Thursday, October 17, 2013

Preventing another capital market crash

 
 
AT a time the local bourse is regaining momentum, it is encouraging that the Economic and Financial Crimes Commission and the Nigerian Stock Exchange have signed a Memorandum of Understanding aimed at further protecting investors, maintaining market integrity and facilitating capital formation. The Securities and Exchange Commission, the regulatory agency, had also earlier inaugurated a 10-year Capital Market Master Plan Committee that “will lead to a world-class capital market, which supports an inclusive economy and improves the living standard of Nigerians.” Any effort aimed at enhanced transparency will benefit the market, sundry investors and the economy as a whole.  But what is imperative is that the laws governing the securities industry must be diligently enforced.
Globally, capital market operators are notorious for misrepresentation or omission of important information about securities, manipulation of market prices of securities, stealing of customers’ funds or securities, violation of broker-dealer responsibility to treat customers fairly, insider trading and selling of unregistered securities. The missing link, however, is that infractions have for long been tolerated here. The main anti-graft agency, the EFCC, said it had uncovered all the criminally-ingenious strategies used by unscrupulous capital market players to scam and defraud helpless citizens of their life-savings and investments in the last 10 years. According to the commission, these include shares manipulation through insider dealings, fraudulent falsification of accounting records, clearing of third party individual warrants and impersonation of dead investors.
Indeed, the 2009 crash was caused by a hailstorm of scandals that rocked the market.  The orgy of recklessness and greed that pervaded the market led to the decline of total market capitalisation by about 70 per cent from its peak in March 2008.  According to the SEC boss, Arunma Oteh, the total market capitalisation declined from N12.6 trillion at the end of March 2008 to a bottom of N3.99 trillion in February of 2009. The implication of this is that while some investors lost substantial part of their net worth, most new investors lost virtually everything. Sadly, four years after the crash, most of the perpetrators of the fraud have not been successfully brought to justice. The EFCC’s claim that about 20 cases were at various stages of prosecution across the country offered little comfort either. Genuine investors are not truly protected unless those who prey on them are swiftly and appropriately sanctioned.
Now, the global market looks promising, but the Nigerian market still stands on a shaky ground. It is argued that the aggressive stimulus programmes undertaken by various central banks across the world to boost growth created extra money that has driven down the returns on government debt, making other assets, such as shares, more attractive. As Nigeria made it into the top 20 global destinations for Foreign Direct Investment, with its share put at $8.9 billion at the end of 2012, new imaginative thinking to protect investors should be the preoccupation of the regulatory agencies.
The EFCC boss, Ibrahim Lamorde, was dead right in insisting that the operators and regulators of the capital market should strictly comply with the requirements of the Money Laundering Act and other laws, especially on customer due diligence and reporting obligations. The reported indictment of 92 firms that failed to disclose their audited annual financial statements and interim quarterly accounts on time and for non-disclosure of information between December 2012 and September 2013 by the NSE is not enough.  It is clear that there is still a very glaring institutional deficiency in the capacity of both SEC and the NSE to clinically monitor transactions in the market with a view to tracking down criminal elements and bringing them to book. While detecting violations is an integral aspect of SEC’s mandate, working to prevent future violations can be even more important to protect investors and enhance market integrity. The market, indeed, needs a sea change.
This is where strengthening of SEC is crucial. The regulator needs to be properly funded to achieve a stronger enforcement of securities laws; a fairer and more transparent market; a tougher oversight of market participants and a higher quality of investor-oriented information.
While the commission needs fresh injection of human capital that should drive innovation, new rules that would efficiently sanction stock market offences and market abuse are also urgently needed.
But an adequate budgetary allocation for SEC is a key factor that will affect the market’s efficiency. Unfortunately, the National Assembly’s shameful zero allocation to SEC has created a poisonous atmosphere for laxity. It is as outrageous as it is gravely precarious that the federal lawmakers continue to starve SEC of funds in solidarity with a felonious member. This is another open invitation to the capital market crash and should be avoided. The Senate President, David Mark, and the House Speaker, Aminu Tambuwal, must steer the National Assembly from this specious and ruinous path.

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