Options for delisted capital market operators, by experts

Concerned investment advisers and capital market operators have counseled the twenty-four stockbroking firms that failed to meet the new minimum capital requirement stipulated by the Securities and Exchange Commission (SEC) to either merge or seek new investors for private placement to beef up their capital base.

Those who spoke to The Guardian on the issue explained that failure by some institutions to meet new capital requirements requested by regulatory agencies from time to time is the method that financial services industry uses to shake off the convert insolvent operators that could constitute danger to the system.

“The practice of disallowing both the capital market operators and banks from operation on the basis of inadequate operating capital is not a new thing in the country. It has happened many times before in the banking industry, insurance and also in the capital market. It is the industry’s way of shaking off the weak ones from the system,” said one of the CEOs whose stockbroking firm is located in Ikoyi. He pleaded that his name should not be mentioned.

According to him, what the affected firms can do is either to merge with others or approach new investors for private placement.

But another operator, a retired banker, Stevie Opara, pointed out that what must have hindered the affected firms from being able to raise the required funds could be due to the prevailing down-turn in equities business, illiquidity and the cornering of the business transactions in the market by the financially buoyant stockbroking firms, which regularly feature in the top ten category of most performing firms in the market.

He said the lean business operations of the affected firms could discourage many potential investors from embracing private placement request from them because they might not been able to deliver enough returns on such investment in view of the poor business in the market now.

“There are no enough incentives in the market to attract investors,” he said, adding, on merger and acquisitions are the only reasonable options.

The SEC, which is the apex regulatory agency of the capital market, yesterday, released the list of twenty-four stockbroking firms that failed to make the final list of capital market operators (CMOs) that met the new minimum capital requirement.

In 2013, the apex body announced a new minimum capital requirement for all categories of market operators in pursuant to Section 313(6) of the Investments and Securities Act (ISA) 2007.

Online Free Encyclopedia defined Capital requirement (also known as regulatory capital or capital adequacy) as the amount of capital a bank or other financial institution has to hold as required by its financial regulator. This is usually expressed as a capital adequacy ratio of equity that must be held as a percentage of risk-weighted assets. This is required to ensure that a stockbroking institution does not take on excess leverage and become insolvent.

It is a worldwide practice by financial services industry.

The compliance deadline that SEC gave the operators to complied expired on September 30, 2015, when SEC released a provisional list showing that 437 operators met the capital requirement.

The commission then engaged 16 accounting firms to carry out capital verification exercise. At the end of the verification exercise, 24 stockbroking firms were dropped from the provisional list.

The SEC stated that the list was based on the consideration of the reports on capital verification and the responses received from the affected Capital Market Operators (CMOs).
“In all, 24 CMOs were disqualified for non-compliance and/or inability to substantiate claim of compliance based on queries raised by the audit firms. In addition, 16 new CMOs were added on the list, 10 of which were newly registered companies and six filed evidence of compliance after the release of provisional list which were verified and accepted,” SEC said.

The requirement was sequel to SEC’s increase in the minimum capital base for broker/dealer by 329 per cent from N70 million to N300 million. A broking firm, which operated with capital base of N40 million, was raised to N200 million, representing an increase of 400 per cent.

While the minimum capital for a dealer was raised by 233 per cent from N30 to N100 million, that of issuing house was increased to N200 million from N150 million. The capital requirement for a company to underwrite issues was also raised from N100 million to N200 million, just as share registration companies now have to raise their capital base from N50 to N150 million.