Friday, November 14, 2008

Reforming the Nigerian Stock Exchange

THE recent announcement of the reorganisation of its processes and management structure by the Nigerian Stock Exchange (NSE) is an opportunity to reflect on the place of the NSE in both the lives of the investing public and as an operator of a critical market in Nigeria.

Part of the proposed restructuring is the de-mutualisation of the NSE whereby it also becomes a trade-able stock of its own listed on the NSE and on other exchanges around the world. In another year, too, the NSE plans to transform its Governance rules, Technology platform and develop products for Derivatives trading and Exchange Traded Funds.

Another landmark decision is that the management team is now invited to join the governing Board of the NSE with the creation of the position of a Group Chief Executive Officer and three Executive Directors for Compliance and Surveillance, Quotation and Listings, Market Operations and Technology directorates. At present, only the chief executive sits on the 13-member board while the directorates exist as already functioning departments at the NSE.

We are pleased that the NSE has continued the effort in reinventing itself. It is very commendable that since its inauguration as the Lagos Stock Exchange in 1960 and its transmutation as Nigeria Stock Exchange in 1977, the NSE has veritably become an institution that is well-regarded in the international securities markets forum. Up till the past few weeks, it was still being acclaimed as one of the most profitable emerging markets stock exchange.

The NSE runs a network of branches in Nigeria's urban centres namely Lagos, Ibadan, Abuja, Kano, Kaduna, Onitsha, Port Harcourt, Yola and Ilorin. To that extent, it has grown the investment culture and habit among Nigerians such that it is estimated that, currently, three million Nigerians are investors directly involved with the vagaries of the Nigerian stock market. The NSE is also reputed to possess an efficient automation system with its seamless on-line technology, across the branches and off-site remote trading centres by brokers, rarely impaired.

Within the past five years, a combination of factors has elevated the NSE to a success story status in the Nigerian economy. The main stimulus, but certainly not the solitary instrument, for this fame has been traced to the banking consolidation exercise and the deluge of Initial Public Offers that it spewed forth. Many international and institutional investors spied undervalued stocks and dipped their feet in the Nigerian market. Within months, portfolio traders worldwide had a slice of Nigerian stocks. Entry was liberal and returns were comparatively very high. In what must be seen as a classic win-win situation, the NSE also raked in substantial fees and charges from the unprecedented momentum of its daily operations.

All of this notwithstanding, the Nigerian Stock Exchange is urgently in need of such restructuring that will address critical corporate governance issues that assail it and limit its capacity. The content of the proposed restructuring plans appears to be lopsided in favour of management progress and technology headways. There should be greater emphasis on plans to address the concern of the new millions of adherents to the market about transparency and governance ethos of NSE operations and trading.

Entrance to the NSE is still an experiment open to a group of elite and middle class Nigerians whose appreciation of risk of massive loss is shallow and without market history to learn from. Against the background of the prevailing state of the NSE index, it is appalling for the NSE to ignore the more confidence-building aspects of its functions. It needs to allay fears that this is a market with flexible rules for a few favoured stocks or investors.

In particular, there is still a certain suspicion that the pricing of public offers in recent years, especially of the banks, were inflated and that the subsequent bubble created from that oversight omission was further fuelled by nuances of insider trading. It has also been alleged that there were peculiar arrangements of incestuous margin facility between stockbrokers and parent banks, to pump up the stock market. There is gripe that the NSE closed its eyes to the delirium, a precursor to the current debacle for the new converts to

stock market investment.

Largely, the NSE operates the stock market as a model between a self-regulatory organisation and an institution under the rules and guidance of the Securities and Exchange Commission (SEC). There is need to clarify the structure of that relationship between an operator and a regulator.

A selection of policy responses following the present stock market meltdown exposed the dysfunctional relation between the NSE and SEC. It is an open secret that though SEC is the regulator, instances of NSE being insubordinate have created unbeneficial tension for market operators. Finally, as the public gets to understand that stocks are likely to lose or gain over time, it is desirable to restate that the NSE is essentially a club of private members. The individual membership of the NSE by its extant rules subscribed to over 50 years ago, is by invitation only and its Council is dominated by a select few.

The other members of council are the traders or dealing members who are actually part-makers of rules under which they trade for profit. It is a paradox and altogether an enormous responsibility for all these persons to separate self- interest and stick to the narrow path. There is no better time to re-organise the operations of the NSE.

We call for greater candour in the plans for restructuring and look forward to a reorientation of persons who populate both the Management and Council of the Nigeria Stock Exchange, else the reforms being trumpeted may turn futile.