Haruna Jalo-Waziri is the Managing Director and Chief Executive Officer of Central Securities Clearing System Plc. He has been associated with the Nigerian capital market for over three decades. In this interview with Vincent Nwanma, he talks about a number of issues on the growth of the Nigerian capital market and the broader economy
You have spoken about how the Nigerian Exchange Limited (NGX) can improve its value proposition to listed and unlisted companies. Can you expand your perspective on this?
First, it is important to understand the overarching interests of issuers and why they list on the exchange. So, improving the Exchange’s value proposition to listed and unlisted companies is synonymous with meeting the expectations of the companies’ management, board and shareholders, who are critical stakeholders of every company, though not exhaustive.
A common denominator for listing is the accessibility to a wide pool of investors for capital formation. So, by listing on the Exchange, issuers hope to break the barriers to capital raising and optimise the transactions, in terms of timing, pricing or say valuation, volume and diversification of investor base. So, how does an exchange guarantee that these primary values are delivered?
In this conversation, we can’t underrate the significance of market penetration and, more broadly, the liquidity of the market because that is a pertinent domino variable that can define the prospect of value creation on the exchange.
So, as a market facilitating the interactions between buyers and sellers of financial assets, equity, debt and what have you, it is essential to seek levers that would ensure seamless entry and exit of investors at a competitive cost, as this is an important tool towards creating value.
This brings forward the point around market access. From a macro perspective, how accessible is our market to both local and foreign investors; how easy is it to buy, sell and repatriate capital and profit from our market?
There is a part of the conversation that is outside of the control of the exchange and perhaps the broader capital market stakeholders. Nonetheless, there is a need for consistent advocacy and engagement on this. Investors must be confident that they can exit the market without friction, especially as there is no friction when coming into the system, and there should not be any friction, imaginary or real, when they are exiting.
The other part of the conversation, and maybe the more important discourse on market access, is about the structure of the market. How smart is it for local and foreign investors to access the market?
What are your major concerns regarding the pre-listing and post-listing requirements from the perspective of reporting standards and corporate governance?
Pre- and post-listing requirements are mainly about the fluidity of information, and this is where hitherto private companies that become public tend to struggle in the preparatory stage of listing and sometimes, some also have teething challenges with the expansive reporting standards in the early days of listing.
It is important to emphasise that markets thrive on information and indeed, the valuation of a financial asset is largely about expectations premised on available information. So, the more we can resolve the information asymmetry, the more efficient the market gets. For instance, there has been tremendous progress in the NGX reporting via the issuer portal, unlike in the past when issuers submitted hard copies. But we cannot afford to stop there.
Reporting is one thing, but perhaps a more important part of reporting is ensuring the quality of reports. The NGX needs to invest in monitoring issuers’ capacities to improve the quality of reporting of companies.
Very few, if at all anyone, would like to invest in a black box. So, the more information investors have on a company, the more liquid the securities of such company get and by extension, the more liquid the exchange becomes.
It’s important that companies adopt integrated reporting, which is an approach that ensures the total reporting of key issues beyond just the financial performance and accounting position of the company. This is where the NGX comes in to enhance the capacity of all listed companies to improve their reporting quality.
Similarly, corporate governance is a critical pillar that determines the sustainability or otherwise of a company. So, the Exchange also needs to look beyond just the surface reporting and ensure companies adopt global best practise using moral suasion and regulation to drive discipline and strict compliance with relevant rules. For instance, how are shareholder representatives appointed on statutory audit committees and how effective is the board’s oversight and delineation of powers between the board and management of listed companies?
How does the exchange monitor related party transactions, which can potentially erode the value for minority shareholders and/or raise base erosion and profit shifting issues with tax authorities? These and other key issues relating to effective corporate governance standards are important areas where the Exchange may need to invest more in not just monitoring but also supporting companies toward enhancing practises and culture for the greater good and long-term sustainability of the companies and the broader market.
As you noted, capital raising is a critical attraction for companies to list on the Exchange. How do you think the Nigerian Exchange and other stakeholders can improve companies’ access to capital through the market?
This is about improving the primary market process. While enhancing secondary market structures and driving liquidity helps to deepen and enhance valuation prospects in the primary market, there is also a need to revisit the structure of the primary market, with the ultimate objective of liberalising market access for greater efficiency.
Technology can play a greater role and the MTN electronic IPO is a good start and validation of the potential of technology in breaking barriers to market access. So, it’s important to reform the structure of the market, with focus on both equity and fixed income offerings.
Another important aspect is the time to market. In today’s world, both the issuer and investors are keen on the time value of money and not only are they keen on raising capital or investing their funds timely – both sides of the table want to get value asap. So, intermediaries in the form of market participants and regulation should not be a hindrance to achieving this objective.
Depending on intermediaries and also sometimes the capacity of issuers, primary market equity transactions can take six months or more; that’s too long for a company that is trying to explore an opportunity set, which would never wait. Sadly, some companies may lose the opportunity before the capital is raised or inflation and/or exchange rate volatility may have distorted the dynamics of the target investment. So a delay in the process of capital raising may render the money useless or at least less useful.
The primary market has been somewhat weak since the 2008/09 crash. Are there still prospects for strong listings of equity and what would be the catalysts?
It’s unfortunate that, unlike many other markets in the world, we are yet to fully recover from the burns of the crisis that happened over a decade ago. This is why I have always said, building investor confidence is like a Rolls Royce, it takes time, but it can be completely eroded overnight, same way gas can quickly evaporate into the air. This is why the genesis of getting the primary market fully back is by rebuilding investor confidence right from the secondary market.
As we do that, we also trace back our steps on initiatives relevant to reforming the primary market for better efficiency, as this is a way to reposition the Nigerian Exchange as an effective source of capital formation and indeed the best destination for listing.
So, the question is: why aren’t the oil and gas companies listed? Is it a concern that they would not be able to raise enough capital locally? I disagree with that perception. Saudi Aramco, the biggest oil and gas company in the world, is listed on the Tadawul Exchange and that is revolutionising liquidity on that Bourse.
It’s a chicken or egg game, and the question is which one comes first. When a credible, large corporation lists on an Exchange, it attracts the right investors and liquidity required. Capital is fluid and flows where returns are most attractive.
Again, there is a strong role for fiscal policy, and this is not just about primary market listings, fiscal policies also play a strong role in deepening secondary market liquidity and the overall depth of the capital market, everywhere in the world, including developed markets, where people theoretically assume full liberalisation, which is against the realities of the markets.
Governments use policy incentives to attract both issuers and investors to the capital market.
For instance, in markets like the US and Canada, on the investor side, there is tax savings when you invest in the capital market, subject to minimum holding period and the ability to recycle the funds within the market for a minimum period.
Interestingly, in some markets, large corporations operating in certain sectors that are designated to be critical to the sustainability of the country, are not allowed to remain private once they grow to a stage, as being public has proven to enhance transparency, reporting practices and sustainability.
So, market participants cannot afford to give up on advocacies of relevant policies, both fiscal and monetary.
One aspect that we always shy away from are governance practices, which again comes to reflect on investor confidence. There have been mixed experiences with equity investment and the worst of the experiences has been those relating to corporate governance failures.
So, it is pertinent for all capital market stakeholders to uphold the integrity of the market and that requires that we all become advocates for good governance, especially as this is important in ensuring the sustainability of Nigerian businesses and it has a strong correlation with value creation.