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How FG can lift up the capital market (2)

Uchenna Uwaleke 1

Uchenna Uwaleke

Uchenna Uwaleke

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  • (Continued from last week)

Indeed, there are compelling arguments why government intervention could spur capital market development. Studies have indicated that enabling government policies significantly influence issuer demand for capital markets funding. China is one good example of this trend. In emerging markets in particular, privatisation or listing of state-owned enterprises has proved to be one of the strongest levers for influencing issuer demand. In Nigeria, only a few of the privatised state-owned enterprises have been listed on the Exchange.

As noted by the Chairman of Heirs Holdings, Tony Elumelu, listing of privatised and systemically important entities helps to create a middle class which, like SMEs, is the engine of growth of modern economies. In a lecture delivered to the joint session of the National Assembly sometime in June 2016, Elumelu had urged the government to make it possible for the Nigerian public to invest in the oil and gas sector through the creation of a Special Purpose Vehicle which can be floated on the NSE. His recommendation is valid today as it was some two years ago.

It is not for nothing that Saudi Arabia’s state-owned oil giant, Aramco, the world’s largest oil company, is currently walking the plan for a public share offering on the Saudi Arabia domestic stock exchange with a potential international listing expected afterwards, according to a report in the Wall Street Journal.

The listing of Aramco on the Tadawul is seen as the centrepiece of the Crown Prince Mohammed bin Salman’s efforts to reshape the Saudi economy and reduce the nation’s reliance on oil revenues. It is gratifying to note that Vice President Yemi Osinbajo reportedly said a few days ago that the federal government had not given up on its plans of selling down part of its stake in its joint venture with oil companies. For better outcomes, the process should involve the stock exchange.

In a similar way, government policies can be used to lead more issuers into the country’s capital market. It is instructive to note that the MTN Ghana’s historic Initial Public Offering is a pre-condition given to it by Ghanaian telecoms regulators for the company’s acquisition of the 4GLite licence expected to advance its competitive position in the market. In Nigeria, the capital market was neither factored in during the licensing of the telecoms companies nor did it play any prominent role in the privatisation of the power sector save for the requirement that the investors commit to floating the companies on the stock exchange within five years post-acquisition.  But for the fine imposed on MTN Nigeria by the regulators, the company probably would not have given a serious thought to listing on the Nigerian Stock Exchange.

Going forward, government enterprises and companies strategic to the nation’s development must demonstrate, as a pre-privatisation or licensing requirement, a commitment to list a given percentage of the company’s shares on the NSE within a specified period after commencement of business.

It goes without saying that tax policies have a strong influence on the development of capital markets. Malaysia created tax policies to deepen select asset classes, including fully exempting domestic investors from income tax on the interest from fixed income instruments, while Singapore employed incentives to attract the private sector, including tax exemptions and access to business opportunities such as mandates from the sovereign wealth fund.

The Nigerian government can toe a similar path by granting tax incentives to companies that are willing to list on the stock exchange as well as rewarding already listed firms through government patronage and preferential business access. It bears noting that listing promotes transparency and access to information, makes for corporate governance and mandates full disclosure which helps in objective compilation of data. Little wonder, the bulk of the revenue from Companies Income Tax come from listed companies according to data from the Federal Inland Revenue Service. So, it is equally in the interest of the government if many companies are quoted on the stock exchange.

At another level, sovereign wealth funds and public pension funds around the world have become large holders of company shares. Perhaps, the best-known example is the Norwegian sovereign fund with $880bn under management, of which more than 60 per cent is invested in equities.  Equally, pension funds are critical to longer-term capital market development. Nigeria’s pension funds are estimated to be in excess of N7tn and are still growing. The policy adopted by Chile in the deployment of pension assets is one good example with lessons for Nigeria. The National Assembly should bear this in mind with a view to increasing the limits on pension funds’ investment in the stock market.

The approved multi-fund structure for pension funds investment is already a step in the right direction. Given that the country’s debt market is crowded by government’s debt instruments which continue to guarantee high returns over equities effectively shutting out the private sector, the government’s current debt strategy of rebalancing the debt stock in favour of external debts should be sustained for now. It should equally be borne in mind that budget delays and policy somersaults are a hindrance to capital market growth not least because they create uncertainties in the minds of investors regarding the direction of government policy.

Undoubtedly, widening the retail investor base would help to de-risk the market and detach it from the apron string of foreign investors. This will require a great deal of education efforts including developing financial markets courses in secondary and tertiary educational institutions. Singapore launched numerous initiatives to reinforce financial literacy in the country both at the undergraduate and graduate levels. Singapore’s universities tailored courses to address the growing needs of the financial sector. The National University of Singapore, for example, introduced a graduate programme offering a degree in financial engineering. Nigeria can do likewise.

The National Universities Commission should encourage universities to introduce degree and graduate programmes in capital market studies. The government through the Central Bank of Nigeria can help to sponsor educational programmes targeted at a broad spectrum of investors in Nigeria. And speaking of the role of the CBN, who says the apex bank given its fast assuming toga as the “only game in town” cannot invest in the stock market, play the role of “market maker of last resort” especially if there is nothing in the CBN Act of 2007 that precludes it from doing so. According to “London MarketWatch”, some leading central banks have become major players on world equity markets. The Swiss National Bank, a well-known large public sector equity owner was reported to have 15 per cent of its foreign exchange assets (or $72bn) in equities at the end of 2013!

It goes without saying that the independence of the apex regulator is crucial to market development. To this end, the National Assembly is called upon to amend the Investment and Securities Act 2007 to give the management of SEC the needed independence to effectively regulate the market.

That said, capital market development in Nigeria should be a key policy issue going forward to foster savings and investments for inclusive growth. Indeed, the Nigerian capital market presents various untapped opportunities for sustainable economic growth and it is time the government recognised this by taking more than a passing interest in the affairs of the nation’s capital market.

  • Concluded

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