The Nigerian Capital Market

The Nigerian Capital Market

EVOLUTION OF THE NIGERIAN CAPITAL MARKET

The Nigerian capital market stated on a modest scale with the establishment of the Logos stock exchange in 1961.the Lagos stock exchange was incorporated under section2, cap:37 of 15th september,1960. The exchange thus came into existence with the promulgation of the Logos stock exchange Act of 196. On 5thjune 1961, the Logs stock exchange commenced operation.

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The Logos sock exchange continued in operation thereafter as the only stock exchange company without any branch or floor in Nigeria for 17 years, i.e. from 1961 to 1978. Prior to 1978 however, the federal government set up the Okigbo financial review panel, which was charge with the responsibility of studying the structure and operations of the Nigerian financial system.

The Okigbo panel recommended among others the establishment of autonomous exchanges in other parts of the country. It suggested that the requirements with the Logos stock exchange

Although the government accepted the principle of decentralization, it nevertheless rules that there would be a national stock exchange with branches or floor in other parts of the country. Thus the memorandum and Articles of Association of the Lagos stock exchange were amended to for(NSE) on 22nd December 1977. With the Lagos trading floor (which is the former Lagos stock exchange ) firmly in place therefore other branches of the NSE to  operate as trading floors were established.

Earlier on, ad-hoc committee of central Bank-capital issues committee-has been established in1962 to act as a consultative and advisory body to the central bank of Nigeria and the council of the stock. Exchange. The capital issues committee was replaced by the capital issues committee in 1973 vide a decree since its predecessor was advisory in nature, it could not monitor  the capital market, it could also not effectively ensure that indigenisation Exercise of 1972, were so transferred. To remedy some of the dejects issues commission was empowered to determine the price of shares and stock offered for scale, as well as dolt shares.

The shortcoming identifies in the operation of the capital issues commission led to the establishment of security and exchange commission (SEC) through the promulgation of SEC was re-enacted as the securities and exchange commission decree No 29 of 1988.

This new decree gave more powers to SEC. The power include, among others.

a)                 Determining the amount of the price and  time at which securities of a company are to be sold to the public either through offer for scale or subscription.

b)                Registering stock exchange or their branches register, investment advisers, securities dealers  and their agents and controlling and supervising their activities with a view to maintaining proper standards of conduct and professionalism.

c)                 Maintaining surveillance over the securities market  to ensure orderly, fair and equitable.

d)                Creating the necessary atmosphere for the orderly growth and development of the capital market.

There powers of the SEC remained until in 1993,due to the deregulation of the Nigerian capital market, the determination of share price in the primary market was transferred to the issuing houses.

Development in the Nigerian capital market book a different turn when in 1995, the federal military government, setup the Odije panel to study and make recommendations on the reform of the Nigerian capital market. The panels recommend among others, establishment of the Abuja stock exchange, and the change of name of the Nigerian stock exchange to its former name Lagos stock exchange. In accordance with the recommendations of Odije panel, the stock exchange decree of 1996 was promulgated. Although as at december1999, the Abuja stock exchange has not taken off Securities and Exchange Commission in exercise of its statutory role has directed, the Nigeria stock exchange to change its name as demanded by the Odije report. Other development in the Nigerian capital market includes the introduction of the central securities clearing system LTD in April 14 1997. “Apart from offering clearing, settlement and delivery services, they also offer custodian service”? Before the (SEC LTD took off in 1997, it takesmorethan90days for an investors to receive share certificates after a conclusion of a share sale. This showed down trading activities since possession of share certificates is a condition Precedent before shares can be traded. CSCS Ltd. Provided a stop- gap measure to reduce the lead-time to ‘ + 5’ days.

Much as a lot has been done by the regulatory authorities and government to enhance the development of the capital market in Nigeria, the development has dragged behind when compare to other major developing country’s capital market. Part of the reasons, relates to the volatility of the interest rate and other macro-economic variables. This volatility was traceable to the uncoordinated and poorly articulation of fiscal and monetary policies. Government policies has mainly been ad-hoe in nature which tended to create problem for the capital market in resource mobilization and allocation. The other reason was poor regulatory capacity to affect a change when it is immediately necessary. Bureaucratic bottlenecks enables a problematic situation to endure for a long lime before it is rectified.

MAJOR PARTICIPANTS IN THE NIGERIAN CAPITAL MARKET.

THE CENTRAL BANK OF NIGERIA

The first financial regulatory institute to be established in Nigeria is the Central Bank of Nigeria which commercial operations on 1st July 1939. The CBN has among its junction the development or promotional junctions. This junctions thrust upon the shoulders of CBN active support and / or participatory role in the establishment of other financial institutions, which are to operate in the money and capital markets.

The CBN contributed significantly to the establishment, growth and development of the Nigerian Capital market. In doing this, the CBN ‘plays a promotional, financial, operational and participatory role in the Nigeria capital market…. Beside buying and selling government securities, the CBN impacts residence and stability to the market by buying up all government stocks on issue which are taken up by other purchasers and then subsequently retailing them to the market as the demand arises.

The CBN does not only actively participate in the capital market by buying and selling securities as and when the need arises, but it has promoted and financial key financial institutions in the market. For example the CBN co-financed the Nigerian Industrial Development Bank (NIDB), the Nigeria Bank for Commerce and Industry (NBCI) and the Nigerian Agricultural and co-operative Bank (NACB). The CBN also pioneered the establishment of securities and Exchange Commission (SEC), as well as provided the initial key personnel of these financial institutions.

DEVELOPMENT FINANCE INSTITUTIONS

The financial institutions broadly called Development Finance Institutions in Nigeria include National Development Banks, i.e. NIDB, NBCI and NACB, and the numerous Regional / states Investment Companies e.g. O’dua Investment Company, New Nigeria Development Company and various states Investment Companies.

Many development finance institutions participate directly in the Nigerian Capital market. For example, the NIDB known as the Investment Company of Nigeria at inception in 1959, was one of the Jew foundation members of the Lagos Stock Exchange. The NIDB did not stop at being just a member of the Lagos Stock Exchange and the Nigerian stock Exchange, but it also establishment ICON securities Limited. This subsidiary of the NIDB functioned as an issuing house until it metamorphosed into a merchant bank in 1975. The NIDB on some occasions, also raises funds directly in the capital market. Thus, the NIDB is an active participant in the Nigerian Capital Market either directly, or indirectly through its subsidiary. Besides, the NIDB has been represented on the Exchange for almost throughout the period of its existence.

The participation of other development finance institutions in the capital market is not as noticeable as that of the NIDB. Nevertheless, they still contribute their own quota to the development of the market either as ordinary member of the Nigerian Stock Exchange, dealing member of the NSE or both.

ISSUING HOUSES

The junctions of issuing houses and merchant banks place them in a very important position in the Nigeria Capital market. As financial intermediaries these institutions are charged with the responsibility of advising on, or undertaking the task of raising funds in the markets on behalf of their Clients. These could be companies, states and / or local governments.

Issuing house could be stockbroking firm and / or merchant banks. The essential feature of these financial institutions is that they remain active players in the capital market. Their significance is particularly noticeable in the primary market where funds are raised by quoted companies or those arranging for quotations. With the deregulation of the capital market in1993, particularly with regard to pricing or new issues. Issuing houses now fix prices of new  shares in the Nigerian capital market.

STOCKBROKING FIRMS

Stockbroking firms are dealers of securities in the Nigerian capital market. They are therefore market makers.

As at 31st December,1999,there are 205 stockbroking firms operating in the Nigerian capital market. They operate variously as stockbrokers, nominee holding service managers, financial advisers, fund/ portfolio managers etc

Stockbrokers or their agents trade on the Nigerian stock exchange. Without stockbrokers, trading cannot take place on the floors of the NSE, price determination of securities would probably not take place, securities would not change hands, etc. stockbrokers  therefore constitute a very important part of the Nigerian capital market.

SECURITIES AND EXCHANGE COMMISSION.

    In line with the provision of securities and exchange commission decree 1979 SEC is empowered to determine the flowing

  1. The price at which share or debenture  of a company are to be sold to the public.
  2. The timing are the amount of scale
  3. For comprise whose share have been quoted on an recognized stock exchange, the price ming and amount of any supplementary offer for sale.
  4.  Vcluction of share of companies in compliance with indigenisation one the SEC Act of 1979.
  5. Preparing a body of rules and regulations designed to facilitate orderly decling in security  designs to promote public confidence in the market for securities
  6. Review the accounts of companies to know the  cause of variation in profit
  7. Supervising the activities of NSE.

