms’ minimum capital requirement should be determined by the level of business they want to do. But the regulators have remained resolute in their resolve to ensure that operators meet the requirements as many of them were inactive.

Final list

The Securities and Exchange Commission (SEC), on January 4, 2016, announced the final results of recapitslisation programme, disqualifying 24 Capital Market Operators (CMOs) for non-compliance or inability to substantiate claims of compliance by the audit firms.

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The list, which was uploaded to the SEC website after capital verification had been conducted, showed that 429 CMOs adhered to the minimum requirements while 24 others were disqualified.

Efforts by New Telegraph to obtain the names of the CMOs disqualified met a brick wall as a source at SEC, who pleaded anonymity, said that the regulator would not be able to release the list due to the sensitive nature of the market as such might further erode investor confidence and trigger more sell off of shares.

The apex regulator, in the circular, said: “In exercise of the powers conferred on it by the Investment and Securities Act (ISA) 2007, the Securities and Exchange Commission hereby releases the list of Capital market Operators that complied with new minimum capital requirement after capital verification exercise. “This list was based on the consideration of the reports on capital verification and the responses received from the affected Capital Market Operators (CMOs).

“In all, twenty four (24) CMOs were disqualified for non-compliance and/or inability to substantiate claim of compliance based on queries raised by the audit firms. In addition, 16 new CMOs were added on the list, ten (10) of which were newly registered companies and six (6) filed evidence of compliance after the release of provisional list which were verified and accepted.”

To facilitate the smooth implementation of the new minimum capital requirements for Capital Market Operators (CMOs), after SEC resolved to go ahead with September 30, 2015 deadline, the Capital Market Committee (CMC) set up a market-wide Implementation Committee on New Minimum Capital Requirement for CMOs” comprising the Securities and Exchange Commission (SEC), the Nigerian Stock Exchange (NSE), the Central Securities Clearing System (CSCS), the Association of Stockbroking Houses of Nigeria (ASHON) and all other capital market trade groups.

Implication of disqualification

The implication of sacking the 24 companies will mean that many workers at the firms across the country have lost their jobs, following their companies’ inability to meet the new minimum operational capital set by the Federal Government for all market operators.

There is also fear that the recent action may trigger crisis in the market as shareholders are already apprehensive for fear of not knowing what becomes of the affected stock broking firms.

Way forward

It is a known fact that one of the reasons recapitalisation was muted was to spur mergers and acquisition and boost liquidity and depth in the market, hence operators in the market have suggested that the only way forward for the CMOs, who could not meet the new minimum operating standards, is to take advantage of window of opportunity offered by the regulator of mergers and acquisition.

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The Institute of Capital Market Registrars (ICMR) had advised market operators to seek the option of mergers and acquisition to enable them meet the new capital requirements. The President/Chairman of the Council, ICMR, Mr. Bayo Olugbemi, in an interview with New Telegraph, said that the industry was highly fragmented with most of the operators lacking both human and capital capacity. “I always advise that there is room for mergers and acquisition.

What the regulator is doing is to strengthen the liquidity base of the operators. “I believe I rather be a one per cent owner of a living company than to be a 60 per cent shareholder of a dying rated company. There is nothing wrong in mergers and acquisition. Though partnership in Nigeria is tough, we always want to do it alone but if you want to go faster go alone, if you want to go far go with other people.

“Looking at your company five years, 10 years and you are not satisfied, take the option of synergy, merge or acquire, if you can’t do it alone call others to come and join you because together the better, the more the merrier.

We encourage people to go into merger and acquisition if they cannot do it alone since the Securities and Exchange Commission has said there is no going back on recapitalisation. Some investment advisers and capital market operators have recommended to the unlucky 24 CMOs to either merge or seek new investors for private placement to beef up their capital base.

They believe that failure by some institutions to meet new capital requirements requested by regulatory agencies from time to time is the method that financial services industry uses to shake off the convert insolvent operators that could constitute danger to the system.

A senior broker, who pleaded anonymity, said that the practice of disallowing both the capital market operators and banks from operation on the basis of inadequate operating capital was not a new thing in the country. “It has happened many times before in the banking industry, insurance and also in the capital market. It is the industry’s way of shaking off the weak ones from the system,” he said.

According to him, what the affected firms can do is either to merge with others or approach new investors for private placement.


Although the future of the local bourse is still cloudy due to several factors leading to persistent low investor confidence, there is need for strong intermediaries, especially the broker-dealers in the market to help galvanise market activities.