Customs Street Advisors

The recommendations of the Dotun Suleiman Committee for the Review of Capital Market Structures and Processes have received a lot of attention in the press. As a result of public concerns over certain perceived abuses and improprieties on the Nigerian Stock Exchange, those  recommendations which  touch on the oversight functions of the Securities and Exchange Commission (SEC) over the exchange have been in the spotlight. However, one recommendation, so far adopted, that has received far less attention, is the introduction of book-building method in securities sales transactions. Known as Rule 78(c) it will have significant long-term impact on the Nigerian capital market through its potential to fundamentally change the content of public offering communications, structure of ownership of companies, surveillance of corporate governance, review of corporate performance and the quality of issuer-investor relations. In this post, we examine the trends that have led to the rise of institutional investors in Nigeria and why issuers may actually prefer them at first countenance. Then we discuss the likely implications of their established dominance on share registers and its implications for  companies planning to raise capital.

In a recent critical essay on the dereliction of duty by US money managers in the supervision of public companies  whose securities they buy and hold on behalf of private citizens, John Bogle, founder of the Vanguard Group, the giant fund manager, underlines the risks to the financial system as markets have gradually but surely transformed from owner-governed to agent-dominated systems. However, beyond his criticism of the ineluctable trend to greater ownership of corporations by fiduciaries, Bogle identifies their central role in contemporary capital markets, not simply as conduits of capital, but as watchmen of corporate governance and performance. Read More…

As in other parts of the world, the securities market regulator, stock exchange and central bank in Nigeria have been in the first line of fire from commentators for the turmoil that has engulfed the local economy in the past year. For what is now judged their reluctance and, in some cases, passive complicity, in what are now considered to be abuses and excesses as well as their failure to warn about the impending crisis, even denying the vulnerability of the economy, the regulators are now fingered as having the primary responsibility for the crisis. According to some commentators, while the regulators may not be the mechanical causes of the crisis, their inertia makes them accomplices. They argue that the regulators’ partial, even discriminatory, actions in the execution of their fiduciary responsibility to protect investors from market abuses by some issuers and intermediaries puts the blame squarely on their shoulders. Moreover, as the producers of the most visible and applauded metrics of economic success during the boom years, the collapse has raised major questions about, not simply the foundations of that boom, but the competence of its architects. It is in this context that BusinessDay, a leading source of economic, financial and business news in Nigeria, called for the resignation of Professor Ndi Okereke-Onyiuke, director-general of the Nigerian Stock Exchange, and Musa al-Faki, director-general of the Securities and Exchange Commission. According to the paper, the ripple effect from the developed markets’ financial crisis was not the cause of the local crisis. Rather, it only exposed festering maladies which had plagued the local stock market for quite some time. The paper adjudged that the regulators’ ‘light touch regulation’ was the cause of the crisis. In response, the Nigerian Stock Exchange issued an acerbic press release accusing BusinessDay of ‘hyperbole’, while identifying the paper as ‘the problem in the ongoing effort to restore investor confidence in the market, because confidence cannot be erected on obvious negative and baseless media publications on the market.’  The SEC has not issued a response. In this post, we provide a background to the issues then proceed to reconstruct the response of the NSE to BusinessDay.

In a presentation given in January 2009, Professor Charles Soludo, the governor of the Central Bank of Nigeria, offered a disgnosis of the causes and effects of the global economic crisis. According to him, the roots of the crisis are to be found in the banking system, and not in the securities or forex markets. Tracing the origins of the crisis to the United States, he explained that countries like Nigeria were swept up in the second round effects of the crisis.

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The publication of alleged evidence on the manipulation of African Petroleum’s share price against Alhaji Aliko Dangote by the board of the petroleum marketing company has brought two burning issues to the fore. First, the inability of the stock exchange to identify the actions; second, the basis for the valuation and high multiples of AP’s shares. Since the AP board’s release of Alhaji Dangote’s clearing house transaction details to support its claims, several news articles have been written, while regulators have launched investigations into the matter. The case which is shaping to be a protracted one, already has some commentators declaring African Petroleum, and specifically, Femi Otedola, its chairman, as the victor of the first round. The Securities and Exchange Commission has placed a one year suspension on Nova Finance and Securities, stock brokers to Alhaji Dangote, while Eugene Anenih, its CEO, has been banned from working in the securities industry for five years. Further, a number of shareholder associations and individual investors have condemned Alhaji Dangote in strong terms, including calling for his removal as the first vice-president of the Exchange. In the heat of the debate, particularly on such a sensitive issue, a number of opportunities are being missed by African Petroleum. If winning public opinion is the single goal of AP, that much, so far, seems a secured objective. However, by its failure to follow up with an intensive investor relations program, African Petroleum may be allowing whatever victory it has won in the court of public opinion to slip out of its hands. In this post, we argue that for companies like AP whose share prices are under assault, but whose management is convinced that the sustained and widening gap between the economic value of the firm and the market price of its shares are driven by ‘ex-analytical’ factors, it is their duty to proactively communicate the performance results and cash-generating potential of the firm. In fact, we hypothesize that failure to do so allows room for ‘bystander’ investors, not initially involved in the sell-off, to join the bandwagon, taking the silence of the firm as a signal that the current downward trending market price is the true reflection of the state of the business. We then go on to list a number of areas that AP needs to elaborate on in its investor communications. We conclude by  arguing that for well run companies with solid prospects, distortions in market valuation are self-correcting, but that this process can be made quicker with a responsive, credible and robust investor relations program.

It is arguable that the decision of the board of African Petroleum to publish the trading records of Alhaji Aliko Dangote in the March 23 edition of ThisDay newspaper as supporting evidence in its claims that he was behind the aggressive crossing of its shares, without a beneficial change in ownership, over an eight week period, marks the entry into unfamiliar territory by the board of a Nigerian issuer which believes that its share price has been manipulated. According to the company, the pseudo-transactions created an appearance of active trading in its shares, when in reality there was none. Less than two weeks later, Day Spring Law Office, filed a petition on behalf of Femi Otedola, the CEO and chairman of African Petroleum, Zenon Petroleum Oil & Gas Limited and Luzon Oil & Gas Limited, seeking damages of N117,188,517,953 being the cumulative losses suffered by the petitioners for the drop in its share price from N293 on August 21, 2008 to what the petition describes as ‘a miserable N66.50 on March 26, 2008.’

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