Capital Market Structure and Development in Nigeria

Capital Market Structure and Development in Nigeria- Using the Nigerian Stock Exchange as a Case Study

Capital market in Nigeria has been in existence from time immemorial before the colonial era in the form of light capital market.According to Mohammed (1998) capital market is a place where investment decisions among savers users of funds are taking the market constitutes of major investment decision instrument of a capital economy.

Stock exchange developed it’s root the middle ages. In those days, bourgeoning trade in agriculture and commercial commodities was developing in some of the European countries. It was the practice in these trader that geared individual traders together at a place in appointment days to strike bargains in commodities.

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These practice gradually change into exchange institutions and therefore, cannot be found in socialist economies where its functions are performed by government. And the Nigeria stock exchange remains an institution for the exchange of stocks and shares but under the umbrella of the securities and exchange commission, as it’s apex institution. The securities and exchange commission in addition to overseeing the Nigeria stock remains responsible for pricing of securities in the pricing market, timing of new issues and regulatory of all issues.

Nigeria stock exchange fact book (1998) stated that NSE was incorporated in 1960 as non-profit making organization under the inspiration of the federal, the Nigerian industrial development bank, the central bank of Nigeria and the business communities Lagos stock exchange act of 1661 and it opened doors to business in 1961.

Also, the Lagos stock exchange was establish in 1960  as a company limited by guarantee to make it national the  name was change to “the Nigerian  stock exchange” in 1977 on 2nd December the exchange operated with the following branches in  Lagos opened in 1961 Kaduna opened in 1978, Port-Harcourt opened in  1980. These three branches primarily operate as trading floors while the national council of the exchange retains overall responsibility for quotation and enforcement of regulation in the capital market.

2.2    CAPITAL MARKET OPERATORS
Olulemi (1997) said; the principal intermediaries encountered by the Nigerian issuers and investors as between themselves and the financial market are issuing house, underwriters, broker/dealer, registrars and the Nigerian stock exchange other categories of capital market operator licensed or liable to be licensed by SEC are investment advisers, portfolio managers, national association of securities, dealers and any roles of capital market operators describes above, each  category of capital market operators will fulfill a different specific role depending on the transactions, issues on to investment activities involving unquoted companies which involve foreign capital are expected by law to be carried out through SEC  registered market operators only the SEC’s Registration of securities and market operators, entitled it not only to regulate the market but also to discipline and erring market operators thus enhancing orderliness in the make whilst promoting investors safety and confidence.

The capital market present to issues and investors a like, a very wide and almost limitless array of opportunities which will within the law, can be crystallized to any extent that the imagination, skill or experience of their chosen capital market  operators will allow.

2.3    TYPES AND FUNCTIONS OF THE NIGERIA CAPITAL MARKET
The functions of the capital market has been defined by OSAZE (1997) said: I have chosen to  categorize  those roles in the combinations in which they are  more likely to be found in practice and not necessarily in direct categorization which the SEC grant it’s registration. They are follows:
A.    ISSUING HOUSE/FINANCIAL ADVISERS
Fund raising is fundamental to issuing house and the related financial advisory services work. The purposes for which funds are required could include, financing an acquisition, expansion of that existing business, putting the business on a more secured financial footing, or in order to exploit a new opportunity.

The main activity of issuing liaises centre around it raising on behalf of companies or project, new or additional capital, through the issue of equity, debt semi equity or other appropriate financial instruments and the placing of these with investors in order to generate the required funds strategies for placing these instruments may include direct placing with institutional investors, offer to the existing investors only, offer to the public or a combination of these. This activity would usually also include listing of such instrument on the stock exchange in  the case of companies which  are already quoted of  those who desire to do so. In this event, the issuing house  together with the sponsoring stock broker, commonly known as broker to the  issue,  has an especial important role  in preparing the issuer for listing. Thus responsibility includes satisfying themselves on basis of all available information that  issuing company is  suitable to be listed and can  fulfill the  receptive initial registration, listing  and post registration listing  requirements of the SEC and the stock exchange.

