i The Investments and Securities Act, 2007
The Nigerian capital market is regulated by a panoply of laws, chief among them being the Investments and Securities Act, 2007 (ISA). Divided into 18 parts, the ISA makes provision for the establishment of the Securities and Exchange Commission (SEC or the Commission). The SEC is the apex regulatory organ of the Nigerian capital market. The SEC, inter alia, has the power to:
- a make rules and regulations for the market;2
- b register and regulate securities exchanges and other self-regulatory organisations;
- c register and regulate the issuance of securities;3
- d intervene in the management and control of failing capital market operators;4 and
- e in appropriate circumstances, impose penalties and levies on defaulting capital market operators.
Consequently, the Securities and Exchange Commission Rules and Regulation, 2013 made by the SEC pursuant to its powers, is considered as the market’s bible. The SEC periodically releases new rules to complement the SEC Rules.
Two other key bodies established by the ISA are the Administrative Proceedings Committee (APC) and the Investments and Securities Tribunal (IST). The APC is a committee of the SEC established as a quasi-judicial fact-finding body. The APC essentially provides the avenue for market operators, against whom complaints have been made by investors and the SEC alike, to be heard prior to the determination of the complaint by the SEC.5 It goes without saying that a decision of the APC will be regarded as a decision of the SEC, and an appeal therefore can be made to the IST.
The IST6 is established under the ISA to hear and determine any question of law or dispute involving:
- a a decision or determination of the Commission in the operation and application of this Act, and in particular, relating to any dispute between:
• capital market operators;
• capital market operators and their clients;
• an investor and a securities exchange or capital trade point or clearing and settlement agency; or
• capital market operators and self-regulatory organisations;
- b the Commission and a self-regulatory organisation;
- c a capital market operator and the Commission;
- d an investor and the Commission;
- e an issuer of securities and the Commission; and
- f disputes arising from the administration, management and operation of collective investment schemes.
Decisions of the IST are to be enforced in the same manner as a decision of the Federal High Court (FHC). Appeals arising from decisions of the IST lie at the first instance to the Court of Appeal.
ii The Companies and Allied Matters Act, 20047 (CAMA)
The CAMA is secondary in its applicability to the capital market. It governs most aspects of the incorporation and operations of companies and other corporate bodies requiring incorporation or registration with the Corporate Affairs Commission (CAC).8 To the extent that these companies and corporate bodies are participants in Nigeria’s capital market, CAMA provisions are significant and apply also to the capital market. For instance, Parts VI and VII of the CAMA make provisions on the nature and types of shares and bonds to be issued by companies. These securities end up being offered and traded in the Nigerian capital market.
iii Other relevant statutes
Undoubtedly, other sector-specific legislations have a certain degree of relevance to the capital market. Arguably, the most important of such legislation are those relating to banks9 (Banks and Other Financial Institutions Act, 1991 (BOFIA)), pension fund administrators10 (Pension Reform Act, 2014) and the Central Bank of Nigeria (CBN)11 (Central Bank of Nigeria (Establishment) Act, 2007).
iv Regulation of foreign investment
There is no difference in the regulatory treatment of foreign investment in the capital market in relation to the regulation of local investment in the market. Dealings in foreign exchange are regulated by both statute and the CBN through regulations, circulars and directives. A key piece of legislation is the Foreign Exchange (Monitoring and Miscellaneous Provisions) Act12 (FEMM Act).13
There are no regulatory restrictions on foreign investment in the market. Pursuant to Section 26 of the FEMM Act:
A person, whether – (a) resident in or outside Nigeria; or (b) a citizen of Nigeria or not, may deal in, invest in, acquire or dispose of, create or transfer any interest in securities and other money market instruments whether denominated in foreign currencies in Nigeria or not. A person may invest in securities traded on the Nigerian capital market or by private placement in Nigeria.
