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As the equity market progresses into the new year, one of THE crises which The market has to grapple with is the compelling need to quickly restore investors’ confidence in the market.

Unsuccessful recovery attempts prior to the appointment of market makers remind stakeholders of the zero level to which investors’ confidence has dropped. Between last August and December, the market which had been on a steady jet-landing, bounced back severally in response to several market stabilization measures by stakeholders but relapsed for the worst after each rebound.

The consequence has been a steady depletion in value of investors’ funds in the market as reflected in the sharp drop in prices of stocks traded on the floors of the Nigerian Stock Exchange (NSE). Value of the heavily capitalized stocks like banks’ dropped by more than 50 per cent; and in some cases by up to 70 per cent. Insurance stocks have since crashed and the price gains almost wiped off.

As at Wednesday, December 17, 2008, when the market made the latest recovery attempt after 45 days of bearish market, the All-Share Index which measures the health of the market had dropped to 28,667.44 points from a height of 66,371.21 in March before the meltdown started. Market capitalization fell to N6.10 trillion by mid December after reaching a height of N12.6 trillion in the first week of March. In concrete terms, investors lost a whopping N6 trillion in share price value as at mid December, further heightening apprehensions to invest in the market.

Shedding light on factors that led to erosion of confidence in Nigerian equity market, the Managing Director of Crane Securities Limited, Mr. Okpara Mike Ezeh, said that confidence could be eroded as a result of a particular action like fraud. He said, “I know we have regulators, and the major duty of regulators in the market is to make sure that confidence is maintained by putting in place certain control measures that can prevent incidents that could lead to erosion of investor confidence.

“We know that in the last couple of months, the market has been melting down but the meltdown, as it were, has not affected the confidence of investors in the market. The only thing that has happened is that many investors have been tactical about their investment. Prior to this time, they were coming head-on, buying any stock at any price. But they were buying with the hope of appreciation from that level of purchase”.

According to him, if the market is melting down, it does not lead to erosion of confidence. Rather, it leads to tactical investment. “Some make tactical withdrawal; they don’t invest at all. They observe the market. While some come head-on and buy more to average their cost. And as professionals, we advise our investors to, at this time, be tactical about their investment. That is why we are here as professionals. You have to buy more at lower prices, the stocks you bought at high prices, so that you can average your cost. It reduces your exposure to losses.

So, as far as I am concerned, the confidence of investors has not been eroded. If we watch volumes that are traded on daily basis, it does not betray loss of investors’ confidence. The market where investors’ confidence is low cannot have that kind of transaction level”.
Enumerating the factors inherent in a zero investors’ confidence market, Mr. Ezeh identified apathy on the part of investors. He said the average investor would not like to hear mere mention of equity market investment because he would readily remind you he had lost so much money. He added that volume of transaction would drop sharply, pointing out that such indices as he had enumerated had never been experienced in the market.”

However, the Chief Executive Officer of Supra Commercial Trust Limited, Mr. Funmi Abiodun, held a different view. He said: “The market as it were is already down. Investors no longer have the appetite for equity investment. It is going to take a double effort on the part of government to restore investors’ confidence and bring sanity into the market”. According to him, what could have fast restored investors’ confidence in the market was direct government intervention. But in the absence of such, people should not expect any quick turn around in the market so soon.

The erosion of confidence in the market is so total that companies had to recapitulate on plans of new issues to raise funds from the market. For instance, Union Bank of Nigeria Plc had to suspend a proposed N300.6 billion hybrid offer. The bank had planned to float 1.117 billion shares at N35 per share via rights issue and another 7.3 billion shares at N36 per share as public offer. It had planned to channel the funds into information technology, branch expansion, infrastructure financing and private public partnership schemes.

The Managing Director of the bank, Mr. Barth Ebong, announcing the suspension of the offer, said that the bank was clamping an indefinite suspension on the hybrid issue, citing the prevailing price losses and the low perception of investors on the market. Ebong confessed that “the public offer suspension is not only necessary, but prudent, to enable us assess the current capital market depression and strategies on the best way to raise funds within and outside the Nigerian Stock Exchange. Wisdom demands that we sit down and analyse how the current national and global capital market affect and will affect us.”