Prior to embarking on actual raising of funds, it is the  responsibility of  issuing house/financial  advisers to advisers to advise the issue on the;
a.    Desirability or a appropriateness of raising capital envisaged.
b.     The   structure and other terms and  condition of the  proposed financing package and
c.    Timing of the offer – ounce it has been decided to attempt to raise the funds the prime responsibility of the issuing house/financial advisers to advise the issuer on the.
1.    The best way of articulating the financial ramifications of the underlying identified opportunities, available to of intended to be explored by the issuer.
2.    Suitability of underwriting the issue and it suitable arranging the underwriting as may be appropriate.
3.    Effective management and co-ordination of the issue to ensure that the required funds are raised and created by the issuer in good time and
4.    Assisting in the process of creating a positive image of the issuer to potential investors, regulatory authorities and the general public.
In discharge these responsibilities the issuing house is expected  among others to ensure that it: –
a.    Continue to liaise with the issuer regarding arrangements for the proper and optimum deployment of the issuer’s managerial, information, technology and other resources.
b.    Obtain, set out and provide accurate and fair information about the identified opportunities available to the issuer, of appropriate offer documents (having provided source to the regularly authorities and obtained required approval).
c.    Market the issue using it professional skills and information network to ensure full subscription.
d.    Provide and vet necessary documentation as may be appropriate.
e.    Co-ordinate other professionals to the issue – accounts, auditors, stock bookers, registrars,   receiving agents and printers as may be  appropriate.
f.    Remind available to the  issuer at all times in order to liaise  with and   advice on all matters arising from the process described above.
BUSINESS TIMES NEW PAPER STATED
That regularly underlying this involves an arrangement where  by the issuing house directly or through the suitable qualified entities agree, for permissible commission, to subscribe or to procure subscribers who will pay an issuer of securities of a predetermined data, an amount based on the offer price with a view to resale of the securities so  subscribed at a later data, and  not as a form of investment. Underwriting may now be regarded as an integral part of any capital raising exercise for a  publicity  quoted company in Nigeria  (right  issues expected, since the SEC required some level of underwriting for these issues excepting only if the issuer choose not to have underwriting.

The effect of underwriting is to guarantee issuers certainty of  receipt on due date,  of the value of securities being issued to the extent to which has underwriting.
The effect of underwriting is to guarantee issuers certainly of receipt on due date of the value of the securities being issued  to be extent to  when has been  underwritten.

B.    BROKER/DEALERS: – Brokers. Dealers are registered by SEC and exchange the traditional role of the broker/dear involved the execution of stock transactions for the account of (clients agency broking) an  for the own  account (market making).
However broker/dealer may  more truly be regarded as the link between companies and the stock  exchange broker/dealer play important roles,  relatives to the  capital raising activities of companies and  would normally, working together with issuing house offer advise on:
a.    Appropriate timing of issues (rights, offer for  subscription sales)
b.    Likely  market reaction to new  major event proposed by issuers they are also  responsible for: –
i.    introducing issuers or new issues to the stocks exchanged and
ii.    Arranging pacing of securities of issuers for which they act in an   offer and ensuring that the best possible price is obtained for the securities placed.
Broker/dealer also provide general investment advice to companies and investors through the issue of circular or research bulletins where they comment on the result and progress of listed companies. They can also often assist issuers in the preparation of circulars intended for stock exchange, their shareholders of the  general public specially regarding major developments in presentation of the matters in a question would help to ensure that the desired response is obtained.