Nevertheless, a foreign investor seeking to invest in the market must ensure that any foreign currency to be invested in the market is imported into Nigeria through an Authorised Dealer.14 In so doing, the Authorised Dealer issues a certificate of capital importation (CCI) to the investor. The CCI guarantees ‘unconditional transferability of funds, through an Authorised Dealer in freely convertible currency, relating to dividends or profits (net of taxes) attributable to the investment’.15 Similarly, foreign exchange purchased from the Nigerian Autonomous Foreign Exchange Market16 can be freely repatriated from Nigeria without any further approval.
The SEC Rules also require portfolio investors to appoint a custodian and to file a copy of the letter of appointment of the custodian with the SEC within 10 working days of making such an appointment.17
Nigerian law requires foreign companies seeking to operate in the Nigerian capital market to first incorporate and register a Nigerian company with the CAC.18 Subsequently, such companies must register with and obtain the relevant licences or authorisations from the SEC before they can commence operations as capital market operators in the market.19
Similarly, foreign companies can only apply and be registered as dealing members of the Nigerian Stock Exchange (NSE) upon registering and incorporating a separate Nigerian entity with the CAC.
v Cross-border securities transactions
Much like foreign investments, foreign issuers can issue, sell or offer for sale or subscription securities to the public through the Nigerian capital market. Such securities may be denominated in naira or any convertible foreign currency.20 The SEC Rules require foreign issuers to file an application for the registration of their securities with the SEC, and such application must be accompanied by a draft prospectus.21 Importantly, under new NSE Rules, foreign issuers may apply for the listing of their sukuk and debt securities on the NSE.
Foreign issuers may, at the discretion of the SEC, be exempted from certain securities registration obligations under the SEC Rules if it is ‘in the public interest and where reciprocal agreement exists between Nigeria and the country of the issuer, or the issuer’s country is a member of the International Organization of Securities Commissions (I.O.S.C.O.)’.22
vi The court system
Nigeria operates a common law system, but with a federal written Constitution23 as the basic law. The Supreme Court of Nigeria sits atop the hierarchy of courts, with the Court of Appeal on the next rung. The high courts and National Industrial Court are on the next rung. These courts are referred to as superior courts of record. Of importance to the Nigerian capital market is the FHC, which has 36 divisions spread across the country.
The FHC has exclusive jurisdiction over matters:
- a ‘arising from the operation of the Companies and Allied Matters Act or any other enactment replacing that Act or regulating the operation of companies incorporated under the Companies and Allied Matters Act’;
- b ‘the administration or the management and control of the federal government or any of its agencies’; and
- c ‘any action or proceeding for a declaration or injunction affecting the validity of any executive or administrative action or decision by the federal government or any of its agencies’.24
Most operators in the capital market are limited liability companies incorporated under and regulated by the CAMA. It is arguable that the FHC has jurisdiction over matters that touch on the operation of these ‘CAMA companies’, even if such matters occur in the capital market. Points (b) and (c) above are also relevant to capital market disputes because the SEC, the apex regulatory body of the capital market, is an agency of the federal government.25
vii The FMDQ OTC Securities Exchange
The FMDQ is today the largest securities exchange in Nigeria by trading volume and focuses on debt and derivative products. It operates as a hybrid somewhat of a traditional securities exchange and over-the-counter (OTC) platform. Equity securities are currently not admitted for listing on the FMDQ. The FMDQ’s listing requirements are similar to those of the NSE but dissimilar in its admission of commercial papers for listing. Also unlike the NSE, the FMDQ operates only one quotation list.
The FMDQ also has a thriving derivatives platform and plays a vibrant role in the trading of OTC FX futures.26 In 2016, the FMDQ in collaboration with the CBN launched the naira-settled OTC FX futures. The FMDQ also developed the NAFEX, which is a fixing for the settlement of certain FX derivatives in the Nigerian market. Generally, and with the supervision of the CBN, the FMDQ is responsible for the registration and operational regulation of FX options and will spearhead the development of other risk management products and guidelines. Setting up of a CCP is imminent as is broadening of the product offerings available.
viii The NSE
A very significant player in the Nigerian capital market is the NSE.27 Established in the wake of Nigeria’s independence from British colonial rule, the NSE operates an automated trading system and is, in conjunction with the Central Securities Clearing System Plc (CSCS), capable of offering electronic clearing, settlements, delivery and custodial services. Headquartered in Nigeria’s commercial capital of Lagos, the NSE has 13 other branches around Nigeria where trading occurs simultaneously.
