DEVELOPED CAPITAL MARKET PANACEA TO ECONOMIC DEVELOPMENT – OTEH, SEC BOSS

By NBF NEWS
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Beyond immediate priority of its crowded reform agenda - restoring investor confidence- one major commitment leadership of the Securities and Exchange Commission (SEC) has set out to actualize is market diversification.

As part of the reforms needed to lift the capital market and reposition it as one of the leading capital markets in Africa, the commission said it will increase the depth, breadth and sophistication of the market.

The Nigerian capital market is predominantly equity driven with the banking sub-sector accounting for more than 65 percent of activities but the Director-General of SEC, Miss Arunma Oteh, has repeatedly said it was time for the capital market to become diversified in order to ensure that it fosters entrepreneurship by linking the market to its role in the larger economy for development.

Insight into capital formation at the capital market:

There are two kinds of capital formation -short-term and long-term. While it is the duty of the money market to form short-term capital to finance short-term deals in the economy, it is the duty of the capital market to form long-term capital, which is used in financing capital expenditure and development in general.

Analysts believe that since the inception of the market, the focus had been on aggregating short-term capital for commercial services sector to the detriment of the productive sector. They argued that because the real sector has been starved of funds, the commercial service sector now has so much long-term capital than they require. And instead of diverting the funds to the real sector, they now transfer them out of the country to service the real sector abroad.

The short-term capital mobilization has been a dominant factor in capital intermediation, and therefore, there is a compelling need to redirect the financing capacity of the market away from its service-oriented financial aggregation into the real sector capital financing.

It will now be better to promote deliberately the financing of the productive real sector in strategic manner. The capital that will now be formed in the market will be strategically positioned to develop engineering infrastructure.

The components of heavy industrial base are the metallic industry, which comprises of ferrous and non-ferrous metal, the energy power sector. It is the underdevelopment of these three sectors of the economy that denied the engineering industry that is required to drive light industrial sector in a sustainable manner and also other heavy activities. So the process of capital formation must be more strategically geared towards financing heavy engineering productive base.

Linking the capital market to develop larger economy

The financial market intermediate in the process of capital formation in any economy, and I think that the capital market is extremely important to any economy, much more so to our own economy. Over the years, we have been dependent on oil. And government has made efforts to have a more diversified economy.

I think that the capital market will help us do that, because entrepreneurs can raise funds in the market to facilitate innovations, sponsor them, and to create jobs. It is extremely important to our own economy. Nigerians are industrious and the market is extremely important in helping the country realize its potentials. There are a limited number of asset classes as the market is dominated by equity investments.

Therefore, we need to expand market offerings to include products such as fixed income securities. Hedging instruments such as futures and other derivatives must be promoted as well as securities lending and collective investment schemes'.

She stressed her aversion for anything that is improper, vowing to apply a zero tolerance policy against all infractions and abuses in the market place. Her words: 'I have zero tolerance for anything that is improper. People that have worked with me know that I have zero tolerance for anything that is improper and that is what we preach'.

In an interview with Daily Sun, the SEC boss spoke on how she plans to deepen the market and execute her zero tolerance policy. She opened up. Excerpt:

Deepening the stock market
Our market had been predominantly equity-driven. We need to make sure that others are attracted to the market issues. We have other sectors that are quite vibrant; the telecom sector for example. We also need to make sure that second tier market and the alternative investment market are fully operational because it is important that the capital market fosters entrepreneurship. We also need to look at other products.

We must focus much more the fixed income market. Over the last few years, we have created sovereign debt market. The debt management office has done very well in ensuring that we have a sovereign debt market because that is one of the building blocks of the fixed income market. If you have got the sovereign debt market, it is a benchmark that hencefort, you are going to allow the state governments or corporate bodies to price your transactions up.

We have seen a lot of entries from state governments, Lagos State is taking the lead in that regard. It has got approval to issue a second bond transaction after the first one. So having a vibrant bond market and fixed income market is extremely important. But that fixed income market needs to be developed with risk management and products so that dealers can focus on what they do well which is intermediation, that they can hedge their positions. We need to ensure that the future market develops in our country.

We need to leverage more on over the counter derivatives like swap whether it is interest rates swap or currency swap. But we also need to look at most importantly the things that target the ordinary investor. And we at SEC are encouraging collective investment vehicle. We are looking vigorously at making sure that the framework such as fund managers have the expertise to do the things that they have been set up to do.

We have trustees and other infrastructure that ensure we have right kinds of checks and balances. We also feel that we can do much more in Islamic finance. We believe that one of the market operators has an Islamic funded opportunity for us to do much more in our country and we will be working very closely with market participants to develop the framework such that we can have much more focus on Islamic finance.

We need to create a market that allows us to do reposition that allows us to have securities mending that helps us have a market that is liquid even as sovereign debt market that we have to do. It is greatly an opportunity for us to deepen the market with products that are more sophisticated. But all of these must be accompanied with the right infrastructure because one of the challenges that we had in the last two years is that there were things that were done without the right infrastructure. The right infrastructure creates the checks and balances that allow us to ensure there are no sharp practices, and that they are stopped soonest.

SEC & Islamic finance products
We feel that we can do much more in Islamic finance. One of the market operators (a stockbroker) has an Islamic funded opportunity for us to do much more in the country and we will be working very closely with market participants to develop the framework that we can have much more focus on Islamic finance.

We also need to make sure that second tier market and the alternative investment market are fully operational because it is important that the capital market fosters entrepreneurship. We also need to look at other products. We need to focus much more the fixed income market.

Having a vibrant bond market and fixed income market is extremely important. But that segment of the market should be developed with risk management and products so that dealers can focus on what they do well, which is intermediation.

