WHEN THE REGULATORS SLEDGE HAMMER FALLS ON BANK REGISTRARS
Baring any last minute change of policy on its resolve to totally overhaul the modus operandi of Nigeria's banking sector, a final death knell might soon be resonating on registrars department of various banks in the country as the Central Bank of Nigeria in association with other agencies are bent on clamping down on them.
The Central Bank of Nigeria (CBN) a fortnight ago hinted of an impending plan to scrap the Registrars Department of various commercial banks in an effort to check share manipulation by bank chiefs in collaboration with stockbrokers.
The CBN Governor Mallam Sanusi Lamido had disclosed in Benin City, Edo State, while delivering a lecture at the 15th edition of the workshop for financial correspondents and business editors that the apex bank was working on the new policy initiative in conjunction with the Securities & Exchange Commission and other regulators to allow a single non-bank Registrars firm to handle the register of shareholders of all deposit money banks in the country..
Sanusi explained that the ''CBN has discovered that some banks had used their Registrar subsidiaries to commit insider related abuses, including share buy back, and illegally routing such transactions through their in -house Registrars department.
As a matter of fact, he hinted that a particular bank had bought about 88 per cent of its Initial Public Offer (IPO) shares during the 2005 banking consolidation programme through this incestuous relationship, an indication that the bank raised only 12 per cent of its offer.'' The CBN boss also frowned at a situation where banks, rather than mobilizing funds from the surplus to the actual deficit agents of the economy, engaged in what he called ''incestuous relationship with stockbrokers in the capital market '' (a practice where banks lend to stock traders and still buy back their own shares , all revolving around the stock market).
According to him, the ideal thing was for banks to lend to the real sectors to encourage growth across all segments of the economy, but the situation on ground does not suggest that the financial services providers are really living up to public expectations.
What has left many still wondering was why SEC and the Nigerian Stock Exchange as regulators allowed such activities to continue for this long until the current alarm by the CBN. From Daily Sun investigations, some stakeholders believe that the allegations of insider abuse bandied by the CBN are weighty enough to warrant a drastic action if only to correct it and safeguard the integrity of the nation's capital market.
It was discovered that at the base of bubble capital lies some of these insider related deals that had made billionaires of most bankers and capital market operators..
A review of their operations show that no fewer than 10 banks established in-house Registrars Department to play this game of deceit. Consistent with the universal banking model that operated in the country then, some of the deposit money banks that had set up registrars departments include, Wema Bank,, Zenith, Oceanic, GTBank, Intercontinental Bank, First Bank of Nigeria Plc, UBA Plc and Union Bank of Nigeria Plc among others.
While the department can be said to have done so well in managing the register of shareholders for various quoted companies outside banking, regulators of the financial market seemed convinced that some of the policy and regulatory leakages that brought the Nigerian capital market to its knees over the last two years could largely be attributed to the unprofessional roles played by these organizations.
It was revealed that the institutions had set up the Registrars Unit as subsidiary companies during and immediately after the 2005 banking consolidation programme to manage their own public share offerings, and rights issues as well as assist powerful directors and core investors to manipulate the organizations' shareholding structure to advantage.
''We are going to charge some people with criminal stealing. If I am the managing director of a company and I did not tell the board that I have set up another company but I go ahead and get approval for a loan and give myself that authority and disburse money, take the loan, use it to acquire property or private investment and from the day I took the money until CBN intervened three years later; I did not pay any money back to the bank, but created commercial paper and sell it to discount houses so as to hide the loans and later pay the discount house then that is stealing'' Sanusi stated.
But the CBN boss also revealed that accounting fraud of up to 5 years were discovered to have been covered up through the use of Commercial Paper and Bankers Acceptances by banks using various subsidiaries including discount houses. However the decision to excise the registrars' functions from core functions of financial institutions according to Daily Sun search may not be unconnected with regulators alleged role of the departments in the series of infractions that brought the industry to its knees over the last one year.
This is grave and indeed worrisome as Central Bank of Nigeria (CBN, the Securities and Exchange Commission (SEC), among other market watch dogs appeared not impressed by findings of recent inquest into the roles played by these operators. Although a comprehensive review of activities of banks' registrars could still be underway, preliminary indications are that several chief executives might soon be held culpable for various market abuses recorded over a period of time.
While assessing the circumstances that led to its intervention in eight of the 24 deposit money banks on August 14, 2009, CBN governor, Mallam Sanusi Lamido Sanusi pointed out that the chief executives of the organizations actually misappropriated resources at their disposal using all manner of fronts and pseudo companies to fleece their institutions and indeed depositors of billions of Naira.
Perhaps some of these infractions may have been considered weighty that the monetary authorities recently concluded that the nation's banking sector has indeed been turned into a gambling enterprises by those charged with responsibility for managing it. Part of the startling episodes unearthed by regulators during a recent survey was that besides endangering the depositors fund in a bid to meet the N25billion benchmark set for them by the CBN, most of them also allocated large amount of shares to themselves without paying for them, thus ripping off the organizations.
Prior to these revelations, majority of Nigerians have been hoodwinked into believing that the 24 or 25 surviving banks were actually swimming in money raised in the capital market then, and had therefore expected that the real sector currently the bane of our economy would no longer be crying for lack of funds to financing their businesses. But that may have been the biggest lie of the decade, as the Central bank of Nigeria Governor Mallam Sanusi Lamido, declared last week that the banks never mobilized the cash they claimed they raised during the consolidation programme.
.That perhaps seemed to be the position the banking sector found itself since the conclusion of the 2005 consolidation programme, when most institutions started trading with funds they actually did not have in their coffers. The unfolding events however showed how most of the institutions may have grievously exposed their customers to market and other risks contrary to the norms of the profession.
This development more than any other may probably have forced Mallam Sanusi Lamido to declare at last week in Benin, Edo State that our bankers, and perhaps with regulatory connivance misled the nation into believing the 25 or later 24 deposit money banks raised money in the capital market, when indeed they concocted some algebra or creative accounting processes to meet the N25 billion capitalization benchmark implemented by the CBN in 2005.
It was therefore not surprising that no sooner than he ordered that such instruments be treated as off balance sheet items that the fortress that held several of the banks collapsed. For Sanusi, the days of wonder banking in Nigeria is over for good as he seemed fully resolved to enthrone a culture that thrives on due process, transparency and respect for corporate governance principles. He has since read the riot act to bankers and stockbrokers that the game was up for managers who bungled the 2005 consolidation and misled the Nigerian public as he sees this opportunity to slam the registrars as the best time to clean the Augean Stable.
Reliving the observations of a study group that investigated the industry last year prior to the CBN intervention, Sanusi retorted, 'Some banks that claimed that they raised money during consolidation never raised money. They used all manner of manipulations including depositors' funds and other market instruments to convince the public into believing they raise funds from the capital market when they never did.'
For the CBN boss, it would be strange for an institution that claimed to have raised such staggering sums to be permanently latched in the Expanded Discount Window designed to resolve temporary liquidity constraints in the money market. He wondered why several of the institutions that were boasting of having billions in their kitty would remain permanent customers of the EDW for upward of 12 months.
At a point in time, the CBN boss hinted, a particular bank needed about N180billion to meet some of its urgent obligations raising concerns that got some observers worried. But how did the phenomenon of bubble capital become a problem with Nigeria's banking industry one may be tempted to inquire?
According to the authorities, the bubble capital bug caught up with the banking industry because of sharp practices and mindless breach of corporate governance principles. A situation where an institution purchased 88 percent of its initial public offer during the consolidation while another acquired 30 percent of its shares on offer through subsidiaries would certain create problem with capitalization especially when the transactions were sealed with worthless commercial paper and bankers acceptances or share certificates traded between the institutions and discount houses.
Another instance was the one where the chief executive of a bank bought 40 percent of the shares of the bank using depositors' funds. The CBN governor for instance noted that bank chiefs working in conjunction with stockbrokers manipulated the capital market to their advantage to the point that total exposure to margin loans rose to an all time high of over N2 trillion.
The implication of this development, Sanusi pointed was that their partnership misled the market into believing that wealth was being created when in actual fact it was mere make belief. The result was that the industry created phenomenal stock of toxic assets that would be difficult to clean up fully, even with the coming of Asset Management Company of Nigeria, (AMCON).
AMCON is expected to inject capital into the embattled banks in exchange for tier 1 or 2 capital in an effort aimed at enhancing mergers and acquisition. Just as the Registrar and Chief Executive of the Chartered Institute of Bankers of Nigeria CIBN, Dr Uju Ogubunka also pointed out in a recent presentation banking thrive on confidence and any breach of trust between the customer and his bankers will certainly make the confidence built over the years to evaporate.
For instance, how on earth would anyone expect a bank chief executive to give out unsecured loans to the tune of N900 billion without collateral?
Or how can a bank chief executive take a loan from a bank in the name of a customer without the said customer knowing about it?
Unfortunately these were some of the realities we had had to live with over the years with the institutions that emerged from the 2005 consolidation programme.
Perhaps the on going reform may correct this farcical gamble imposed on Nigerian public in the name of reform.
A recent communiquÃ© issued by Corporate members of the Institute of Capital Market Registrars after a meeting their members on August 2, 2010, stated 'Registrars are an integral and important part of the Capital Market, playing central roles in capital (primary) issues, trade settlement (secondary market transactions) and general maintenance/management of shareholding registers.
The Institute has noted with dismay the persistent attempt to single out Registrars as the problem of the capital market as evidenced by the campaign of calumny, name-calling and outright misrepresentation of facts as they relate to the practice of share registration in Nigeria. In particular, we have taken note of recent newspaper articles suggesting that the Central Bank of Nigeria (CBN) in conjunction with the Securities & Exchange Commission (SEC) would be setting up a common share registry for all Banks/Companies in Nigeria. While these reports have neither been confirmed nor denied, it is necessary for us to highlight salient issues for the records.
Bank equities currently account for about 66percent of the market capitalization of the Nigerian Stock Exchange. The implication of ceding all bank equities to a single entity would be to immediately create a monopoly, which runs contrary to the SEC's direct responsibility to guard against anti-competition practices in the Capital Market.
Over time, Registrars have been encouraged to contribute to the development of the Nigerian Capital Market by developing the capacity; human, material and financial, to service the growing number of shareholders and quoted companies in Nigeria. The effect of stripping the bank securities from Registrars will be the immediate creation of redundant capacity, ultimately resulting in shrinkage of Registrars' branch network, staff and other service complement.
Registrars companies have contributed immensely to the development and growth of the Nigerian Capital Market, since the premier Registrar unit was inaugurated in the late 1950s. These are all Nigerian owned and managed companies, and important stakeholders whose interests and opinions must be taken into due cognizance by regulators, other operators and the investing public, at all times.
The institute will intensify its public enlightenment activities, and will shortly be sharing some more details and views on; investors' complaints, resolution procedures/channels, unclaimed dividends and other topical issues of importance to capital market stakeholders. Commenting on the planned closure of banks' registrars' department, Chairman, Association of Stock broking Houses of Nigeria (ASHON), Alhaji Rasheed Yussuff, noted that the recent announcement that CBN and SEC were planning to scrap the institutions was a recent development, pointing out that the regulators were yet to give details on how it would be implemented.
He therefore stated it would be premature to comment extensively on the concept since details about its implementation are still sketchy. According to him 'there is always room for Nigerian capital market or any other capital market, to accommodate new ideas as long as they are intended to help the market improve on old ways of doing things'. He stated that it might be that the CBN and SEC have studied some of the problems that came about in the last two years and in their own wisdom, believed that setting up a single registrar could be part of the solution to achieving efficiency in the market.
Yussuff queried 'But how are they going about it, because we still have to wait for details of the plan as it unfolds.' He contended that what probably may have prompted the regulators to look towards that direction may have been based on the complaints leveled against both the regulators and operators, particularly during the global financial meltdown.
It was alleged in some quarters that as part of price manipulations in the capital market, that some banks with in-house registrar welded enormous power, control and influence over their registrar department either by delaying in dispatching certificates to people or selective release of certificate of public issues.
Observers believe that the above abuses may well be part of the ploy by operators to manipulate the share prices.
He admitted that the regulatory authorities have global information of what has happened, stressing that they may have been able to establish that some of the information was true and therefore in their own wisdom decided that closing the registrars department of banks and establishing a single non bank registrars firm could be another way of addressing that problem. Alhaji Yussuff stated that it technically possible to have a single registrars department for the capital market, stressing that the performance of the CSCS was a good indication that it can be replicated elsewhere.
He said it was more or less like a registrar because CSCS is the custodian of all certificates that are being traded on the Nigerian Stock Exchange today. The ASHON president added that a single registrars' department would be able to keeping the certificates of shareholders of companies and other administrative work that CSCS is not currently doing.
According to him, to the extent that it can operate the technology of keeping names, addresses, number of units of shares of individual shareholders, the facility could be deployed to do exactly what registrars are doing. And if you take cognizance of the fact that CSCS is what you can call the registrar for the whole Nigeria, because they are the only one with the capability right now, and the millions of shareholders trading presently at the NSE are all registered with the CSCS.
