The Nigerian Stock Exchange
Goddy Egene writes that despite the challenges, the Nigerian capital market has recorded some growth in the last 55 years
Nigeria celebrated her 55th independent anniversary last Thursday. Looking at the developments in the country over the years, the last 55 years has been a mixed grill of the bad, good and ugly. Economically, it has also been a story of mixed fortunes. The capital market, which is used as barometer to measure the performance of the economy, has followed the same trend like the country in the last 55 years. Coincidently, the establishment of the stock market began the same year Nigeria got its independence. The founding fathers of the capital markets signed Memorandum and Articles of Association that established the then Lagos Stock Exchange (LSE) in 1960. Those who signed the initial Memorandum and Articles of Association were Sir Odumegwu Ojukwu, Akintola Williams, C.T Bowring and John Holt Investment Company. The Exchange began operations as a private company limited by shares. But formal trading did not commence on June 5, 1961. After existing as the LSE for about 17 years, the exchange was renamed Nigerian Stock Exchange (NSE) in December 1977 and re-incorporated as a company limited by guarantee in December 1990.
As a limited by guarantee not-for-profit organisation, the NSE thrives on the goodwill, reputation and integrity of its members.
The stock market started operations with only four stocks, which were the Nigerian Tobacco Company (now British American Tobacco), John Holt Investment Company Limited Company (ordinary stock) John Holt Investment Company (preference stock) and the Nigerian Cement Limited. And for many years, the call-over system was used for trading. At the initial stages of the call over system, a clerk used a white chalk to indicate buyer and seller position. However, as more securities got listed and more operators entered the market, the system changed from a black board to a round table. Under the round table call-over method, a call over clerk would shout out and match bidding and selling orders.
Five-five years after, the Nigerian stock market has metamorphose into a leading regional market. Although the Nigerian market is second to South Africa, the plan is to develop it into investment gateway into Africa.
Current Market State
From low value, the market has grown significantly over the years, hitting N10.51 trillion last Friday. The NSE All-Share Index (ASI), which is a value-based common index formulated in 1984 with a base of 100, closed at 30,588.41. The market value had hit a peak of N15.67 trillion in first quarter of 2008 before the global meltdown affected the market. The ASI had also peaked at 66,371.
Apart from the growth in value of market, the trading system has evolved over the years. From a manual call-over system, trading in the market today has been transformed through various advanced technologies. Specifically, the exchange acquired a new TRADING PLATFORM- X-Gen- which is a version of NASDAQ X-Stream developed by NASDAQ OMX System.
The trading platform is based on a number of leading technologies, including NASDAQ OMX’s XStream matching engine, and the NSE’s flexible and robust X-GEN Market Database, developed from scratch by the NSE and its technical partners. X-Gen has been described as the fastest trading engine in Africa. The Exchange this year upgraded the trading engine and the market’s FIX order management system (OMS) to enhance efficiency and functionality of the trading system. Compared to the past, the OMS, which coordinates orders from scores of stockbrokers trading simultaneously from their remote or office locations and trading floors of the exchange, has also been made more flexible to accommodate various orders.
The new TRADING PLATFORM has led to the introduction of online portals by operators, a development that is capable of enhancing more investor participation. The online stockbroking portal provides on-line, real time access to investors to personally execute their orders on the NSE. The portals provide investors with round-the-clock access to their portfolio and cash statements while investors can also place their orders within and outside the trading hours of the NSE. On the average, to be eligible to trade on the portal, one needs only access to internet, a functioning e-mail address, any active bank account, a fair understanding of the workings of the stock market and a stockbroking account. While the main trading floor at the Customs-Street head office of the NSE symbolically represents the market, the market in actual sense now is the global space, through the nooks and crannies of the vast geographies of Nigeria and beyond.
Contribution to Economic Growth
Although the stock market is yet to fully reflect the performance of the economy due to limited representations of all sectors, the market has contributed significantly to the growth of the economy.
Apart from government that has raised several billions of naira from the market through bonds, eight companies raised about N156 billion the first three quarters of this year. Besides, there are strong indications that six companies might shop for N160 billion before the year runs to an end.
In terms of funds raised by state government, Zamfara recently raised N7 billion through a bond issue. The N7 billion Zamfara State Government Seven-Year Fixed Rate Development Bond was the first tranche under the N30 billion Zamfara State bond issuance programme. The net proceeds of the bond issue would enable the Zamfara State Government to deleverage and reposition its finances towards delivering further dividends of democracy to its citizens.