So they can hedge their propositions to ensure that the future market develops in the country. We need to leverage more on over-the-counter derivatives like swap whether it is interest rates swap or currency swap. But we also need to look at most importantly, the things that target the ordinary investor.

And we at SEC are encouraging collective investment vehicle. We are looking vigorously at making sure that the framework of fund managers have the expertise to do the things that they have been set up to do. We have trustees and all the infrastructure to ensure that we have the right kind of checks and balances. We also feel that we can do much more in Islamic finance.

We should create a market that allows us to do repos (repurchase agreement); that allows us to have securities mending that helps us have a market that is liquid even as sovereign debt market that we have to do. It is greatly an opportunity for us to deepen the market with products that are more sophisticated.

Udoma, SEC and gospel of zero tolerance:
Quite a number of questions have arisen over Senator Udoma Udo Udoma's appointments as Chairman of SEC, UACN Plc, and others. He (Udoma) has repeatedly explained that he was on the board of UAC prior to his appointment as SEC boss. And that before he took up the appointment, he declared his interest as required by the International Finance Corporation (IFC) and Investment and Securities Act (ISA) and since then, he had not accepted any new board appointments in public companies. He noted that his position is consistent with the practice in other countries such as Malaysia, and others. This is his position.

We are what we preach, and we must be a role-model. If you ask my staff what I told them during our meeting recently, when I stated that I have zero tolerance for anything that is improper. I think that we are in a privileged position because we have been asked or we applied and we were successful in our role. It could have been anybody. Such a privilege to serve the nation in a role, do we not preach zero tolerance? We have to. People that have worked with me know that I have zero tolerance for anything that is improper.

Executing our zero tolerance policy
Everybody knows things that are wrong. We must make sure that the crux is very high for individuals and organizations because we can't afford, to have anything that is improper. We have seen what happened in the last two years. We have seen the consequence to individuals. People have lost all their life savings.

People have lost the opportunity to put their children in school. There are allegations of share price manipulations and insider dealings. We can't afford that. Our country is one that has great potentials, so we are a great people. We can't afford to let anybody to do things that are improper. Wherever our capital market is, our economy goes and our country goes. Therefore, we cannot afford anybody that is doing improper things.

At SEC, we have a good enforcement team. I intend to increase our capacity in that area because we must send signal; we must do the things that will show people that we cannot afford to continue to do things incorrectly. We can't afford it. When people invest in the market, they do so on the basis of trust. Because some of the challenges we have had in the last few years is erosion of investors' confidence. We have seen the market recover slightly. It will take some time to correct some of the things that happened.

To restore that confidence, we have to make sure that people who do improper things will not get away with it. We have a good framework for ensuring that improper behaviour is not accepted. In addition, we as regulators, are co-ordinating much more effectively. Therefore, it is easier to stop those engaging in improper behaviour. More importantly, when you have zero tolerance for anything that is improper, it deters others from doing anything wrong when people realize that the cost of doing anything wrong is extremely high to themselves and to their organization. We must do right things for the country.

This is a nation of great people who are predominantly gifted and work greatly hard and we cannot afford for our country not to realize its potentials 50 years on after independence and moreso with the people we have. All over the world, Nigeria has distinguished itself. There is a lot for us to do as a nation. Presently, President Yar'Adua's Seven-Point Agenda articulates the things that we must do whether it is infrastructure, or investing more in agriculture, education, etc. we have huge needs and the capital market offers an opportunity to address those huge needs.

If we must make our market the first port of call for the local or foreign investors, we must make sure that there is nothing that creates the impression that things will not be done properly. So, we have no choice but to do things right. So, I believe for the short-term I have been in this role listening to the ordinary investor, public opinion is that things have to be done properly in our country.

So everyone agrees that improper behaviour will not be tolerated any more. Our role as apex regulator is to make sure that we do that; that we got the institution; we got the support from the executive, from the National Assembly and from the ordinary investors to make sure that things are done rightly.

We shall name and shame without fear or favour
We will do name and shame people, but before we do that, we make sure that our investigations are done thoroughly, such that we don't accuse people wrongly. But where people are found to have done anything that is wrong, we will name and shame because it is also important to deter people; so naming and shaming is a very important tool.

So it is such an important tool that we must use it and will continue to use it. Nobody will be spared no matter his or her status. The executive, the legislature, public opinion shows that we have seen the importance of making sure that people understand we do not tolerate anything that is improper. Nobody is above the law. We are in an administration that supports the rule of law. And everybody must be treated equally.

On recommendations of capital market committee
We are going to adopt recommendations of the I5-man committee established to review the capital market late 2008. The 32 key recommendations articulate the reforms that are needed to lift the capital markets, and those recommendations have laid the foundation for some of the key issues that we will be undertaking in SEC.

A well-functioning capital market is essential to Nigeria's economic development and to realise its full potentials, the country must have a world class capital market that is strong, sustainable, well-functioning, and plays a central role in the economic development of the nation.

We must adopt a zero tolerance policy against all infractions in the market, if we must position market as one of the leading capital markets in the continent.

There is also a fundamental need to strengthen regulatory oversight. On our part as apex regulator, we are going to improve the effectiveness of market regulation, oversight and supervision and also strengthen the SEC, in terms of capacity and operations.

Disclosure, transparency and accountability are also key issues that need to be addressed in the market. We must continue to send the right signals about the critical importance of integrity and transparency as critical ingredients of good corporate governance. We must establish strong institutions across the market and instill principles of risk management into capital market operations.

We need the co-operation of all market operators to ensure that the SEC has access to a set of reliable information about operations in the capital markets. The SEC and the Nigerian Stock Exchange (NSE) will also be collaborating to update, implement, monitor and enforce a comprehensive risk management framework that reliably keeps systemic risk in check.