But Union Bank was not the only company that shelved planned public offer, arising from investors’ loss of confidence in the market. Crusader Nigeria Plc had earlier taken a similar decision, citing general decline in investors’ appetite for equity investment. Its Managing Director, Mr. Olutola Mobolurin, said that as a quick reaction to the decline in investors’ appetite for equity shares in the Nigerian stock market, the company had decided to postpone its planned offer of 1.2 billion ordinary shares.

However, companies that had already concluded successful private placement offer and took a nose dive to list their shares on the Exchange had to discover shortly the grave implication of an equity market in crisis of confidence. For no sooner had they listed their stocks than the prices dropped below or a little above their listing price if not their par value. The erosion of their share price value had nothing to do with the companies’ fundamentals since the Exchange had always vouched for their fundamentals.
For instance, Starcomms Nigeria Plc, a front line indigenous telecommunications services provider, with cutting edge technology, that places it on good stead for stiff competition, had their 6.8 billion ordinary shares of 50 kobo per share listed at N13.56 per share early July last year. By the first week of December, the share price had dropped to as low as N3.56 after attaining a high of N14.90 shortly after listing.

Daar Communications Plc, Fidson Healthcare Plc, Tantilizers Plc, FTN Cocoa Processors Plc and Omatek Ventures Plc are among the recently listed companies on the Exchange whose share prices values have been significantly eroded below listing prices. In all these, the investors have had their fingers thoroughly burnt which explains why real investors are scared away from investing further, leaving the market dominated by speculators otherwise seen as gamblers in the market.

Admitting the serious impact of loss of confidence on the market, the Chartered Institute of Stockbrokers (CIS) had pointed out in their communiqué after recent stockbrokers’ retreat in Ilorin, the Kwara State capital, that the fundamental problem of the capital market had three components, loss of confidence, liquidity crunch and overhanging sale of equity orders.

According to the communiqué issued at the end of their annual conference between October 22 and 25, 2008, and signed by the President and Chairman of the institute’s council, Mr. Oladipo Williams, the stockbrokers wanted the institute to do more public enlightenment campaigns to re-orientate the public on their perception of the market and use the medium to restore investors’ confidence in the market.

In addressing the high incidence of sharp practices and abuse among stockbrokerage community, the communiqué also agreed on the need for stiffer penalties for erring operators and institutions that fail in the area of good corporate governance practice.

Before the market meltdown set in, there had been several cases of sharp practices and abuse involving stockbrokers trying to shortchange their clients. Stakeholders have had cause to discuss some of the demeaning issues, touching on the integrity of the market operators which in turn have contributed significantly to deflate investors’ confidence.

For instance, at the meeting of Thursday, June 19 2008, between chief executive officers of stockbroking firms and key stakeholders, including director-generals of SEC and NSE as well as the chairman Senate Committee on Capital Market, Senator Udo Udoma, part of the agenda for the meeting were unauthorized sale of investors’ stocks by some dubious stockbrokers, incessant complaints of non-remittance of their stocks as at when due.

Also, on the 11-point agenda were issues such as non-dispatch of transfer forms to registrars on transactions consummated on the floor of the Exchange; refusal of brokers to transfer client’s accounts to other firms of their choice even after filing the necessary documents for such a transfer; lack of proper supervision of activities at branch offices for firms with branches, allowing for easy perpetration of fraudulent activities and more importantly, the incessant price movement of stocks without fundamentals.

In the heated debate at a meeting in which the suspended issue of recapitalization of stockbroking firms took centre stage, the Managing Director of Clearview Securities Limited, Rev. Olu Odejimi, gave an insight into the reason for investos’r loss of confidence in the market. Blaming regulators over some of unguarded utterances, he said: “The integrity of the market and the stockbrokers is in doubt. Investors no longer have confidence in the market, owing to some of the unprintable statements you regulators have made about brokers.

“You cannot shout from the roof top that somebody is a rogue and still expect people to do business with the same rogue. And you know that this market is confidence driven. We have to embark on reparation process to restore the confidence of the investing public in the market”, the doyen of the market advised.

In response to the situation, the Director-General of the Exchange, Professor Ndi Onyiuke, told journalists at a stakeholders’ forum organized by Capital Market Correspondents Association of Nigeria (CAMCAN) the Exchange (NSE) would black-list erring stock broking firms it would not want the investing public to deal with any longer.

According to the DG, the public would be put on notice, regarding the stock broking firms they should not deal with and those they should deal with. The impending sanction, she said, was intended to protect the investing public prone to fall prey to unethical practices of some stockbrokers.

