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HOW REAL IS REGULATORY PROTECTION OF INVESTORS?

By NBF News
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Oteh
Buoyed by criticisms from shareholders that regulators are not protecting investors, fireworks are on from the regulators' to correct the anomalies.

It was against this background that the apex regulator of the Nigerian capital market, Securities and Exchange Commission (SEC) recently promulgated what it termed new rules and regulations on book building.

Its Director-General, Ms Arunma Oteh, stated that the aim of the new policy would stem the tide of market infractions that deny shareholders return on their investments. The rules are primarily geared towards checkmating and regulating activities of operators in the market and they exploited various areas where operators could cut ways and cheat on their clients or investors/shareholders.

However, stakeholders in the Nigerian Capital Market (NCM), seeing the rules as paper tiger, criticized the Commission for its alignment with all policies enacted by the Central Bank of Nigeria (CBN) as they relate to the capital market.

Those who criticized the SEC's romance with CBN tied their grouse on the fact that both are parastatals of the Federal Government and so consent of SEC to any line towed by CBN is considered as acceptance to second fiddle position when it should stamp its feet and fight for superiority. Most shareholders believe that rules and regulations against market should be modeled to really protect investments in the market through implementation.

The Nigerian Stock Exchange (NSE) on a number of occasions emphasized investor protection as one of its cardinal functions. During the joint workshop for Capital Market Correspondents organized by the NSE/ Central Securities Clearing System (CSCS), Mrs. Taba Peterside, General Manager/Head Regulation and Risk Management of the NSE, said that the capital market is usually built on the foundation of investor confidence in instruments, operators, regulators, processes and procedures.

She noted that the sustenance of investor confidence depends, to a large extent, on the level of protection provided against avoidable risks. 'Investor protection is therefore a pre-requisite for orderly conduct of the capital market. It is the collective responsibility of all stakeholders in the capital market,' she said.

According to her, the essence of investor protection in the capital market stemmed from the fact that the market is made up of participants with different motives, adding that in most cases, operators want to make profit, increasing their bottom line against regulators' desire for orderly conduct of business through general market conformity with rules and regulations. Peterside said this informed the decision to constantly review the rules guiding the market.

In line with this, SEC included in the existing rules that a public company may offer securities by way of book building process, but with the prior approval of the commission. 'That in the book building process a minimum of 20 per cent of the offer shall be reserved for retail investors. That in the event of an under subscription by retail investors, the unsubscribed portion may be taken up by the qualified institutional/high net worth investors and that any unsubscribed portion thereafter may be taken up by the underwriters.

'For fixed income securities, a minimum of 10 per cent of the offer shall be reserved for retail investors with conditions for approval of offer to include; (a) the resolution of the company authorizing the book building process shall be an ordinary resolution as defined in the Companies and Allied Matters Act, and shall be filed with the Commission. (b) The option of book building in the issuance of securities shall be available to all public companies. (c) The issuer shall appoint registered issuing houses as book-runners and their names shall be mentioned in the prospectus.

'(d) There shall be no more than one lead book runner who shall be primarily responsible for building the book and that the securities available to the public shall be separately identified as securities for retail investors.

'(e) While the red herring prospectus containing all information except the information regarding the price at which the securities are offered and the volume of securities shall be filed with the Commission. (f) The total size or value of the offer shall, according to them, be disclosed in the red herring prospectus. (g) Upon approval by the commission of the red herring prospectus, it shall be circulated by the book runner to the qualified institutional/high net 3 worth investors, inviting offer for subscription to the securities. (h) The red herring prospectus to be circulated shall be issued with an invitation letter, which shall indicate the price range within which the securities are to be offered for subscription.

'(i) The book-runner on the receipt of the offers shall maintain a record of the name and number of securities ordered and the price at which the qualified institutional/high-net-worth investor is willing to subscribe to securities under the portion reserved for them. (j) All other issuing houses/book runners shall maintain a record of the orders received by them. (k) The issuing houses/book runners shall aggregate the offer so received on a daily basis and make available to the lead book-runner the aggregate amount of the orders received during the book building period.

'(l) At the end of the book building period, the lead book runner and the issuer shall determine the price at which the securities shall be offered to the public based on the aggregation of orders received. (m) The market clearing price so determined shall be applied to the retail investors' portion. (n) On the determination of the issue price, the prospectus shall be amended/updated and filed with the commission along with Form SEC 6 within 48 hours.

'That the allotment of shares to qualified institutional/high net worth investors shall be made on the date of signing of the executed offer documents while two different accounts shall be opened for the subscription monies, one for the qualified institutional/high net worth investors and the other for the retail investors.

Other items in the rules state that upon the allotment, the issue proceeds in respect of the book-building portion shall be remitted to the issuer within 24 hours, while the executed offer documents are filed with the commission within two (2) working days of the Completion Board Meeting. The book-runner and other intermediaries associated with the book-building process shall maintain records for the book-building process.