C.    REGISTRARS: – Registrars service are usually provided by  specialized entities, which are independent of the companies  for which  they  act. The   traditional role of registrars is to deal with the book keeping and logistics of securities in recalled aspects of statutory compliance. In  reality, registrars are  additionally, also quite involved in all aspects of capital raising and required to work closely  with other financial advisers to ensure an effective issue and proper and accurate  records at applications and monies receives and the eventual establishment and maintenance of the  resulting registrars  may be summarized as;
a.    maintaining the (computerized) Registrar of members including processing of transfers.
b.    Arranging for the dispatch of dividend or other payment warrant,
c.    Attending of general meeting of  issues to ensure, for example, allowed to attend  to act as scrutinize on count of any voting by priority of  poll.
d.    Upon request: analysis registrars of  stockholders and keeping  issues informed at any significant change of stockholding
c.    arranging the dispatch of lights, circulars, bonus certificate and  any other  special correspondence intended for circular  rotation to the shareholders.
f.    Summarizing subscription returns to lights and other often made by issuers.
g.    Assisting the issuer and the issuing house to prepare the basis of allotment of securities based on the subscriptions received.
g.    Assisting the issuer and the issuing house to prepare the basis of the allotment of securities based on the subscriptions received.
4.    Issuing and arranging the dispatch of new certificates in respect of transfer, new issues etc. the record  of stockholders and transfers in a securities, can  have a tremendous impact on the level  of the shareholders and public interest in holding that security and the therefore to it’s performance in the stock market.
D.    INVESTMENT ADVISERS/PORTFOLIO MANAGER: – investment advised portfolio managers are a recent phenomenon in Nigeria capital market. They provide professional portfolio management and advisory services to market. They provide professional portfolio management and advisory services to individuals can corporate clients who require assistance regarding the selection of securities to comprise their investment portfolio and the subsequent monitoring and management thereof.

Investment advisers/portfolio managers on their expert knowledge of the market and their research and analysis of the economy, industries and individual companies in offering advise to their clients.

The type of authority over portfolio manager would vary depending  on the requirements of the  client and could be full discretionary based on specified conditions.

The services of investment advisers/portfolio managers could prove invaluable to investors who require superior return or desire to maintain specialized investment portfolios or  who have not got the  time or the resources to  tailor  personally  to the management of their  portfolios it is also not usual for investors with sustainable portfolio and  give the over to be managed externally,  thereby  affording the portfolio the benefit of an  independent bench mark  against  which the performance of the  portion retained and managed in-house can be measured.

2.4    THE NEED FOR STOCK MARKET
Allilie ( 1997) said, stock market are essential because they allow competition between various instruments of bank based  financial system and non bank financial intermediaries basis, without the need of a government guarantee, offer instrument which do not suffer from a cash. How mismatch and facilitate the development of other financial market such as derivation  (options) market.

In stock market there after an alternative to returns. As a consequent, they  offer an alternative  to safe but low, sometimes negative  real  rates of return in developing countries.  They provide investors  with a greater  range of risk and  return opportunities than a bank based financial market. They also allow  for a  better machining of the risk and return characteristics of less risky assets with   stable  returns  or to relatively safe  bank instruments where stock  returns tail to  compensate  for  risk.

Stock market is also important with demand for domestic securities of  emerging market is partly due to the potential reduction in risk and increase in return as a result of intentional diversification. This, industry foreign securities may have the effect of reducing the  convenience terms, thereby reunion the level of non-diversifiable risk.  As a consequence of the differences in conflict among countries, there should be demand  that emerging markets by foreign investor, providing that emerging market securities meeting  other requirement such a liquidity   safety and yield .

Equity market development. It also supported by the internationalization of the cost of capital. Global raising the cost of capital may potentially  result in lower cost of raising funds for  firms, thereby improving opportunities for generalizing  increased funds.

2.5    BENEFITS AND OPPORTUNITIES OF CAPITAL MARKET IN AFRICA
Shala (2005) said: some of the major, benefits and opportunities open to investors through active participation in the capita market as follows.
i.    Increased access to external sources of funds for expansion and growth playing market provides firms with a ready access to external  sources of funds for expansion and growth more   rapidly. The ability to raise  additional capital is considerably easier and more successful where the firm is listed (or quoted) on a stock  exhcnage.

