Arunma Oteh: Zero Tolerance For Impropriety

As Nigeria’s capitals markets celebrate 50 years of regulation, we interview Arunma Oteh, the Director General of the SEC Nigeria. Since taking office in January 2010, Ms Oteh has overseen sweeping changes designed to tighten oversight and restore confidence to the country’s capital markets.

African Banker: What are your long-term goals?

Arunma Oteh: Our long-term goal is to build a world-class capital market that will enable Nigeria to diversify its economy, finance its huge infrastructure needs and enhance its business climate and environment.

If the country is really going to take its place in the community of nations, we must transform the economy and this can be enabled only through a world-class capital market.

The potency of such a market is evidenced by its capacity to serve as an enabler of socio-economic development, foster meritocracy, promote good corporate governance, engender innovation and encourage entrepreneurship, which in turn creates job opportunities that harness the skills and entrepreneurial zeal of the many hard-working people that Nigeria is blessed with.
Evidently, a world-class capital market is absolutely essential to Nigeria’s economy.

Q: How can the SEC Nigeria support the creation of such a capital market?

A: The minimum standard required for the market is integrity. We need investors to feel confident that their investments are protected – that nobody will defraud them of their investments. A world-class market has to be anchored on integrity, on transparency and on accountability. That is where our interest in the highest quality comes in. People must feel that when they invest, their investments are safe. They must feel that their returns evolve from the decisions they have made.

The SEC Nigeria has the critical role of providing a tough enforcement regime – one that will bring people to book when there is wrongdoing.

We have zero tolerance for anything that is improper. It doesn’t matter who you are, we will do the job of enforcement. But you also have to have timely disclosure, so we like a regime that is robust and transparent. People must feel that there is a strong accountability regime. It is important not only to say so but people need to feel it.

It is equally vital that people who have done wrong be made to disgorge any illegally gained profits, so that, if possible, we can make restitution to investors in the future.

What is even more important is the signal that it sends: we are not sitting aside and watching someone do something that is wrong and not doing anything about it. Sending such a signal is crucial. It will dissuade many people from wrongdoing if they know that they will be caught. Behaviours have changed. People are trying to identify their roles and fiduciary responsibilities. