By NBF News
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Mindful of its role as a centre for capital formation, The Nigerian Stock Exchange (NSE) has instituted significant changes aimed at creating capital for productive sector of the economy.

Before now, capital formation at the Exchange had always tilted in favour of the commercial services sector of the economy, which is why commercial services companies have largely dominated the Nigerian economy, some of them listed on the Exchange.

But in this exclusive interview with Daily Sun, NSE Chief Executive Officer, Mr. Oscar Onyema, disclosed that The Exchange had formed new business development areas anchored in three new departments whose primary job is not only to attract new companies for listings but also help those that want to raise capital and at the same time offer services of The Exchange to the companies on the premise of value proposition.

'We have instituted significant changes to redirect capital formation towards productive sector of the economy. We have formed a new business development area that has three departments: Listings Sales and Retention, Product Management, and Branch Network. The Listings Sales and Retention group's primary job is to attract new companies that want to raise capital and to maintain relationships with existing ones so that we continue to service them on the premise of the value proposition', Onyema stated.

He further disclosed that the Product Management group recently put in place, is targeted to have 5 tradable products in 5 years, products which he said, would give investors and potentially people that want to raise capital tools with which to do so.

The NSE boss also said that the Exchange was going to utilise its geographical reach with 13 branches spread across the country to pitch its numerous products and services as well as ongoing investor education outreach to create awareness among investors and manufacturers, to explore opportunities which the market presents for capital formation.

According to him, the Exchange's effort towards raising capital to state governments for infrastructural development has started yielding results with many states coming to the capital market to raise funds for infrastructure developments through issuance of debt instrument.

'If you look at the different products that we offer, if you take bonds for instance, we have really seen a lot of actions from state governments with regards to infrastructure bonds to drive developmental purpose'.

That effort also goes to corporate bonds as well. We have about 10 corporate bonds. We will continue to support clients that want to access capital market by issuing debts through the Exchange. We welcome it and we support them. We are streamlining the rules around listings to make it more flexible while retaining the highest standards which we are known for.

In the equities segment, Onyema said aggressive efforts are underway to get listed companies and listing prospects to leverage the Exchange to raise much needed cost effective and long term funds for business operations.

'We have been aggressively going out to companies both listed companies and prospect companies that want to list, telling them the story of the Exchange and how they can leverage the Exchange to raise capital. We are building a strong pipeline so that companies that want to access the capital market can do so once they feel the market conditions can allow them to do that. I have been very active in speaking at several forums to address different sector and corporate needs.

'Last week I was at a petroleum exploration companies' forum that Standard Bank organised to talk to indigenous upstream oil and gas companies that are looking for access to the capital market to address their issues. So, we are already out there talking with companies, trying to help them come to the market. And they technically would come in under our main board'.

'In our ASEM platform, which is our small and medium scale enterprises, we are already talking with the Bank of Industry (BOI) and Central Bank with regards to agriculture programmes. As you know, agriculture accounts for about 40 percent of the GDP.

'Our goal is to work with these small and medium scale enterprises to package them properly before coming to access the capital market as an exit strategy from the loans they receive from the Bank of Industry (BOI). So, there is comprehensive programme around making sure that we continue to serve as the centre for capital formation', Onyema stated.

He speaks further on the transformation agenda of the Exchange, efforts to restore investor confidence, pull the market back from brinks, and a range of other topical issues in the capital market.

Restoring investor confidence
We plan to introduce investor clinics around the country. Our approach entails working with our broker-dealer community to meet with major retail investors. At these clinics, we will educate these investors about portfolio diversification principles, and thereafter have the brokers talk with their customers to help them structure their portfolio. To assist with this effort, the Exchange has created categories such as large cap, mid cap and small cap, income and growth stocks.

Income stocks are stocks that pay dividends as part of their dividend policy and growth stocks are stocks where company policy is that they will not pay dividend. Instead, they plough back profits as part of growth strategy till such a time when the company will have been firmly established and begin to make impressive returns on investments.

We know typically that there is no significant correlation between large capitalization (cap) stocks and small cap stocks. So if you diversify in those five boxes, i.e. large cap, mid cap, small cap, growth and income stocks, you stand a better chance of withstanding bearish time like this than when you put all your money in one basket. This applies to equity asset class.

Now there are different assets classes investors should have their portfolios spread out to. This will include real estate, fixed income and so many other asset classes. You don't want to put all your eggs in one basket, that is what portfolio analysis is all about. That is one way we want to address investor confidence in the market. Another thing we are doing is, we intend to introduce market making on the Exchange. Because if you want to sell, and there is somebody on the other side that wants to buy what you want to sell at reasonable prices, that gives you confidence that there are participants in the market that will take the other side of the trade.

So with enhancement in market structure and continued firm regulatory enforcement we are enhancing the market to boost investor confidence. We are making our rules clear; we are working with different stakeholders to make them comply by our rules. Where our rules are violated, there will be consequences. So we want investors to know that this is a market where when they invest their money, they can be sure there is somebody looking out for them via the investor protection programme that we have.

Bringing back fleeing investors: We are working in collaboration with some of our bigger broker-dealers firms to talk to their institutional clients. I was in London about two months ago at the Standard Bank conference where they gave me room to meet with a lot of the institutional investors on one-on-one basis. I have also done something similar with large dealer firms in Nigeria; who continue to bring global institutional investors to meet with us, which then gives us an opportunity to explain to them what we are doing with regard to enhancing Nigerian capital market.

We are also meeting with institutional investors in the country as well as the Pension Funds Administrator (PFA) community, because we want to make sure that we are properly servicing the different communities that deal in our market.

Dealing with market infractions
In every market around the world, you will typically have issues that border on market infractions. Our goal is to make sure that we properly monitor our market and that when we find out that any firm is committing any of these types of infractions, we address it relatively quickly based on what our rules provide for. So, I do not know what existed in the past but under our watch, we will make sure that we properly monitor the market and when we find market infractions we deal with it decisively.

Challenges in the job
In terms of market challenges, investor confidence and lack of liquidity and depth in the market are some of the big challenges. In terms of working as Chief Executive Officer (CEO) of the Exchange, obviously, we are driving a transformation agenda here. And when you are bringing a change, typically there are certain challenges to be expected, one of them is cultural change, in the way you communicate with staff and other stakeholders for them to understand your transformation agenda and to be cooperative in helping to execute and implement the transformation.

One other major issue is the requisite skill to help us drive some of these agenda items, bringing out new products, working in very professional manner that meets global standards. So we are addressing those challenges. We have had several staff trainings and we will continue to do that. We are also bringing in new staff through our recruitment programme. We are working through the applications that we received to see if we can get experienced skilled labour to help us in implementing some of our transformation agenda.

Market demutualization progress
With regards to demutualization, I have to say that we in management slowed down the process because demutualization requires a lot of time commitment, and there has to be a management project team that will work with the demutualization committee of the Exchange, and professionals (bankers, lawyers, etc.). And so, we said we needed to first of all conclude our recruitment process, and have the key players on board to help us drive the demutualization process.

The other aspect of it is, in going through demutualization, there are certain guidelines that need to be in place from the Securities and Exchange Commission (SEC) perspective. And SEC has recently constituted a committee that will help in setting up these guidelines. So, the demutualization committee has been established by the Council of the Exchange and it is ready to go. In fact, they are doing their own preliminary studies, so that when we start the process, we can move in very efficient and expeditious manner.

Efforts to stem delisting: Generally, Exchanges around the world experience listings and delistings on an annual basis. Under delisting, we have delistings that are forced by the Exchange because the companies are not meeting regulatory requirements; or voluntary delisting because strategy of the company has changed. Nigerian Bottling Company Plc's (NBC) case falls under voluntary delisting because their strategy has changed. The explanation that they gave us was that they wanted to invest more in their Nigerian operations by ploughing back all their revenue into the business.

According to NBC, in a culture where dividend payment is important, they do not want to deprive investors of that opportunity. That is what they told us. As to whether there is anything wrong with what the company is doing (ie delisting) there is nothing wrong with that. But obviously, we do not want companies to delist. So, we have created new departments, Listings, Sales and Retention department. Their job is to maintain relationships with our existing companies to make sure that we are properly servicing them, giving them the value proposition for listing. And the second part of their job is to go out and attract new companies. So, I believe that if we are properly servicing the companies, and giving them a conducive environment to list, the incentive to delist will be greatly minimized.

Market segmentation and streamlining
Our market segmentation study is a study that has gone on for several months. And the idea is that we want to conform our industry segments to global standards such as the North American Industry Classification System (NAICS), Australia and New Zealand Industrial Classification (ANZSIC) and Standard Industrial Classification (SIC). We also want to make sure that we are being reflective of the Nigerian economy. So, we wanted to have industry classification that covers the entire economy. And we feel that if we do our industry classification well, we can create products based on that classification. One of such products is indices.

Importantly, we want to position Nigerian capital market as the gateway to African market. That means that we want to have industry classification that is simple for global investors to understand, something close to what they are used to already. Those are the thoughts driving our industry classification. And that will also make it simpler because 33 is unwieldy. Making it simpler and just having between 10 and 12 makes it easier to understand and more robust. In the current classification where you have 33, there are sectors where you have just one company. And that is not right for Nigerian economy.

Extending trading hours again
We had conversation with trading communities and we decided that for now we will put a hold to extending trading hours again. So we leave the trading hours the way they are which is from 9.30am to 2.30pm. One of the thoughts behind wanting to extend trading hours initially was that we can have a better overlap between our trading hours and when the US markets are open.

Typically, much of the volume traded in the New York market happen before 11.00am (US time) that is between 9.30am and 11.am. The trading trickles down and thereafter peps up again at the close of their market which is 4 O'clock. So, we wanted to have this overlap because a lot of investors in that market also play in our market, so that we can give them opportunity to trade which will drive volume in our market. But given the heated debate that we had with our trading community, we felt that we should leave it for now at the existing hours. We are already overlapping with London and that also gives us opportunity to participate with Asian market because of a slight overlap.

Assessment of the economy
From the statistics we have, the Nigerian market is growing at a pace over 7% on annual basis. And the Minister of Finance just came out with a projection for next year, about 7.8% percent. So, from that statistics, the economy is growing. The market has been struggling as you know by the All Share Index.

But the market is reflecting certain sentiments, not necessarily all the market fundamentals, outside of the banking sector. So, part of the reason why we are doing the market segmentation study is to make sure that we get investors and market participants to start thinking in terms of sectors and to be reflective of what is going on in the various sectors so that sum of the parts can actually make the whole.