enabling laws and institutions of the capital market … · including their investment in the...

LEGAL, OPERATIONAL AND REGULATORY

FRAMEWORK OF THE NIGERIAN CAPITAL

MARKET

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INTRODUCTION

Capital market is one of the institutions that contribute to

economic development of any nation.

As a driver of economic growth and development, regulation

of capital market is necessary.

Government has put in place regulatory and institutional

frameworks to ensure the growth of capital market.

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OUTLINE

Background

Enabling laws:

Overview of the ISA 2007

Major participants in the Capital Market

Institutions of Capital Market

Conclusion

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BACKGROUND

Prior to 1988, the regulation of the capital market was

essentially by way of self-regulation by the Nigerian Stock

Exchange (NSE) and by piecemeal legislation such as the

Lagos Stock Exchange Act 1961 and the Companies Act

1968.

The Central Bank of Nigeria (CBN) also played an informal

role in the regulation of the market having mid-wifed the

Exchange into existence. By the Lagos Stock Exchange Act

1961, statutory recognition was given to the Lagos Stock

Exchange (LSE) (later changed to Nigerian Stock

Exchange).

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BACKGROUND CONT’D

The NSE set up the market for trading in securities and

manages the market in terms of seeing to its operational

efficiency.

It adopted a listing requirement and other rules and

regulations which every company or authority wishing to

participate in the market either as a trader or issuer of

securities must comply with.

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BACKGROUND CONT’D

Regulation by the NSE suffered from the usual pitfalls of self-

regulation, i.e.

Lack of independence and objectivity in regulation as

the market operators tend not to be objective either in

the formulation or implementation of regulation for

themselves.

Absence of sufficient coercive powers to prevent

market abuses. Even when the self-regulator is

objective, it may not have the machinery of

enforcement.

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BACKGROUND CONT’D

Government responded by the promulgation of the Securities

and Exchange Commission Act 1988 which established the

Securities & Exchange Commission (SEC) as the apex

statutory regulatory organization for the capital market. In

addition, there were other piecemeal efforts at statutory

regulation and control.

The various laws affecting the market were later

consolidated and reviewed in the Investment and Securities

Act 1999, which has been replaced by the Investments and

Securities Act 2007.

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ENABLING LAWS

Major: ISA

Investment and Securities Decree No. 45 1999, became known as

the Investment and Securities Act 1999, by virtue of section 315 of

the Constitution of the Federal Republic of Nigeria 1999.

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ENABLING LAWS CONT’D

Section 263 (1) repealed and amended the following:

The Lagos Stock Exchange Act of 1961.

The Nigeria Enterprises Promotion Issue of Non-Voting Equity Shares

Decree 1990.

The Securities and Exchange Commission Act 1990.

Part XVII of the Companies and Allied Matters Act 1990.

Section 21 (2) of the Nigeria Investment Promotion Commission

Decree 1995.

Section 3 (d) of the Capital Gains Act

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ENABLING LAWS CONT’D

ISA 1999 was repealed and replaced by the ISA 2007 which

came into effect on 1st June, 2007.

The ISA 2007 was a product of a long process of

consultation for the reform and modernization of the rules

governing capital market transactions as contained in the

ISA 1999.

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OVERVIEW OF ISA 2007

Divided into XVIII (18) parts all dealing with various issues

on capital market.

Part I established the SEC. Part II sets out its functions and powers. Part

III lists the staff of the SEC. Part IV is on financial provisions. Part V is on

registration of Securities Exchange and Capital Trade Point. Part VI-

registration and regulation of capital market operators. Part VII on

inspection and investigations power of SEC. Part VIII-registration of

securities. Part IX regulates public offer and sale of securities and

invitations to the public. Part X deals with conduct of securities business.

