Friday, February 13, 2009

Technically suspend our capital market regulators

posted by martin oluba

Add your opinion

Varieties of opinion exist as to why we need regulators in our markets. Incidentally, this argument does only exist among those who thread the middle ground of that subject matter. Ideological polarities on the subject on one hand hold that there should not be regulation at all while the other extreme holds that the market needs to be fully regulated. It is this type of reasoning that gives fillip to such myths as the global financial crisis being a consequence of poor regulation and thus needing more regulation to resolve. In the same vein, many also believe that some measure of regulation is important though this group has not been able to clearly define the cut-off points at which further regulation should become unnecessary. Free market advocates equally believe that government intervention should be very minimal and at best non-existent as the market has self-regulating capacity. But even if it does not and the subsisting status quo where there is ample regulation of our various markets is considered most desirable, many at times when we evaluate the roles of the regulators we may be tempted to conclude that there is no need for their existence.

Take for instance central bank's regulatory responsibility which in turn strengthens its capacity to create more money autonomously and through its statutory powers to influence bank credit creation as well as orchestrate moral hazards which over a longer period of time in turn weakens the same financial system. The manners in which these powers are exercised of course underscore the degree of consequent macroeconomic instability that it can trigger and are therefore strongly implicated as the cause of the global financial crisis. Taken alone, should we therefore for this reason scrap central banking? We can also ask same question about the Nigerian Stock Exchange in regard to several of its obvious lapses.

When it was initially confronted with the challenge of resolving the sudden-but-persistent fall in prices of equities the Nigerian Stock Exchange seemingly exhausted its regulatory wisdom when its most strategically proffered solution which never worked was to scuttle the normal market price adjustment process altogether by placing a wedge on their downward movement. When it however became apparent that this 'visible hand' approach could not resolve the crisis, the regulator seemingly succumbed and the solution-hunt was escalated to the level of a presidential advisory committee. But something was fundamentally wrong with that approach. The regulator earns its respect for acting in that capacity because it is able to take well-considered decisions based on its deep understanding of the market. The presidential advisory committee lacks such depth and thus not any better suited than the combined duo of the Securities and Exchange Commission and the Nigerian Stock Exchange putting heads together to come up with a superior solution. More so even from a purely statutory point of view the committee was still not better suited. However, worse still was that the committee was composed largely of fringe participants in the market. The result again was the failure to arrive at any sustainable solution. Two issues here deserve attention. The first is that it is the regulator - in this case, the Securities and Exchange Commission and the Nigerian Stock Exchange - with their deep understanding of the market that ought to provide solutions and perhaps if need be, advise the presidential advisory committee and not the other way round. Secondly, being big time investors in the market does not automatically make one qualify as person with good market understanding for which such person should make the list of advisers in typical crisis situations such as the one discussed. Be that as it may, one recognizes that the opinions, experiences and even the hunches of stakeholders all count and of course are important but that cannot supplant the technical wisdom of core professionals in providing context-specific solutions.

In any case, even if the capital market regulators shirk their responsibilities, there is however at least one area where they have become champions. This is in the area of technical suspension. As is typical of regulators, technical suspension offers another opportunity to frustrate the efficiency of markets. It is worse when (a) the suspension drags for a long period of time say like a year, which is usually the case in our market. (b) It is equally worse when there are no periodic revisions of the price or value of the suspended stock. The fact that the value of a stock is artificially frozen and technically suspended does not mean that the value does not change - either upwards or downwards as the case may be. Therefore if a stock is technically suspended in the secondary market while the underlying fundamentals of such equity is decaying and not improving, those who buy them at the suspended price would have been seriously short-changed under an arrangement arrived at by the regulator itself. The reverse is the case because those who purchase at technical-suspension prices when the fundamentals are seriously improving would have gained much at the expense of the company issuing such equity.

Therefore if you compare the levels of capitalization of WEMA, UBA, Oceanic and GTB as at last week, you will discover that WEMA bank for instance is doubtfully the most capitalized among them. This falsehood could only be possible with a 'technical suspension' shield in the face of market correction: a situation that worsens the market discovery process towards efficiency. Thus while the prices across board in the Nigerian market are widely pointing southwards, movement of prices of such stocks as ETI, African Petroleum, Ecobank Nigeria and WEMA bank have been shielded from the correction. These companies graciously made the list of the 15 most capitalized companies on the Nigerian Stock market as at January 30. A commentator - Jacques Blendou - had asked: 'honestly, what is the purpose of technical suspension in the end, if a stock can remain under such conditions for more than a year? In the end, this really distorts all statistics. Take ETI for instance, it is listed in Nigeria, Ghana and Ivory Coast. On the former two exchanges the price reflects current market sentiments because there, unlike in Nigeria "technical suspensions" do not exist'.

Because the interest and emphasis is obsessively on market regulation and very little on the provision of relevant and timely information for market competition, grievous blunders are committed. You can imagine how misleading it can be for a foreign investor who predicates his investment decisions on such valuations. My thinking is that if the Nigerian Stock Exchange chooses to freeze the movement in the prices of a stock beyond a quarter, it shall develop or agree the criteria for re-evaluating and determining the value of the stock periodically even during the time of suspension. That way, even though the stock's price movement is frozen, investors can make appropriate decisions concerning them. That way, the regulator will be seen as providing relevant and timely information to market participants. It is equally in this regards of providing such information that one needs to stress how important it is for the websites of our market regulators to contain up-to-date information. Understandably their websites command the confidence of investors particularly those outside of the shores of this country and as such should contain information that is truly helpful. For instance, the NSE website states that there are 720 million outstanding shares for Guinea Insurance, while in reality, that company has 5.3 billion shares.

The day our market regulators see themselves less as 'regulators' but more of institutions that further the cause of genuine entrepreneurial competition, the better for our markets. That challenge hold the ace of making the regulators more vigilante and concerned about the same market which they regulate. That responsibility will entail more of supervision, information provision and ensuring that market participants operate on a level playing ground while market freedom is not jettisoned.

Martin Oluba N. Ph.D., DBA is the President/CEO of ValueFronteira Limited. martin@valuefronteira.com