October 10, 2013 10:46 pm

Nigeria Stock Exchange cleans up its act

A view of the trading floor at the Nigerian Stock Exchange©Reuters

Cleaning house: strong corporate governance is actively encouraged

When Oscar Onyema took over as chief executive of the Nigeria Stock Exchange in 2011, the second-largest bourse by market capitalisation in sub-Saharan African, many of the companies listed on it were a byword for scandal and corruption.

Three years on, the former Wall Street executive is cleaning house, winning praise at home and overseas for his fight against malpractice. Over the past two years, he has focused on rebuilding the corporate governance of the exchange itself.

Now, he is taking a further step. “We are moving beyond the exchange, and we are saying to the companies: ‘If you are listed in the exchange, you need to have strong corporate governance,” he says in an interview at the exchange’s headquarters in Lagos. “We are driving a transformation,” he adds.

The exchange will soon launch a corporate governance index that will give companies a score based on the quality of their corporate governance; integrity; compliance; and the reputation and quality of their directors. The best companies will list on a new “premium board” to reflect the fact they meet the “highest” standards.

The exchange has already invited 20 companies to volunteer to be scored and join the premium board. “To qualify to be in the premium board you should be on the index and have a minimum market capitalisation of $1bn,” Mr Onyema says.

The premium board could do “wonders” for Nigeria companies, the chief executive says. “[Membership of the premium board] means that you are one of the big boys ... it would reduce the cost of capital,” he says.

The talk of corporate governance, benchmark indices for best practice and premium listings is a far cry from the situation Mr Onyema inherited three years ago.

The reputation of the Nigeria Stock Exchange suffered a big blow after the global financial crisis, when local equity prices plunged, and several scandals hit listed companies and the bourse itself.

After an investigation, Nigeria’s Securities and Exchange Commission (SEC) told lawmakers about “financial skimming, misappropriation, false accounting, misrepresentation, questionable transactions and financial gratification”. In one case, the SEC found the exchange bought a yacht, which it gave away as an award for long service. Yet, “there are no records of the beneficiary,” the regulator said. In another case, the exchange bought 165 Rolex watches at a cost of nearly $1m. More than half of the fashionable and expensive wristwear went missing.

As a result, the regulator fired the previous managers and brought in Mr Onyema, who was once a senior executive at the New York-based American Stock Exchange (now part of NYSE Euronext), to restore confidence and rebuild the market.

The reforms he and the SEC implemented have won back investors’ trust, especially domestically. While foreign investors still dominate trading volumes, local investors have been responsible for almost half of the trades so far this year, up from a low point of 30 per cent in 2011.

Nonetheless, the market is still far from its potential. At about $70bn in capitalisation – or just 25 per cent of the country’s gross domestic product – the bourse is far behind the more than $900bn of the Johannesburg Stock Exchange. Local businessmen and bankers say that, in spite of all the effort, few companies have listed their shares in the market over the past three years. Even the government is failing behind – when Nigeria issued sovereign bonds in US dollars, it listed them in London, not Lagos.

But Mr Onyema believes that his push for better corporate governance, together with a new electronic trading system, will soon kick-start a new period of growth.

“Our goal is to bring this market to $1tn market capitalisation,” he says, adding that he hopes that in a decade the Lagos-based market will join the club of 22 exchanges with a market capitalisation above $1tn.

The new electronic trading system, called Nigeria Stock Exchange X-Gen and based on the Nasdaq OMX Group’s X-stream trading solution, will be critical for the growth plans. The new system, which will be up and running by the end of the year, will cut time delays and simplify processes, while also allowing the launch of new products. After introducing exchanged-traded funds (ETFs), Mr Onyema will target over the next three years options on equities, interest rates futures and, above all, futures contracts for the naira, the local currency.

“Foreign exchange is a big part of the business costs of local companies, so a product to hedge the naira would be very helpful to them,” he says.

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