Part XI is on trading in securities. Part XII on mergers, take-overs and

acquisitions. XIII deals with collective Investment Securities. Part XIV is

on Investors Protection Fund. Part XV deals with borrowings by Federal,

State, local governments and their agencies. Part XVI established the

Investments and Securities Tribunal. Part XVII deals with miscellaneous

issues. Part XVIII is on interpretations and citations.

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OTHER LAWS THAT CONTAIN

PROVISIONS WHICH IMPACT ON THE

CAPITAL MARKET The Companies and Allied Matters Act (CAMA): It made several

provisions on shares and debentures. Section 22(5) specifically

restricts private companies from issuing shares or debentures to the

public. The rights and liabilities attached to shares, allotment of

shares as well as the right to transfer shares are contained in CAMA

1990.

Asset Management Corporation of Nigeria 2010: This Act

empowers AMCON to amongst others issue bonds or other debts

instrument as consideration for the acquisition of eligible bank assets.

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CAPITAL MARKET CONT’D

The Banks and other Financial Institution Act (BOFIA): A bank is a

financial institution and a financial intermediary that accepts deposits

and channels those deposits into lending activates either directly by

loaning or indirectly through Capital markets. BOFIA essentially regulate

banking and other financial institutions in Nigeria. Section 4 empowers

the Central bank of Nigeria to invest any amount deposited with it in

treasury bills or such other securities 1991.

Pension Reform Act PENCOM 2004: This Act empowers PENCOM to

regulate investment activities of Pension Fund Administrators (PFAs).

Pursuant to this power, a regulation on investment of pension fund

assets was issued to licensed PFAs detailing criteria for investment in

capital market instruments.

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CAPITAL MARKET CONT’D

Central Bank of Nigeria CBN: CBN, both under BOFIA and its own

establishment Act, controls and regulates the activities of banks,

including their investment in the capital market, as well as their use of

the market to raise funds.

National Insurance Commission Act NAICOM 1997: NAICOM also

regulates the investments an insurance company can make under the

provisions of its Act. It does this by issuing guidelines and regulations

For details of the regulation see www.pencom.gov.ng/regulation

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MAJOR

PLAYERS/PARTICIPANTS The players in the capital market are the operators who act as

intermediaries between the provider of the funds and the fund users.

They include securities exchanges, brokers, dealers, issuing houses, jobbers, registrars, trustees, investment advisers, fund/portfolios managers, etc.

These players are heavily regulated by SEC and as capital market operators required to comply with SEC Rules and Code of Conducts.

Part VI essential provides for registration and regulation of capital market operators.

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INSTITUTIONS

SEC: Charged with the overall control, registration and

regulation of investments and securities business in Nigeria

and it also regulates the activities of capital market operators

with a view to maintaining sanity in capital market operations

in Nigeria.

As key regulator of the capital market, the SEC has put in

place Rules and Regulations as well as Code of Conducts to

guide capital market operators.

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INSTITUTIONS CONT’D

Selected Regulations –SEC:

General Rules of registration

registration with the SEC is required from the various listed

persons whose activities impact on the capital market, such as

Inter broker dealers, securities clearing and settlement companies,

custodian securities, capital market operators to wit issuing

houses, underwriters, brokers/dealers, sub-brokers, jobbers, share

transfer agents, banks to issue, receiving bankers, registrars,

trustees, investment advisers, fund/portfolio managers

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Regulation of Public Offerings: Registration

and Disclosure Requirements:

Under section 13 (d) of the ISA 2007, the Commission shall

register securities of public companies to be offered for

subscription or sale to the public

An investing company is expected to disclose every material

information to the public.

the company shall issue a prospectus containing the financial

statement of the Issuer and all other information relating to the

offer and historical background of the company.

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Regulation of Public quoted companies

Rule 106 of Securities and Exchange Commission (SEC) Rules

and Regulations provides that public quoted companies shall

register their securities and shall thereafter file reports with the

Commission. This power derives from section 13 (c) and (13)(d) of

ISA 2007 that empowers the Commission to monitor and regulate

the shares of public quoted companies in Nigeria.