The NSE currently operates the Main Board, the Alternative Securities Market (ASeM), and the Premium Board, which was introduced in August 2015.28 The ASeM Board is targeted at small and medium-sized enterprises, and requires less stringent listing requirements and relatively lower capital-raising costs. Significantly, companies seeking to be listed on the ASeM must appoint a ‘designated adviser’ whose role is to navigate the company through the listing process and requirements, especially its continuing obligations once listed on the ASeM. Conversely, the Premium Board is for gold standard companies that successfully meet the most stringent standards of the NSE. Importantly, all trading and listing on the NSE occurs through dealing members, which are stockbroking firms so licensed by the NSE. Investors are required to open securities accounts with the CSCS.
As mandated by the ISA,29 the NSE maintains an Investors Protection Fund (IPF). The IPF is administered by a board of trustees subject to the regulatory supervision of the SEC. The IPF is for the compensation of investors’ losses arising from:
[…] the insolvency, bankruptcy or negligence of a dealing member firm of a securities exchange or capital point; and defalcation committed by a dealing member firm or any of its directors, officers, employees or representatives in relation to securities, money or any property entrusted to, or received or deemed received by the dealing member firm in the course of its business as a capital market operator.30
Claims can be made against a dealing member, and the current maximum amount an investor can receive as compensation in a claim against a dealing member is 400,000 naira.31
ix Other securities exchanges
The NASD provides a formal OTC trading platform for unlisted securities of public companies. Unlike the FMDQ, equity securities can be traded on the NASD platform. Securities traded on the NASD are categorised as either ‘blue tier’ (higher disclosure requirements) or ‘pink tier’.32 There are a number of proposals to establish exchanges for commodities. None of them has come to fruition yet.
II THE YEAR IN REVIEW
There has been, in recent times, a flurry of activity in the derivatives regulatory space in Nigeria. Derivatives are largely traded on a bilateral basis between international banks and major Nigerian banks. Perhaps, because a majority of the players in the space are banks and the underlying instruments for most derivatives transactions that currently occur in the market are foreign exchange (FX) ones, the main regulator has been the CBN.
ii CBN regulation
By way of some background, prior to 2016, certain hedging products had been approved by the CBN for offer by authorised dealers to their customers. In particular, Memorandum 5 of the CBN Foreign Exchange Manual (2006) permits authorised dealers to deal in FX spot, forward and swap contracts. In addition to this, the CBN, in 2011, released ‘Guidelines For FX Derivatives in the Nigerian Financial Markets’, which lists the approved hedging products that authorised dealers can offer to their customers as ‘FX Options, Forwards (Outright and Non-Deliverable), FX Swaps and Cross-Currency Interest Rate Swaps’. The 2011 guidelines further state that ‘Authorised Dealers are to ensure that their customers are hedging trade (visible and invisible) -related foreign exchange exposures in their obligations and not speculating on the Naira’.
In 2016, as part of its response to the prevalent FX liquidity shortage in the Nigerian financial markets, the CBN issued its Revised Guidelines for the Operation of the Nigerian Inter-Bank Foreign Exchange Market (the Revised Guidelines). By the Revised Guidelines, naira-settled non-deliverable over-the-counter (OTC) FX futures (NDFs) were included in the ‘approved hedging products’ that authorised dealers can offer to their customers. As with other hedging products, these NDFs must be backed by trade transactions (visible and invisible) or evidenced investment. The CBN further directed that the NDF trades were to be facilitated on the FMDQ platform.