The more international the  stock exchange (and  for the more exchanges firm is listed) the greater the access and opportunities to external sources of fund growth  occur via  internal  organic process or by  expansion through acquisition or other firms.  Stock exchange listing   facilities the latter process.
ii.    STATUS SYMBOL: A stock exchange quotation  centers on a company and frequency allows it to obtained bank credit on better terms than would be the case for similar sized non-quoted organization. It also  helps publicize a  company bringing it to notice of large client. A sufficiency large quoted  company many well find that is it to exploit international sources of capital by borrowing   or issuing equity in another country or perhaps via Euro market.

iii.    FLEXIBILITY OF CAPITAL STRUCTURE
The availability of stock exchange finance gives a  firm mere flexible capital structure. It is possible to vary the financial structure of the organization more easily by altering the debt/equity mix to obtain finance at the cheapest terms. Issues can be arranged not only in conventional securities but also in lyrics such as convertibles (bonds with an option to convert into equity at a later date) etc.
iv.    REALIZATION OF WEALTH
Share holders can by selling sharers, use the stock exchange to realize part of their wealth as a company grows the value of the shareholding will reflect that growth and an original large investment in the shares may core to represent an extremely valuable claim on the assets of the  company. However a s for as long as holding and a paper millionaire.

2.6    THE KEY PARTICIPANT IN THE NIGERIAN CAPITAL MARKET
The capital market caters essentially for long-term investment need of business and government. Accounting to DOZIE (1996) the raising of funds  in the capital market possible the construction of  factories, office buildings, highways, bridges and acquisition of machines. An efficient capital market therefore mobilize savings from surplus units and allocates a greater portion to these companies with the  highest prospective rates or returns  after giving due  allowance for risk. This  allocation function is critical in determining the over all growth of the economy. If capital resources are not provided to these economic areas especially industries where demand is growing and which are  capable of increasing production and productivity, then the rate of expansion of the economy  will inevitable suffer.

ONYINKE (1997) said; the capital market is not a single entity it’s rather a network specialized financial institution  that in various ways brings together suppliers and users of capital. The key participants in the Nigerian capital market are:
1.    The securities and exchange commission (SEC), which is the apex regulatory institution in the market.
2.    The Nigerians stock exchange (NSE), which is a self regulatory organization, is the hall mark of Nigerian capital market.
3.    The central bank of Nigerian and other banking financial institutions such as insurance companies, unit trusts and pension  fund  etc
4.    The market operator: issuing houses, stock broking   firms, trustees   registrars etc.

2.7    PUBLIC QOUTATION AND TRANSFER OF SHARES PUBLIC QOUTATION
One of the basic and most important responsibilities of organized securities market is the protection  of the investing public from shady or unstable outfits; furthermore, public quotation is the premises on which daily buying and selling activities of the stock market rest. Therefore, a company seeking public quotation is always thoroughly scrutinized.

Ojo (1998) outlined some pillars of the Nigerian stock exchange market they are:
a.    He  stock exchange  1961
b.    Second tier securities market (1985) for small investors
c.    The securities and exchange commission (1989) for the regulation entire market.
d.    The brokerage firm which numbered up to  164 by December 1997
e.    Issuing houses which are mainly banks.

ONYNKE (2000) stated that to be admitted in the daily official list of  Nigerian stock  exchange a company most satisfied the following conditions.
i.    Must be a public limited company.
ii.    Must have five years operating record
iii.    Amount of the money that can be raised is unlimited depending on the borrowing power of the director/company.
iv.    Minimum of  2% of equity must be made available to the public
v.    Number of share holders must not be less than 300
vi.    Strength reporting and prospective  requirements
The second tier securities market was introduced by exchange in 1985 as a market for smaller/medium emerging companies. The list requirements are less stringent  as listed below.

i.    Must be a public limited company.
ii.    Must have a  3 years operating record
iii.    Minimum of  10% of the equity must be  made available to the public
iv.    Number of shareholders holders must not be less than 100
v.    Amount of money that can be raised may not exceed N10 million.