She said, “all over the world, you do not hear any stock exchange market announcing that they are investigating this or that company. Rather, after investigating and finding something wrong, that is when they punish the company and then tell the public. It is the punishment they announce and not the investigation. We police the market and make investigations. We do punish people but we do not announce it unless such announcement is to make sure that somebody else does not fall into wrong hands”.

But beyond the image problem of some market operators, analysts believe that the erosion of investors’ confidence in the equities market was a direct outcome of the crisis facing the market since March. Tracing the genesis of the crisis, Dr. Martin Oluba, the chief executive officer, Value Fronteira Limited, linked it to two primary causes, one deriving from domestic monetary and financial policies such as the untimely reversal of the margin trading policy, a decision that halted the boom in the market where stock prices had hitherto enjoyed astronomical rise in share prices.

He said that this was further exacerbated shortly after by the increased pressure on banks to start recalling their funds in response to the suspended uniform year end accounting system for all banks.
According to him, another factor which had earlier prepared the ground for share prices manipulation was the excessive financial re-engineering by banks during the consolidation and recapitalization, a hurriedly executed exercise that exposed most of them to customer funds and credits to finance acquisition of trillions of shares. Through a second and third level of share price engineering and fund raising at the stock market ballooned and manipulated prices in order to create enough funds to repay creditors.

“As a result, there were massive inflows of portfolio investments into the Nigerian stock market. Many foreign investment banks promptly set up offices in Nigeria in order to closely monitor and take advantage of the opportunities which the market offered.

Banks had sustained the equity market boom by using a combination of tactics, including direct interventions through lending to stockbroking firms primarily to buy their own shares in order to sustain demand pressure on their stocks such that its prices continued to rise without corresponding appreciation on the underlying values”, Dr. Oluba explained.

He said that the last straw that broke the camel’s back was the JP Morgan report of May 12th 2008, which clearly pointed out that majority of banks stocks were over-valued and share prices running well ahead of their fundamentals, warning investors of the risk from both the operational and macro-perspective.

In his words “The carmel’s back was, however, broken when JP Morgan, on its May 12, 2008 report pointed out that more than 56 percent of the banks are overvalued, while pointing out clearly that bank share prices have run well ahead of fundamentals and do not incorporate the numerous risks facing the sector from both the operational and macro-perspective”.

The professor of economics added that it was this scenario that triggered an increased drop in the holdings of bank shares and massive withdrawal of funds particularly by the foreign investors who reasoned that the market was, indeed, headed for a meltdown which other global markets had already started to experience. This was coupled by the need back home for some of the foreign investors to service debts caused by the economic crises in their various home fronts.

Another reason which he said strengthened the loss of confidence in the market was the Exchange’s decision to resort to anti-market measures in which the trading floor was fixed for upward movement in share prices for upwards of one week. During the period, it was possible for stock prices to go up but not allowed to go down, a measure that guided share prices on a weeklong one-way movement upwards only for prices only to tumble again after the measure was reversed.

Disturbed by continued tumbling of share prices, government and key stakeholders sought ways to halt investors’ dwindling fortunes. At a meeting on August 28, in Abuja, the presidential advisory committee was set up to determine appropriate intervention measures that could stem the tide of losses and make the market once more attractive. Among the measures decidedly taken, by the committee made up of 16 persons drawn from SEC, NSE, CBN, and the Ministry of Finance included adoption of the earlier failed anti-market fixed floor for equity prices in which prices could not drop below 1% of its market price for each day but could rise by as high as 5%.

It was this restriction that further sent wrong signal to equity investors, who saw the measure as undue interference in the market mechanism. For the market analysts, the restriction seen as a wedge was a subtle way to keep at bay genuine investors, waiting for share prices to bottom out. A cross section of the dealing members of the Nigerian Stock Exchange joined in the hot criticism that greeted the measure. The wedge was eventually removed after stockbrokers’ annual general conference and retreat. Consequently, share prices commenced a steady decline in search of the natural bottom with intermittent but unsuccessful recovery attempts, the latest of which was the rebound on Wednesday, December 17, 2008.

To sustain the current rebound, market analysts said that stakeholders must first work to restore investors’ confidence in the market. Part of the measures taken to restore investors’ confidence is the recent appointment of market makers. Early in November, the SEC approved the application of three market makers, while 12 others were being considered for possible approval.

