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MEMORANDUM
BY
THE
SECURITIES
AND
EXCHANGE COMMISSION TO THE NATIONAL
ASSEMBLY ON THE DRAFT BILL TO ESTABLISH
THE ASSET MANAGEMENT COMPANY (AMC)
1.1
Honourable
Members
Representatives,
of
the
distinguished
House
ladies
of
and
gentlemen. The Commission is delighted to be at
this public hearing to discuss the draft bill on the
establishment of the Asset Management Company
(AMC). The Commission supports the initiative
given its likely beneficial effect on the capital
market.
1.2
There is no gain saying that the Nigerian capital
market has witnessed one of the most difficult
periods in its history with significant drop in asset
value and eroded confidence of investors. Market
indicators in recent years have clearly showed the
extent to which the market had slid. This is most
obvious in market turnover which dropped by
71.1% in 2009; a sign of investors apathy driven
by declining share prices, evidenced by a 45.8%
and 33.8% loss in the NSE All Share Index in 2008
1 and
2009
respectively.
Equity
market
capitalization has also lost significant value in the
last two years as the table below indicates:
1.3
SOME MARKET INDICATORS 2007 – 2009
Index (Points)
% Change
Equities Market Capitalization (N’Trillion)
% Change
Total Market Capitalization (N’Trillion)
% Change
New Issues (Corporate Bond/Equities) (N’Billion)
% Change
New Issues (State Government) (N’Billion)
% Change
New Issues (Federal Government (N’Billion)
% Change
Trading Value (Equities) (N’Billion)
% Change
1.4
2007
57,990.2
10.3
13.3
1,338.6
596.5
2,083.4
2008
31,450.8
(45.8)
6.9
(33.0)
9.6
(27.8)
944.2
(29.5)
50.0
515.0
(13.7)
2,375.6
14.0
2009
20,827.2
(33.8)
4.9
(29.0)
7.0
(27.1)
44.4
(95.3)
41.5
(17.0)
614.4
19.3
685.7
(71.1)
With such apathy, it was not surprising that new
corporate issues have been practically frozen,
losing about 95% in 2009 as against 29.5% in the
preceding year.
Investors are essential to the
success of any offer and with dampened appetite
for securities; entities have had no choice but to
suspend issuance activities.
2 Chart 1
Chart 2
3 1.5
Honourable Chairmen and Members will agree that
the capital market is very important to capital
formation and economic development. The current
apathy could hinder the ability of the market to
perform these roles effectively.
1.6
Recovery has been slow due mainly to the heavy
leverage by operators and investors as well as
banks’ exposures to the capital market.
1.7
Prices have been sluggish as the market continues
to witness considerable imbalance in demand and
supply of equities. Clearly, as long as the margin
loan overhang persists, the market is not likely to
recover as quickly as desired, as heavy sell
pressure particularly by banks will continue to
depress prices and unnerve investors. It is a
known fact that whenever the market showed
signs of recovery, the banks dumped, in an
attempt to minimize their losses.
banks,
operators
and
Indeed, many
investors
had
understandably dumped shares out of panic which
4 further depressed prices and fuelled more panic
and dumping. It is also a known fact that the
burden of non-performing assets arising from
margin loans, has impacted negatively on bank
balance sheets. Therefore, there is the danger that
if left unresolved, the issue of margin loans would
impede effective intermediation and the ability of
the capital market and the banking sector to grow
the economy and support the 7-Point Agenda of
the Federal Government.
1.8
Many operators are today engrossed in efforts to
resolve their indebtedness rather than effectively
engage in intermediation activities which are their
core function. In point of fact, many of them have
negative shareholders’ funds arising from their
heavy exposures to banks.
The banks as is well
known represent about 70 percent of market
activities which exposes the stock market to the
vagaries of the banking sector. In other words, if
issues surrounding the banks, particularly their
exposure to the capital market are not resolved,
5 the capital market is not likely to recover as
quickly as desired. It is against this background
that the Securities and Exchange Commission
endorses the initiative to establish an Asset
Management company by the Federal Ministry of
Finance and the Central Bank of Nigeria (CBN).