The SEC amendment of 2010 contain Rules on Regulations of

Public Companies as Part B4 Rule 97A. By virtue of that Rule,

every public company whose securities are required to be

registered, shall file with the Commission on a periodic or annual

basis and on a specified format, its audited financial statement and

other returns as may be prescribed by the Commission from time

to time.

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In ensuring that the public quoted companies are

adequately regulated after the offer and in dealing with any

problem arising from the offer, the ISA 2007 provides the

Commission with the power to establish departments.

By virtue of this provision, the Commission set up the

Administrative Proceedings Committee (APC) which is an

adhoc body that is convened to redress any wrongdoings

in the securities industry and to impose penalties. Its

decisions would then be ratified by the Board of the

Commission before becoming effective See section 14 of

the ISA 2007.

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Regulation of allotment of shares in public

offers:

S.124 CAMA states that subject to ISA, the powers to allot shares

in a company lie in the company (through a general meeting) and

may be delegated to directors (usually acting through its Board).

S.88 ISA 2007 on allotment of shares is however clear in that it

mandates an Issuer company and Issuing Houses to be

responsible for allotment of shares in accordance with SEC Rules

& Regulations (SECRR) and SEC approval of such allotment

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Regulation of Capital Market Operators:

By virtue of Rule 165A, the SEC may where it deems fit appoint an

individual or body corporate to oversee the affairs of a suspended or

ailing capital market operator in the interest of the investing public.

Further, a market operator shall notify the SEC at least three months

before the meeting of creditors of its intention to compromise with its

creditors.

The SEC has also made various Rules to ensure effective regulation

of the capital market some of which are: Rule 109B on share buy

back to apply to public companies, Rule 204B on payment of

dividends, etc.

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The Nigerian Stock Exchange :

Under section 13 (a) & (b) of the ISA 2007, the Commission has

power to register and regulate securities exchange in Nigeria.

The NSE is licensed under the Investments and Securities Act (ISA)

and thus regulated SEC.

It has its code of conduct for dealing members as well as its listing

requirements.

NSE now requires compliance with Post Listing Requirements (PLR)

which is contained in the General Undertaking to be executed by all

listing companies.

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Flow chat: NSE

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The Central Securities Clearing System Plc (CSCS) is a

subsidiary of the NSE.

It is the clearing house of the NSE that was incorporated in

1991.

CSCS is licensed by SEC as an agent for the Central

Depository clearing and settlement of transactions in the

stock market.

It operates a computerized depository clearing settlement

and delivery system for transactions listed on the NSE.

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The Corporate Affairs Commission: CAMA established the

Corporate Affairs Commission (CAC) with powers to regulate

and supervise the formation, incorporation, registration,

management and winding up of companies. Transactions

involving companies including share transfers and allotments

as provided in CAMA are usually filed at the CAC.

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Asset Management Corporation of Nigeria established by the

AMCON Act 2010 to efficiently resolve the non-performance

loan assets of banks in Nigeria.

AMCON essentially buys the eligible assets within 3 months

of designation. The consideration to be furnished by AMCON

shall be 7 years bonds or other debts securities of such tenor

as the CBN may prescribe which will be issued by AMCON

and guaranteed by the Federal Government of Nigeria.

It seems that AMCON Act created special dispensation for

AMCON in dealing with shares and bonds of eligible banks

without recourse to SEC approval.

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CONCLUSION

The Nigerian capital market has come a long way from the

days of self-regulation by the Nigerian Stock Exchange (NSE) to this present era of heavy regulation by SEC. Recently, SEC published a Consolidated Rules 2011 (published in 2012) for possible comments from stakeholders.

The Consolidated Rules which have more extensive provisions will amend the existing Rules once they come into operation.

The Rules and Regulations on capital market may not be entirely perfect but to a greater extent ensure that there is sanity in the market and that the Nigerian market remains attractive to both local and foreign investors.

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