The commission responsibility can be summed up as follows:

(i) The protection of investors

(ii)             The acceleration of capital mobilization and the formation process

As part of the government effort to deregulate the economy  in 1992, the share valuation function and fixing of interest rate on debenture was transferred to issuing houses and their respective issuer. The commission was also empowered to approve terms of mergers or acquisition by the SEC Decree subject to the approval of the federal ministry of trade and industries. The CAMD 1990 n vests the authority in mergers are acquisition on the commission.

STOCK EXCHANGE

An organized market place for buying and selling of stock and share? The ownership of stock is vested in its members. In capital market, thee stock  exchange is referred as self regulatory organization. SEC Decree provides that the commission can delegate part of its functions to the exchange. The rules and regulation of the exchange are usually submitted to the commission for approval  the exchange has six trading floor. The trading system is cell over” of the names of all stock or brokers indicated their “Bid” or offer interests on the  trading floor minder the supervision of call over chairman who is usually a top officer of the exchange and monitored by representative of the securities and exchange  commission. Thus the exchange provides liquidity to the investor and the price at the floor of the shares.

SHARE REGISTRARS

Registrars are agents of the listed companies appointed by them to handle registration of share and the names of their owners in the register of members, prepare and send certificates and payout approved dividends to those entitled to them’s  when  quoted companies sell in the petal  market, they want to know the  number of investor who have subscribed to their shows. This information is important both during and after the allotment exercise.

Share holders too want  to know whether or \not their application were successful one. If successful when their certificates will be mailed to them., they also want to received annual reports of the companies in which they have invested as  well as notice of annual general meeting (AGM) promptly. In addition, share holders want to receive their dividend  warrants promptly. All these can be properly done if the companies have correct particular of the investors. Share registrars

: Come in readily here by assisting quoted companies to keep their registers of shareholding.

The register of a company’s shareholders may be kept by the company’s secretary or it may be contracted out. The latter is usually done in Nigeria. This is probably due to the egalitarian nature of shareholding in the country.

COMMERCIAL BANKS

Commercial banks participant indirectly by assisting quoted companies and their issuing houses. They do this by distributing forms to prospective shareholders during public offer of shares and debentures. Commercial banks also receive would-be investors completed forms and money for onward transmission to the issuing Houses / stockbrokers of companies intending to raise new funds.   Performing this crucid role by commercial banks through their extensive branch net work all over the look and crannies of the country  many share holders in semi urban and rural area would never have had any acless to owning share. This is because neither the NSE nor the stock broking firms and even merchant banks operate out side major cities.  The desire of commercial banks to performance issuing house functions has not really materialized in the market. However, the big three banks  first bank, union bank and UBA have registrars.  Perhaps with the coming into effect of universal banking commercial banks have to convert to universal banks before they can offer issuing house function.

INSURANCE COMPANIES AND PENSIOR PROVIDENT FUNDS

As institutional  investors, insurance companies and pension provident funds constitute part of  the Nigeria capital market.

Income tax management act 1961 requires provident  funds or superannuating scheme to invest in prescribed securities, usually government securities to enjoy non-tax deductible income. Similarly, the National provident fund 1961  requires the fund to invest in federal government securities for safety of investment income.  The insurance act, 1991 requires insurance companies to invest not than 35% of  its total assets in securities specified huder the trustees investment  act of 1962. By investing  such sums insurance companies have been found to  be one of the major  participants in the Nigerian capital market.

DIVIDEND

The dividend decision of the firm is one of the three fundamental decision it faces.  Like the other  two investment and financial the dividend payment has both theoretical and managerial facets. Stuart (1985) remarked that individual represent the amount paid out by a company to the holders of its preference ordinary and deferred share. Being the risk capital of the business these equity share rank for dividend only after the interest on loan capital has been paid. In accordance with the companies and  allied matters Decree 1990 (CAMD), it is  the responsibility  of the directors to  recommend  to the share holders to declare dividend in  respect of any year or any other period.

FORMS OF DIVIDEND

Theoretically dividend payment comes in five different forms. The first  or most popular form is the cash dividual. Under this form of dividend, shareholders get their return on their investment through cash, clegue or dividend warrant. Another form of dividend is the stock dividend. This form is becoming more popular in Nigeria and it is generally  used when the company is experiencing a temporary cash shortage.