1.9
At the peak of the crisis, there was strong clamor
for government intervention to restore investors’
confidence
and
reactivate
the
market.
One
strategy which was advocated was the use of a
Special Purpose Vehicle (SPV) or an existing
vehicle
such
as
the
Ministry
of
Finance
Incorporated (MOFI) to mop up shares in the
market.
Although, there were different views on
the structure of the SPV and mode of funding of
the
share
consensus
purchases,
on
the
we
need
believe
for
there
some
was
form
of
intervention to resolve the market crisis. There is
no doubt that the AMC is an intervention vehicle.
6 1.10
SPVs in form of Asset Management Companies
(AMCs) as intervention instruments in stabilizing
and restoring confidence in financial markets have
been widely used by countries. Today, the United
States and many countries in Europe, Asia and
Latin America have such vehicles. Many of the
Asian
countries did so during the crisis of
1997/98, and empirical evidence showed that the
AMCs contributed to the recovery of these markets
as they helped in giving life to banks which were
literally choking from toxic assets. We understand
that five African countries either have AMCs or are
in the process of establishing one. Incidentally, the
CBN had during the banking consolidation made
efforts to establish an AMC which unfortunately
never took off.
1.11
A key objective of the AMC as stated in section 5(a)
of the draft bill is to “assist eligible financial
institutions efficiently dispose off eligible Bank
Assets in accordance with the provisions of the
Act”, Section 5 (b) expects the AMC to “efficiently
7 manage and dispose off eligible bank assets
acquired by the corporation in accordance with the
provisions of the Act”.
We are of the view that
while the AMC is not a panacea for the full
recovery of the market, it would provide a vital
push
for
its
recovery.
This
will
strongly
complement other initiatives by the SEC including
the implementation of the market structure report,
which is currently on-going, to revive the market.
Removing capital market related non-performing
assets off the books of banks would reduce
pressure by banks on operators as such assets
would now be owned by the AMC which hopefully
would neither be in a hurry to dispose off the
assets
nor
amount
repayment
pressures
on
operators. It is expected that the liabilities of the
operators to banks would be restructured into a
much longer term obligation.
This should give
“breathing space” to operators and effectively get
them back into their core function of financial
intermediation.
8 1.12
Buying off non-performing capital market related
assets from the books of banks by the AMC would
also improve banks’ liquidity and capital while
enhancing
their
financial
shareholders’ value.
intermediation
and
The Commission is of the
view that taking toxic assets off the books of banks
and
instilling
supported
by
good
the
corporate
various
governance,
banking
reform
initiatives, should ultimately improve profitability
and image of banks, most of which are quoted on
the Nigerian Stock Exchange. In disposing assets
acquired from eligible financial institutions, the
AMC should take into consideration the state of
the capital market and indeed have a long term
view in doing so. It is therefore, expected that the
AMC will play a stabilizing role by staggering the
disposal of assets.
Any attempt to dump would
have a negative effect on the market and the value
of the assets held by the AMC.
9 1.13
The Commission is aware of the concerns of
market operators about the AMC bill. It is however
of the view that the concerns particularly those
bordering on valuation of eligible bank assets,
definition of eligible bank assets and holding
period of the assets should be addressed by way of
guidelines. Embedding these issues in the Act will
not give the AMC the required flexibility to address
pertinent issues as they arise in a dynamic
environment.
1.14
In conclusion, the Commission would like to reiterate its support for any initiative that benefits
the capital market and the economy. The AMC bill
does, and therefore has the endorsement of the
Commission.
The
Commission
has
been
collaborating with the Federal Ministry of Finance
and the Central Bank of Nigeria (CBN) on the
establishment of the AMC and will continue to do
so.
Thank you.
Ms Arunma Oteh
Director General
10