A Timely Intervention

The Securities and Exchange Commission and Nigeria Stock Exchange take swift actions to halt continued downward slide in the value of stocks in the market

June was a frantic month for the regulators of the Nigerian stock market. During the month the Securities and Exchange Commission, SEC, and the Nigeria Stock Exchange, NSE, struggled to halt the slide that was speedily eroding the market’s capitalisation. The stock market lost N1.215 trillion when the market’s capitalisation crumbled from N11.631 trillion to N10.416 trillion between June 2 and June 25. The slide was precipitated by an unconfirmed report that the Central Bank of Nigeria, CBN, had banned banks from engaging in margin trading. The apex bank later denied issuing such a directive.

The first step taken by SEC and NSE was to empanel a committee that would review the practice of margin trading, known also as financier account in the capital market. A financier account enables investors and stockbrokers to borrow money from financial institutions for the sole purpose of buying shares in the stock market at a predetermined interest rate.

Members of the committee were selected from SEC, CBN, NSE and the Nigerian Deposit Insurance Corporation, NDIC. On June 9, the NSE followed this up with the introduction of the circuit breaker, an artificial support system that does not allow stocks to trade below their previous day’s closing price.

The NSE also directed that a stock must trade up to 100,000 units before its price could either move up or down. It also went further to lift the ban it placed on the financier account, on June 11, and renamed it as custody account. Sola Oni, NSE’s spokesperson, said, “that the lifting of the suspension was with immediate effect. Under this system, the purchased stock acts as collateral and cannot be sold without the knowledge of the lending institution. This arrangement empowers the investors and sustain demand in the market.

Ndi Okereke-Onyiuke, NSE’s director-general, explained that it was expedient for the market regulators to intervene and restore confidence to the market. Said she: “There is no stock market in the world where the managers will sit down and watch the market crash. If we see something going wrong in the market, we must intervene.”

In a bid to sustain investors’ confidence, SEC announced its plan to further cut down the cost of doing business in the capital market. Earlier in April, the apex capital market regulator succeeded in bringing down transaction cost in the market by 40 percent. Lanre Oloyi, corporate affairs manager of SEC, explained that the move was intended to attract foreign and local investors into the market. “Already, there is an in-house committee working on this and as soon as it concludes its business, the outcome would be made available to the federal government for approval before its implementation,” he said.

The above measures appeared to have restored investors’ confidence as the market capitalisation soared from N10.950 trillion on June 6 to N11.721 trillion on June 13. But the revival was only momentary as the market plunged into another wave of decline with share prices dropping on daily basis between June 16, and June 25, from N 11.416 trillion to N10.416 trillion.

As the share prices crumbled, the question of concerned observers was why the market’s downward curve was so steep in June. Onyenwechukwu P. Ezeagu, chief executive of Solid-Rock Securities and Investment Limited, Lagos, told Newswatch that there are three major determinants of share price movement in the stock market. They are a company’s performance, the interplay of the forces of demand and supply as well as market’s hearsay. All these factors, he explained, contributed to last month’s bearish mode of the market.

“The market was reacting to the pronouncements of market’s regulators, particularly the rumour on margin trading, which stampeded stock brokers into selling off stocks in order to meet obligations to their bankers,” he said.

The stampede, he explained, disrupted the market equilibrium as supply rose above demand to precipitate the fall in share prices. Ezeagu also attributed the drop in prices of shares at the market to government’s delay in releasing the capital budget and the distraction caused by SEC’s directive that stock brokers should increase their capitalisation from N75 million to N1 billion or loose their operational license.

David Obi, a member of the governing council of the Manufacturers’ Association of Nigeria, MAN, told Newswatch that the downward trading in the Nigerian capital market mirrors the economic recession afflicting the global market. He said that even as low as the Nigerian market may appear at the moment, it was still performing better than most other countries’ capital markets.

“The slow down in the stock market was even good for us, so that we can ponder on the way we invest. Also, an ever-rising market is not always possible. It is normal for the market to pulsate sometimes,” Obi said. He, however, noted that the important thing is for the country to be serious in the manner it manages its economic activities because in the final analysis “it is the investors’ confidence in the economy that drives the capital market.”

Bismarck Rewane, head of Financial Derivatives, has warned regulators to be more careful with their pronouncements because of the sensitive nature of the market. He said that their actions were capable of increasing the anxieties of investors, “and when investors are anxious, they do only one thing: stop bringing money in and might start to take money out.”

Rewene was right. The withdrawal of the directive for brokers to increase their capital base on June 26, coupled with the lifting of the ban on financer account, has seen the market bouncing back and becoming more bullish. Consequently, the market capitalisation has grew from N10.416 trillon on June 25 to N10.920 trillion on June 30.