The increased in shares are proportional equally. Thus each shareholder will retain his / her proportion of ownership.

The third form of dividend is the optional dividend. This form gives the shareholder the choice to receive either cash or stock dividend or a combination of both. The major disadvantage of this form of divdend is that it is extremely difficult to administer. This form has not been used in Nigeria at all.

A further form of dividend is the script dividend. It is similar to the stock dividend, the company issues note promising to pay dividend at a latter date. Script dividends became popular in Nigeria in 1976 when the Federal Military Government imposed a restriction of the maximum dividend payment by companies. Inaga (1977)7, observed that the companies reacted by resorting to making script issue to circumvent the restriction.

The final form of dividend is the property dividend. This form is not in use in Nigeria. It occurs when the company pay to shareholder in assets other than cash. Distribution may be made when the assets are no longer necessary in the generation of the business.

FACTORS INFLUENCING DIVIDEND POLICY

Many authors have written on the factors determining dividend

policy, even though most of them agree that the ultimate power to declare dividend is vested with the Board. However, there is a large amalgam of other interacting factors, which influences this decision.

One of such factors is the legal framework. Uzoaga and Alozieuwa (1974)8 dividend this framework into three major parts, the net profit rule, the capital impairment rule and the insolvency rule. The first rule ensures that dividends are paid from only current and accumulated earnings. The capitals impairment rule forbids the payment of dividends from company’s capital, since this will be tantamount to a disbursement of the investment in the company, rather than a distribution of its earnings. The last rule prohibit the payment of dividend when the company is insolvent. Other features of the legal framework as it affect dividend policy can be seen in various portion of the companies and Allied Malters Act of 1990.

The Central Bank of Nigeria credit guideline to Banks states that expect with the approval of the Central Bank of Nigeria, a bank must not use its funds to pay dividend unless it maintains a capital funds to loans and advances ratio of 1:12.

Another determinants of dividend policy is the financial and liquidity needs of the company. Few people will disagree that the company should sacrifice its solvency to pay dividends. The financial and liquidity requirements of the company, therefore goes a long way in influencing the size and frequency of dividends. It should however be noted that company’s access to the capital market, will to a large extent determine how much a company will reserve for its financial and liquidity need for its daily operating expenses.

Loan contract restriction is another factor that determines dividend policy. Long term institutional loans tend to have provisions, which among others tend to restrict dividends payments.

Finally a company dividend policy may be determined by its desire to maximize the standing of stock ie. Optimization of long term earning of the company.

STABILITY OF DIVIDENDS

“Every organization faces the choice between investment, stabilization and profit maximization on one hand are dividend stabilization on the other’9

there is a need to consider which of these alternatives management should follow and examine their effect on dividend policy. Firstly, a stable dividend policy has a positive impact on market price. A company that pays out a fixed percentage of earnings. Secondly, a stable dividend policy offers to both management and investors the opportunity of controlling the level of systematic risk. The investors uncertainty are resolved particularly when the earnings per share drops. In the third instance, stable dividend develops the loyalty of the shareholders, speculators who are only interested in short term profits are discouraged. Stability therefore is advantageous to the company in its efforts to raise external finance since stability makes the shares of the company an investment rather than a speculation. Finally, a stable dividend policy can aid directors in establishing which will perpetuate their position of influence or power within the organization. In a nutshell, the directors will attempt using dividend policy to portray their contribution to the continued prosperity of the firm. Stable dividends also have some disadvantages.

Firstly, once a stable dividend policy is established it is very difficult to change without seriously affecting the investors attitudes and the financial standing of the company. Secondary, for a newly formed company, what will be the central bench mark when planning its first dividend payment.

A write up on the stability of dividends will be incomplete without acknowledging the contribution of Linter (1956) 10 . He carried out a study of 196 company years. (28 companies from 1947-1953). He concluded that corporate management takes the existing dividend rate as a standard and view dividend declaration as a question of whether or not to change this rate in the current period. In other words, according to Linter, current dividends is a junction of the dividend during the last period and earnings during the current period. This conservation attempts to avoid cratic changes in rates and ultimately results in the development of reasonably consistent pattern of behaviors in dividend policy.

 

—-This article is not complete———–This article is not complete————

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The Nigerian Capital Market

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