iii OTC FX futures and NAFEX
By a circular dated 21 April 2017, the CBN established an investors’ and exporters’ window for eligible invisible transactions detailed under the miscellaneous payments of Memorandum 15 of the CBN Foreign Exchange Manual. The CBN by the circular gave the FMDQ the responsibility of publishing the NAFEX, to facilitate derivatives activities in the window.
iv Electronic certificates of capital importation33
As a result of the problems posed by the issuance of a paper CCI, such as the difficulties encountered in transferring CCI from one investor to the other or in replacing a lost CCI, the CBN in 2016 initiated the development of an electronic CCI platform. By a Circular dated 7 September 2017, the CBN intimated to all authorised dealers and the public about the deployment of the electronic CCI platform. Consequently, from 11 September 2017 the processing of CCIs would be done electronically on the eCCI platform. The expectation is that the CBN will in the coming weeks publish the guideline for the procedure for the integration of existing CCIs into the electronic platform.
v Investor protection fund (IPF)
In furtherance of Part XIV of the Investments and Securities’ Act, the FMDQ established its investor’s protection fund this year. The NSE had earlier launched the NSE IPF in 2013, and the SEC also launched the National Investor Protection Fund (NIPF) in 2015. The rules of the NIPF were finalised as at June 2017. The launch of these funds is in furtherance of the investor protection mandate of the 10-year Nigerian Capital market master plan launched in 2015.
III OUTLOOK AND CONCLUSIONS
The Nigerian capital market can best be described as emerging, robust and dynamic. Current economic challenges have no doubt had an effect on the Nigerian capital market. However, tailor-made regulations and products introduced by the SEC make the market attractive to both local and foreign investors.
1 Fred Onuobia is the managing partner and Bibitayo Mimiko is an associate at G Elias & Co.
2 The SEC has issued the SEC Rules, 2013 (as amended) (SEC Rules): sec.gov.ng/regulation/rules-codes.
3 ISA, Section 315, defines ‘securities’ as:
(a) debentures, stocks or bonds issued or proposed to be issued by a government; (b) debentures, stocks, shares, bonds or notes issued or proposed to be issued by a body corporate; (c) any right or option in respect of any such debentures, stocks, shares, bonds, notes; or (d) commodities futures, contracts, options and other derivatives, and the term securities in this Act includes those securities in the category of the securities listed in (a) – (d) above which may be transferred by means of any electronic mode approved by the Commission and which may be deposited, kept or stored with any licensed depository or custodian company as provided under this Act.
4 ‘Capital market operators’ is defined in the ISA as ‘any persons (individual or corporate) duly registered by the Commission to perform specific functions in the capital market’, and covers brokers, underwriters, solicitors and their respective firms. ISA, Section 315.
5 Under a SEC circular dated 16 February 2015 on complaints management, most complaints are now to be initially lodged and resolved at trade group level or by self-regulatory organisations, such as the Nigerian Stock Exchange. Complaints not resolved at this level are to be referred to the SEC. Consequently, market operators must register as members of their respective SEC-recognised trade groups. The objective of this arrangement is to secure speedy resolution of complaints.
6 See ISA, Section 274.
7 The Companies and Allied Matters Act, Cap C20, LFN 2004.
8 The CAC is established by the CAMA, Section 1. It is Nigeria’s equivalent of the UK Companies House.
9 Banks are significant issuers of securities traded in the Nigerian capital market.
10 Pension fund administrators are influential investors in the market. Regulations made pursuant to the Pension Reform Act on assets that qualify for investments by pension fund administrators invariably dictate products that make their way to the capital market.
11 The CBN regulates banks and dealings in foreign exchange in the Nigerian economy.
12 The Foreign Exchange (Monitoring and Miscellaneous Provisions) Act, Cap F34, LFN 2004.
13 The Foreign Exchange Manual issued by the CBN is in furtherance of the regulatory duty imposed by the FEMM Act. The CBN also regularly issues circulars on the regulation of the use of foreign exchange in the economy. For example, the CBN, by a Circular on the ‘Inclusion of some Imported Goods and Services on the List of Items not valid for Foreign Exchange in the Nigerian Foreign Exchange Markets’ dated 23 June 2015, barred access to the foreign exchange market for the purchase of foreign exchange for investment in Eurobonds, foreign currency bonds and shares.
