LEGAL, OPERATIONAL AND REGULATORY FRAMEWORK OF THE NIGERIAN CAPITAL MARKET 1
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. 2
OUTLINE Background Enabling laws: Overview of the ISA 2007 Major participants in the Capital Market Institutions of Capital Market Conclusion 3
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). 4
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. 5
BACKGROUND CONT D Regulation by the NSE suffered from the usual pitfalls of selfregulation, 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. 6
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laws affecting the market were later consolidated and reviewed in the Investment and Securities Act 1999, which has been replaced by the Investments and Securities Act 2007. 7
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. 8
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 9
ENABLING LAWS CONT D ISA 1999 was repealed and replaced by the ISA 2007 which came into effect on 1 st 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. 10
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 VIregistration 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. 11
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. 12
OTHER LAWS THAT CONTAIN PROVISIONS WHICH IMPACT ON THE 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. 13
OTHER LAWS THAT CONTAIN PROVISIONS WHICH IMPACT ON THE 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 14
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. 15
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. 16
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 17
INSTITUTIONS CONT D 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. 18
INSTITUTIONS CONT D 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. 19
INSTITUTIONS CONT D 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. 20
INSTITUTIONS CONT D 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 21
INSTITUTIONS CONT D 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. 22
INSTITUTIONS CONT D 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. 23
INSTITUTIONS CONT D Flow chat: NSE 24
INSTITUTIONS CONT D 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. 25
INSTITUTIONS CONT D 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. 26
INSTITUTIONS CONT D 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. 27
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. 28
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