Joe Mekiliuwa is the General Manager, Operations at the Central Securities Clearing System Plc. He speaks on the prevailing bearish trend in the capital market and the company’s efforts towards achieving 100 per cent dematerialisation of share certificates, in this interview with STANLEY OPARA
The capital market, at the moment, is on a bearish trend. How has this been affecting the operations of the CSCS?
Nigeria is part of the global community. Since the recent global meltdown, the market has been experiencing a bearish trend. Foreign investors took greater part of their investment out of the system. By so doing, it means they had to sell off. To sell off means shares of greater magnitude will be released into the market and it will depress the market accordingly, and the prices of those securities will go down. There will be a significant drop. Arising from that, the local investor, who want to sell, will be selling at a price that is below the cost price. That is a loss already, and many cannot exit from the market because of the current prices of the securities. It has affected our market in the sense that the local investor could not exit, many of the foreign investors have already exited and inflows are no more coming as they used to. A lot happened in 2007 because so many companies came to the market for private placement with the hope that they would list at a higher price because private placement was at a discount and many investors bought into the private placement having received assurance from the companies that they would be listed in due course. Investors were hoping to make gains when the shares were finally listed at higher prices. But by the reason of the crisis, the prices of shares nosedived. These companies couldn’t come to the market any longer because the implication is that they will be selling below the price at the private placement. Many of the companies, till today, have not come into the market. The investors who bought into the private placement cannot exit the market because it is at the point of listing that they can exit. Many of these investors are caught up in this problem till today.
Are you saying there is no respite for such investors?
Investors can only exit in the secondary market, which will be after listing of the companies on the floor of the Nigerian Stock Exchange. But the only window that could be looked at then was the Over-the-Counter market, where brokers could meet independently on behalf of their clients to buy or sell securities. But this has not really worked as the investors have yet to exit the market. A lot of efforts have been made by the NSE, Securities and Exchange Commission, the CSCS and other capital market players to encourage investors to come to the market to continue the normal business of buying and selling. But the situation where somebody borrowed a large sum of money to purchase shares, some sold their properties to raise money to buy shares with the hope that the margin would be good. But till today, they are caught up. If a company is not listed, how can you exit? The window for exit is very narrow because they are not listed, and that is a big issue.
Part of the experiences we had at that time was margin lending. After the recapitalisation of the banks, they had so much money and were virtually begging investors to come and take money to buy shares. Many investors made a lot of money legitimately from this. All these happened before the global financial crisis. Because of the gains, many investors went back to the banks to get more loans as the banks continued to bombard investors. Many investors took massive loans from the banks then. In some cases, there was no collateral or insufficient collateral. When the market finally went down, the banks pushed in the shares into the market to sell off in order to mitigate losses. This eventually flooded the market and caused price crash.
The CSCS had said it was targeting the first quarter of this year to achieve 100 per cent dematerialisation of share certificates in the system. What has become of this aspiration?
The mandate given by SEC to capital market stakeholders is that we must achieve 100 per cent dematerialisation. We are hoping to achieve 100 per cent dematerialisation of share certificates by the end of 2016 third quarter (September). Currently, over 98.4 per cent of shares certificates of quoted companies on the NSE are dematerialised in the CSCS depository. For the sake of clarity, dematerialisation is the availability of shares certificates of quoted firms on the Exchange in electronic format. The CSCS is working assiduously with registrars to ensure that full dematerialisation is achieved as targeted. Efforts are geared towards assisting the relevant registrars to ensure that the remaining, although seemingly infinitesimal, are firmly attended to so as to achieve 100 per cent success rate before the end of Q3 2016. In order to address various problems associated with share certificates such as delay in issuance, verification, loss, theft, and forgeries, among others, SEC, in partnership with other stakeholders, resolved to eliminate these problems by opting for the full dematerialisation of share certificates. The full dematerialisation move is aimed at completely eliminating existing physical share certificates in the Nigerian capital market and putting to an end the issuance of new share certificates. The registrars of companies, who are involved in the implementation process, are required by SEC to turn in the registers of all companies they manage to the CSCS depository within a given period of time. For the shares to be accessed by the shareholders in their accounts under a stockbroking firms, shareholders are required to instruct their registrars, through their brokers, to migrate such shares to their accounts with the stockbroking firms. Consequently, shareholders are urged to approach the stockbroking firms of choice, obtain and fill in a migration form which will be forwarded to the registrar to enable them to advise the CSCS to migrate the shares to the shareholder’s account with the stockbroking firm and the shares are migrated by the CSCS as advised. With reinforced commitment and determination at the commencement of the dematerialisation exercise in June 2015, it has yielded significant success as incidences of forgery, theft and loss of share certificates have drastically reduced.
Other benefits which full dematerialisation would bring to the market include immediate availability of the shares for trading as soon as mandate is given to the brokers, enhancement of price discovery and deepening of the market, possibility for securities lending and borrowing by shareholders for more income.
The very small amount of share certificates not dematerialised is a result of the inability of some registrars to meet their recapitalisation deadline. Some were acquired by bigger firms or merged with others, while others have discontinued that line of business. That means the register they manage will be handed over to a new registrar. That implies that the new registrar that will be taking over will do some reconciliation. The former registrar may not be fully automated, and this will affect the extent of the continuation. If they are manually driven or partially driven by information technology, the implication is that a lot of manual work will be done. The new registrar will have a lot to do to reconcile the new accounts at the client and the company levels before updating their new register. For the small segment remaining, the new registrars may be having one or two issues. However, we are working with them; hence the success recorded thus far. There was a time when our level of success was below the current level, and we had to invite the registrars to a meeting to guide them on the best ways to solve the problem and make the required progress.
Is there a deadline for the registrars in this respect?
SEC is currently checking the registers and working with the registrars to ensure that the registers are in their required form. We at the CSCS are also playing our roles also. For the new phase, there is no new deadline, but we are saying that the process should not exceed this year; but we will be done before the year ends
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