On the  whole, the exchange ensures that all listed securities are such that can inspire public confidence and that can provide a good measure of  security for the investors fund. In addition, the NSE through  its own rule and regulations, listing require he was  well as code of conduct governing council members, shaft of the exchange, stock  brokers and directors of quoted  companies ensure that the investing public is adequately  protected against any malpractices or inside  deadly protection of the investors is further guaranteed by SEC. it is grateful to note that in its 36 year history, the exchange has not witnessed any major fraud the types of which have rocked some older exchange in recent times.

TRANSFER OF SHARE
Business Time News Paper (1997) provides that an investor wishing to either  buy or sell must in addition to give orders to his stock  holders complete and sign a transfer form. This the means by which  company concerned is notified of the transferred of ownership and it is no its authority that the company will up-date the share register. This in  filling the  transfer  from the transfer most endavour to specify accurately his postal address, since thus is the only means by which the will carry out all communications with him subsequently, all correspondence from the  company, especially  dividend warrants and  share certificates will be sent him through the  specified address.

Signature is very important item in the transfer from the sign signature is the only identification for the holder of the certificate. Companies usually rely on an accurate reproduction of the signatures  in the transfer from to act on correspondences from  stock holdings. The transfer most this ensure that resigns a signature that he  can always reproduce  with ease.

Upon receipt of the executed transfer from the stockbroker sends it to the registrar of company concerned  for verification of the signature of the transfer in order to ascertain the self ownership.

After verification by the registrar, the shares  are traded on the floor   of the exhcnage.

Upon successful dealing on the trading floor, the transfer from is  lodged with the Nigerian stock  exchange for authentic. This is evidence with the NSE’s stamp and authorized signature at the back of the transfer form. Therefore, the authenticated transfer from is collected by the stock broker who find lodges  it with the registrar for the issuance of certificate to now owner(s). The above steps are taken to  avoid fraud and concentration.
2.8    DEFCLARATION OF THE CAPITAL MARKET
Suleiman (2000) said, deregulation has become a major element of economic reform and an important instrument for advancing in global competitiveness of nations.

In January 1993, the  federal government began implementing  a long posed programmed of capital market in the new issues  (primary) market has been transferred from  securities and exchange commission (SEC) to the issuing houses and  stockbrokers  to the  issue, among other changes of fundamental nature in the market operation i.e. allotment and underwriting etc.

PASCAL (2000) said deregulation adds, directly in-terms of shareholder value to the deregularized enterprises.
This   reform in concert  with other reforms in the  larger financial system, has impacted visibility on activities in the  domestic capital market and have not doubt created opportunities and challenges for market operations and regulators, respectively in the  process.

Specifically, the deregulation of interest  rates  and the consequent unprecedented rise in  lending rate caused many corporate fund  users to resort to the capital market to meet their financial needs Hitherto, they had been content working imprudently  described  market funds for the financing of long term projects.

The licensing of more  banks and non-bank financial institutions also  raised the number of capital market operations significantly, with most of  the  merchant banks providing issuing house services and  establishing stock broking subscribers.

Furthermore, as  a result of  the privatization and commercialization pogramme of the federal government more companies have sought and got quoted on the Nigerian  stock exchange. The programme has also swollen the bank of the shareholding population in publicity quoted companies. In 2001 it was estimated that the number of shareholders in quoted companies rose by 55% from 400,000 to 620,000.

These charges in the population of participation have impacted viciously on  activities in the  capital market and  seek of the results of these developments are immediately obvious. In 1991 a total of 52 new issues worth N1.5 billon were approved for quotation by the  stock exchange by  1992, this rose  to 67 new share with market  value of over 50 billion.

Perhaps it is too  early in the day to court  the  gain  and loss accuracy to the Nigerian capital  market and the larger economy  as a result of  deregulation, but one thing  is sure, there has been significant implement in the capital market activities. A development which make regulatory effort imperative and demands the  support and co-operation of the market operators for the maintenance of the confidence, integrity, transparency and  stability in the  market for a self-regulatory authority, there is no gain saying that the situation calls mainly proactive, one which ensures that abuses are snipped in the bud.

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