The allotment in respect of Book-building shall be filed with the Commission within two (2) working days of the Completion Board meeting. The offer to retail investors shall open after the completion Board meeting and shall remain open for a period not exceeding 10 working days.

'It also stated that an allotment proposal in respect of public offer (retail investors) shall be filed with the Commission for clearance not later than 10 working days after the close of the offer and that in the event of oversubscription, the allotment should be in line with Rule 69 (2) whereas in the event of over-subscription, the issuer can only absorb not more than 15 per cent of the value of the offer.

'These rules, according to some market operators, are to guide against manipulating investors' funds put in the company. One of the operators said that with the rules announced to operators, they now know how not to attract the wrath of the regulators who would not waste time to sanction the culprit'.

Most of the operators expressed their views on the nature of protection of investors in the market. Mr. Sam Willie Ndata, a stockbroker with Compass Investment and Securities Limited, in his assessment, said that there is investor protection in the market now unlike in the past. He noted that the NSE has got rules on how to protect investors, SEC has put things in place to protect investors; so has Chartered Institute of Stockbrokers (CIS) got machineries on investor protection.

Ndata said that the only way an investor could feel unprotected is when he has a case and has not made it known to the regulator concerned. 'The SEC and NSE have committees set up in which any time a case is reported against any House, the House is suspended from trading while investigation on the matter was conducted.

Unlike before when the case would drag for a long time, this time he noted, once an investor complains that his stock was sold without his notice NSE will order the stock to be returned before the day's trading was over. The worst part of it is that once the culprit appears before the committee, he will be compelled to pay some fines before the investigation. After the investigation, if found guilty, he now receives the full wrath of the law,' he said.

He said the aim of the whole punishment is to deter operators from impinging on investors/shareholders' rights. He noted that the regulators have also set up fund which is called Investor Protection Fund (IPF) that could be used to reimburse the investor in the event of loss of money.

However, as far as the phrase, 'investor protection' is concerned; according to some stakeholders, regulators, have done little or nothing towards protecting investors' investments in the market. Likely issue to come to mind according to one of them is the AP shares manipulation. The regulators he said were unable to detect that some one somewhere was negatively working down the values of a public quoted company until independent observer communicated same to the company in question.

For Boniface Okezie, Chairman, Progressive Shareholders Association of Nigeria, there is nothing like investor protection from the regulators. According to him, if investors are protected, the Central Bank of Nigeria (CBN) would have contacted shareholders before sacking the chief executive officers of banks. He said that currently, CBN is seeking investors for the ailing banks when ordinarily, it should be the shareholders that would be discussing the way and manner to recapitalize the banks and not the way CBN is going about it. 'The touted investor protection by regulators is merely paper tiger. They have made a lot of rules but the issue is that the implementation of the rules when they come into operation still worries operators,' he said.

Reacting to the tenure regulation announced by CBN, Okezie, said that it is the function of the CBN to regulate the tenure and even punish indiscipline on the part of any managing director. He said that the decision of SEC to align with CBN's line of action as far as banks that have shareholders as financiers is totally wrong.

According to him, shareholders transcend all institutions and not only the financial institutions, therefore to use the provisions of BOFIA for the appointment of Managing Directors (MDs) of the banks with shareholders cutting across all other institutions is totally wrong, he said.

Okezie maintained that CBN sacked the MDs on grounds of low adherence to corporate governance and some other levels of indiscipline which is its cardinal function. He maintained that the shareholders of any company or banks reserve the rights to appoint or elect who will manage their investment and not CBN.

Sunny Nwosu, National Co-ordinator, Independent Shareholders Association of Nigeria, noted that there was misdirection in the management of depositors' funds, urging the apex bank to select its actions carefully. He said that CBN has been looking for reasons to get the banks sold out to fresh investors. He warned that any action of CBN without due consultation with shareholders will meet shareholders' resistance.

Nwosu said there is no investor protection as far as capital market investment is concerned by regulators. According to him, what the regulators do is to promulgate rules that are not monitored. He said that if the regulators care for investors who are shareholders of companies quoted on the NSE, the shareholders would be considered any time rules that would guide operations of the market are fashioned.

He noted that without shareholders being in the picture of rules that guide the operators, such rules are mere pronouncements because the operators would not see the rules as pen tools that would guide them.

Another shareholder leader, Johnson Olufemi Timothy said that regulators should start to do the right thing by allowing shareholders to decide the fate of those who manage their investments. He said that when one mourns the dead more than the bereaved, the aim becomes questionable.