14 An Authorised Dealer is a bank licensed under BOFIA, and such other specialised bank issued with a licence to deal in foreign exchange. FEMM Act, Section 41.
15 FEMM Act, Section 15(4).
16 Defined in the FEMM Act as ‘a market which the authorised dealers, authorised buyers, foreign exchange end-users and the Central Bank are participants and may include other participants that the Government of the Federation may, from time to time, recognise’.
17 SEC Rules, Rule 409.
18 CAMA, Section 54 makes it a general requirement for all foreign companies intent on carrying on business in any sector of the Nigerian economy to obtain incorporation as a separate Nigerian entity before commencing business. The CAC certificate of incorporation issued to a foreign company pursuant to this provision is one of the documents required for registration with the SEC as a market operator.
19 SEC Rules, Rule 407. Other registration requirements include a certified true copy of the certificate of incorporation in the company’s country of domicile; proof of registration with the securities regulator or any other regulatory authority in the foreign entity’s country of domicile; and the shareholding structure of the foreign company.
20 SEC Rules, Rule 414.
21 Extensive provisions are made for the content of the draft prospectus in Rule 419 of the SEC Rules. The registration obligations placed on foreign issuers are the same as those placed on Nigerian public companies, trust companies, collective investment schemes, governments and government agencies, and supranational bodies.
22 SEC Rules, Rule 416.
23 The Constitution of the Federal Republic of Nigeria, 1999 (as amended).
24 Section 251 of the Constitution.
25 There is often an overlap of jurisdiction between the FHC and IST over capital market disputes, and there have been no definitive pronouncements or general guiding principles laid down by the Supreme Court on this issue. Cases have therefore been determined on a case-by-case basis, creating inconsistency, uncertainty and the opportunity to forum shop.
For example, in Ajayi v. SEC  13 NWLR Pt 1157, the decision of the FHC declining jurisdiction was upheld by the Court of Appeal. The case was for judicial review of a decision of the SEC through its APC. The FHC in declining jurisdiction stated that the ISA: ‘rested the adjudication arising from the operation of the ISA within the purview of the IST’. That jurisdiction of the IST is not of a concurrent application with the FHC.’ (Per Peter-Odili, JCA at p. 26). Another panel of the Court of Appeal in Christopher Okeke v. SEC (2013) LPELR-20355 (CA), however, refused to follow Ajayi v. SEC, and decided that the FHC had jurisdiction instead. The Court in its ruling stated that the jurisdiction of the FHC granted by the Constitution ‘cannot be whittled down or taken away by an ordinary Act of the National Assembly in the absence of any amendment to the provision [of the Constitution] in question’. (Per Saulawa, JCA at p. 28).
26 See the Guidelines for the Operation of the Nigerian Inter-Bank Foreign Exchange Market, 2016.
27 The NSE is currently a non-profit making CAMA company limited by guarantee. However, there are plans for the demutualisation of the NSE. Relatedly, the SEC released the ‘Rules on Demutualisation of Securities Exchanges in Nigeria’ in the first quarter of 2015.
28 The Premium Board was officially launched by the NSE on 25 August 2015 with the three pioneer companies that successfully met the stringent listing requirements. The companies are Zenith Bank Plc, FBH Holdings Plc and Dangote Cement Plc. These three companies remain the only companies listed on the Premium Board as at August 2016.
29 ISA, Section 197.
30 ISA, Section 198.
31 This amount might be inadequate to compensate a high net worth investor. In relative terms, however, it is a decent sum to the average small-time investor who is more susceptible to volatility in the market and misconduct on the part of market operators.
32 The NASD provides the rules for admission of securities on its website at http://nasdng.com/issuers/
33 The detail of this circular can be found at https://www.cbn.gov.ng/Out/2017/CCD/Re%20Implementation%20of%20eCCI.pdf accessed on 9 September 2017.