Only a fortnight ago, a source close to the apex regulatory body said that about five more market makers had been approved, waiting to be announced. It would be recalled that the Presidential Advisory Committees had in August, agreed to the idea of introducing market makers who are to inject funds to lubricate the illiquid market. Market makers are wholesale operators whose major objective is to maintain market stability by ensuring the needed liquidity through buying of shares when there is glut or selling when there is scarcity. They have the capacity to change the direction of the market and also determine prices of stocks traded on a daily basis.

However, stakeholders are not agreed on the capacity of market makers to stabilize the market and restore investors’ confidence, considering the colossal decline it has suffered. Mr. Okpara Mike Ezeh of Crane Securities Limited said that not even the appointment of 20 market makers is enough to make the market regain the needed impetus to spice up large volume of activity. He believed that market makers and institutional investors who could invest for a longer period of time are the only people who have the capacity to go into wholesale transactions, such that could boost investors’ confidence in the market.

For Mr. Boniface Okezie, the chairman of Progressive Shareholders Association of Nigeria, market makers lack a magic wand to turn around the gloom in the market. He alleged that after all they were the same people, who through their unwholesome activities brought the market to it knees.
“The so called cannot do any magic to restore investors’ confidence to the market. After all who are the market makers? Are they not same people consisting of issuing houses and their bank financiers, stockbrokers and their stock broking firms? They are the people that killed the market.
“Earlier in the year, I raised alarm that the market was sitting on a time bomb and when it would explode, the market would be wiped off. And that has come to pass”.

According to him, market makers or not, the market would correct itself and when it does, the excesses of the past that resulted in the crisis of confidence, leading to the meltdown would never repeat again because people have learnt their lessons the hard way”.

It is yet to be known whether investors have really learnt any lesson. As Dr. Oluba pointed out, the problem with the market is not so much about loss of investors’ confidence as it is with investors’ perception of it as a fat cow. Many investors saw the market as short-term market where you put in some funds and expect to reap double gains within a short period and get out.

“It is that orientation that has actually caused much of the problem. So, it is not so much about investing, it is also about perception of the market. For instance, if you put down your money, believing that either way the market goes my target is five years, even if five years elapses, you will still wait. But if you have invested, believing that in three months, you are going with a bag of money, of course, you will be disappointed, and the confidence will be lost.

To this extent, market regulators and operators have a great role to play by confronting the challenge of changing people’s orientation about the market. They need to educate the investing public that the capital market is a long term market where investments should be allowed to mature. Even in the secondary market where people trade on stocks on short term basis that it requires a lot of skills to operate without incurring losses.

“Unfortunately, most of the players and the professionals don’t even have those skills. A lot of them don’t have good and functional department that can carry proper forecast and take decisions. What they do is to tell people: if you put down your money today, in six months, I will give you 50% or 100% based on something that happened in a couple of weeks or months ago. And investors come in believing that in six months they get their money and their money get locked in”, Oluba pointed out.

For Mr. Olufemi Awoyemi, the chief executive officer of Proshare Nigeria Limited, addressing the crisis of confidence in the market should be a holistic task which must involve all key stakeholders, including the companies listed on the Exchange. He pointed out that part of the losses investors have incurred in the market arose from fraudulent and improperly implemented share reconstruction of unwieldy volume of shares by some of the quoted companies who used the strategy to cheat shareholders of their funds.

According to Awoyemi, “Share reconstruction, also known as reverse stock split, is a mechanism used by companies to reduce the number of shares and increase their share price proportionately without affecting the total book value of those shares”.
He noted that although the strategy had several advantages, it appeared that some Nigerian companies that recently implemented it used it to the disadvantage of their shareholders.

Citing examples with Skye Bank Plc, Sterling Bank Nigeria Plc, and, of course, Spring Bank Plc, the seasoned capital market analyst submitted: “Although share reconstruction has several advantages for the particular institution implementing it, when companies do not implement the strategy correctly, they short change their investors. Therefore, the regulatory authorities (NSE, SEC, and CBN) should ascertain that companies implement share reconstruction properly because investors are being fleeced if the strategies are not correctly implemented”.

This boils down to protecting investors’ funds which falls within the purview of market regulators, and to some extent market operators. It is important for regulators to strengthen their supervisory roles to give investors sense of security on their funds.