According to him, CBN ought to be contented with the regulatory functions and not to usurp the obligations of the shareholders with BOFIA. 'We the shareholders of these institutions are not happy that our hard earned funds are misdirected, however, it is not enough for the apex bank to throw caution to the waves for that matter,' he said

Recently, Albert Okumagba, Managing Director and Chief Executive Officer, BGL Securities Limited, at the Nigerian Economic Summit Group (NESG) symposium on 'Creating a world class capital market in Nigeria, said that the NCM will attain the world class of our dream if the leadership of the market creates and implements policies that are purely for the growth of the capital market.

Okumagba, who was not happy that CBN did not consult stakeholders of the capital market before taking decision on uniform tenure for chief executives of banks, said that CBN ought to have sought the opinions of both the SEC and dealers in the market before such pronouncements are made.

Also among the policies of CBN that do not go well with stakeholders is the common year end. One of the stockbrokers that spoke to Daily Sun said that the aim of bringing about a common year end for banks may be good but that the approach was not the best as opinions of those to be affected by such policies ought to have been sought.

Most of those that spoke to our reporter said that SEC should not hold every rule that comes from CBN as sacrosanct. One of them said that with this posture, SEC is trying to make itself a tool for CBN to get at operators in the capital market. He decried the attitude of CBN to margin loan, saying that the apex bank could not do home assessment before firing out. 'You can see that after receiving the impact of its policy on both the capital market and the entire economy they started to repeal some and amend some. This should not be so; but it is so because they failed to bite before they chewed,' he said.

He recalled that shareholders of the banks with new managing directors appointed by CBN have faulted the regulator's reliance on Banking and Other Financial Institutions Act (BOFIA) in the appointment of managing directors for banks.

During the manipulation era, AP shares hitherto selling slightly above N293.00 per share got eroded to a little below N50.00. It is true that the company NOVA Securities was punished for that, investors whose profits were frozen were not compensated. When the issue of manipulation came up, Securities and Exchange Commission (SEC)'s Head of Media, Mr. Lanre Oloyi, reassured the investing public that the Commission was investigating the malpractices and has set up a committee to look into the matter after which appropriate penalty will be awarded. It is true that the allegation was investigated and the culprit was also found, what could not be clear among investors was what will happen to investors whose investments in the company were eroded.

Chief Emmanuel Akamobi, Managing Director and Chief Executive Officer, Star Insurance Brokers Limited, said that if there was no protection of investors in the market, the market would not be conducive for both operators and investors. He noted that any time any operator hears of SEC examiners visiting his company, they would have their operations tidied up. He said that charges imposed by SEC for any anomaly by operators are always scaring and better imagined than beheld. 'Any time any investor reports operator to SEC for any infraction of any kind, the apex capital market regulator does not waste time in getting to hear and follow the matter to its logical conclusion.

Another analyst said that the regulators are good for post-investor protection but got a lot of short comings in pre-protection. He said that regulators do not, apart from rules promulgated prepare grounds for investors' protection. 'I can vouch for SEC to go any length to make any operator that defrauded investor to pay through the nose to compensate the investor. I think that in order to deter fraudulent operators in the market from perpetrating their acts in the market, regulators go as far as suspending any firm that is reported,' he said.

Recently, SEC suspended 34 broker dealers for failure to comply with reporting obligations. The suspension according to capital market watchers is the highest in any single period. The infraction that attracted the penalty may have some undertones that could be tied to shortchanging investors even though such is not made public. The SEC threatened a fine of N200 million for the erring broker dealers. The SEC also promised to continue investigation into financial reporting infractions. Nonetheless, dearth of information relating to the level of effect of the infractions to investors has not allowed the public to apportion blames.

Last year also, the NSE in keeping with rule 131 of the rules and regulations of the SEC, formerly announced the delisting of Aboseldehyde Labouratories from the Daily Official List of the Exchange. According to the NSE, the delisting was occasioned by the dormant attitude of the company to functional and financial operations. Again, the interests of shareholders/investors were not considered as the regulator(s) would have resuscitated the company and others in the same picture via some bailout incentives.

The issue is that even though the company was delisted, its factory is still in operation in which case it is only the investors that are shortchanged. By delisting the company from the NSE, the company will be happy as those who will ask how this money was spent or what informed the decision of the company to take this action or that have been blocked. In this case, the company despite receiving funds from investors will now have to eat alone and enjoy the profits of the company alone. No regulatory supervision from SEC or NSE over financial dealings or directorate compositions.

Also, in December 2009, SEC sanctioned 77 capital market operators in its industry sanitization initiatives. Besides, certain operators were in the same year barred by the Commission from holding directorship positions in specific public companies following their respective indictment for serious breaches of the rules. These breaches were not communicated to investors nor the relationship of the rules breached to shareholders' interest.

The commission recently while reviewing the banker-customers/shareholders relationship proposed tough sanctions and penalties for erring bank officials who expose shareholders and depositors' funds to avoidable risk through unsecured facilities and insider abuses. SEC said that diligent prosecution and harsh jail terms awaits those it described as 'greedy and reckless' bank officials for their indulgence in gross abuses of due process.