New Products and Changes
The Securities and Exchange Commission and the NSE has created an enabling environment that has led to new products in the market. Unlike before when the market was strictly equities and bond based, there are now exchange traded funds. Also, the capital market has witnessed the addition of two securities exchanges. There are the FMDQ OTC, which is for the secondary trading of fixed income securities and currency and NASD Plc, which is an over-the-counter market for the transactions of unlisted equities. FMDQ OTC Plc attract high patronage between January and September as it recorded N93.894 trillion worth of transactions.
Whereas the market has performed modestly over the years, it has not fully optimised its potential due to some challenges. Considering the population of the country, the market is witnessing low patronage. There are less than four per cent of Nigerians playing the market, leaving the foreign investors to dominate transactions in the market.
Besides, the market remains very shallow because most major companies in the wealthy oil and gas, telecommunication and infrastructure sectors are not listed.
The absence of several major companies in key sectors of the economy undermines the role of the exchange as a barometer for the economy.
The low patronage has made the NSE, which had set a target of $1 trillion capitalisation by 2016, to backed down on the target. The Oscar Onyema led management of NSE had in 2010 set the target of $1 trillion MARKET capitalisation by 2016, equivalent to about N199 trillion at the prevailing exchange rate. The ambition of the exchange was informed by the NSE’s planned its ambitious target on new listings. The exchange has expected that major oil and gas and telecommunication companies would list before now. Based on this development and current market situation, Onyema declared that the $1 trillion target has become unrealistic.
Wooing Major Companies
Many stakeholders for the Nigerian stock market to become the gateway of investments into the African continental, much need to be done to ensure that the listing of more companies and an increase in investors’patronage.
While some said government should compel major oil and telecommunications companies to list on the exchange, others said it should be done through incentives. Former President, Institute of Directors (IOD), Mrs Eniola Fadayomi, said government may need to consider a dual-approach of incentives and fiscal and legislative restrictions to ensure that companies list their shares on the stock exchange.
According to her, carrot and stick approach may be the best option given the state of Nigeria’s economic development as depending on incentives and voluntary compliance alone may not achieve the desired result.
She explained that national franchises such as national licences for telecommunication and other utilities as well as natural resources could be tied to listing at the stock market, providing compelling reason and incentives for companies to seek listing.
However, Chief Consultant, ‘Biodun Adedipe & Associates, Dr. ‘Biodun Adedipe, said government should use incentives to drive listing on the stock market noting that people and companies behave in line with the economic maxim that people respond to incentives. He noted that out that the Indian government used deliberate incentives to woo companies and develop its information and COMMUNICATION technology sector.
“The more transparent, accountable and equitable a system is, the more confidence it inspires in the current players and the more attractive it makes the market become to prospective investors. The Nigerian capital market has the potential for the kind of capital formation required to drive an economy the size of Nigeria’s and trigger the much desired inclusive growth,” Adedipe said.
According to Director General of SEC, Mounir Gwarzo, the commission is a lot in the areas to ensure more listings in the market.
“One, we are continuously reviewing our disclosure requirements and our rules and regulations so that issuers, whether foreign or local will have an easy way to come into the market. Secondly, we are also ready to give concessions in terms of fees for the big companies to list, despite our dire need for those fees to strengthen our operations. Clearly if there are more listings even lower fees could translate to higher income if volumes improve due to incentives.
“We have been trying to engage several stakeholders, particularly the telecoms and upstream oil & gas industry, offering certain concessions including the interface with our ministry and the Federal Inland Revenue for fiscal incentives so that companies from those sectors can list on the exchange. And the NSE is also in the vanguard of promoting listing of these companies. On our part, we will continue to create the enabling environment to make sure that the cost they will incur will be as small as possible in addition to making rules that encourage product innovation. We have also reduced our turnaround time. We have a mandate that once an application is filed, if it is 100 per cent complete, on no account should that application be kept for more than two weeks. And this is the mandate we have given to the staff and they are keeping to it.”
Looking at the performance over the years, a stockbroker, Mr. David Adonri of Highcap Securities Limited , said the Nigerian stock MARKET was established to server as long term investment outlet and platform for raising long term capital by fund users.
“The market has achieved these objective to a modest extent. If the economy is to adequately create wealth and generate productive employment, more is expected from the Nigeria’s capital market,” Adonri said.