Therefore the large chunk of what registrars are doing in terms of keeping the names of all shareholders, CSCS is already doing similar thing and in greater capacity. That is why I said technically it is feasible whether there are some additional requirement that CSCS is needed to make. He argued in terms of technology, a single registrars firm can manage the market. With respect to the question of whether it can create monopoly he contended that stakeholders can still deliberate on the various options and challenges posed by the the new policy in order have safe ground for better operation.
But according to Mr. David Adonri, the Chief Executive Officer, Lambeth Securities Limited, the policy of adopting a single registrar for the banks is workable but added that CBN had no such regulatory authority to impose the policy on the capital market. According to him, it falls within the regulatory authority of the Securities and Exchange Commission (SEC) which is the agency regulating the Nigerian capital market.
He said 'It may be that they just want to impose it on the banks; and the banking sector is one of the sectors trading shares on the stock market. If they have a single registrar for the banks it might not be ideal for other sectors and companies quoted on the Exchange. He expressed doubts whether a single registrar can muster the technology to handle the register of banks shareholders given the dynamics of the market.
Adonri noted that even with an estimated 35 registrars the companies are still finding it difficult to cope with SEC rule that makes it mandatory to verify documents within 48 hours, pointing out for instance that there are documents that have been with some registrars for months without verification due to constraints of capacity. He stated that the implication of the policy to job security of those employed by the registrars will be phenomenal.
'We still need to wait and get the details of the policy' he said.
He pointed out however that what CBN and SEC said was that they are going to have a single registrar stressing that a lot depends on what they want the registrar to do. Each company is supposed to have a secretariat and it is the secretariat of each company that appoints the registrar. He explained
Therefore if regulators come up with a single registrar; and if that registrar is going to do the work that all the registrars are doing, then fears about job implication will become an issue.
To be realistic, there is no way the registrars are going to remain the way they are currently. Of course if you look at the registrar as an industry, you see that they have a lot of paper work to do, and some time they get buried in the paper work. Most of them are still being done manually and that accounted for the labour force. When the started about 10 years ago, the companies that were listed were not that many; the number of shareholders that each company had was not that many; it was visible and possible for each company to say that I am maintaining my small registrar department so that they can keep manually all the document.
According to the Managing Director and Chief Executive, Union Registrars Limited, Mr. Tunde Ayeni the implications of single registry for banks/companies are diverse and beyond what the authorities are envisaging. For instance he noted that registrars have been able to create capacity over time based on the fact that they are riding on the back of the parent companies' infrastructure. Some have state branches outside Lagos and the largest one has 19 branches outside Lagos which was in line with SEC's policy for registrars to have a presence as close to the investors as possible. He contended.
Ayeni warned that whenever the common interest of banks are no more represented in registrar houses, the tendency was for them to withdraw such infrastructures including IT facilities, location, office space in the banks, and all the things that can help to reduce cost of operation of the registrar, stressing that these facilities that were taken for granted over the years will be stripped off them and that will balloon the cost of operation He noted 'But now I dare say that the kind of technology platform and service complements that registrars have will rival those of the pr-consolidation banks. So that is one immediate consequence that single registry will have'.
The Union Registrars boss explained that if you strip 66 percent of the market share and you consolidate it on one entity and then leave 30 operators to struggle or compete for the balance of 34 percent, the situation may create much redundant capacity which may trigger forced mergers and massive layoffs in the industry. He then stated that the nation's economy, may suffer the impact eventually for job creation or retention should be discouraged.
Ayeni who pointed out the cheapest registry software you can get will probably be in the region of N10 million and above, warned that, the gravest aspect of the policy that can be seen was that there will be a blurring of separation of roles between operators and regulators. It will always create corporate governance breaches as the concept of one single entity was no longer fashionable anywhere in the world.
He further added that a single registry entity would certainly escalate the cost of verification of certificate which most shareholders would not afford.
But in as much as they know now that there is a level of competition and the shareholder or the company can decide that, on the base of efficiency, move elsewhere, that promotes some level of competition among registrar company and can only be to the benefit of investing public.
'I would say that there are better things to do with government funds than to set up private enterprises. We have been thro a round of deregulations and divestments of government equities and listing of government companies and so forth. Now it would appear we are going back in time. So this kind of revisionist agenda is better subjected to public debate and scrutiny. It is important for the regulators to realize that there is no monopoly of ideas or intelligence.' The Union Registrar's boss concluded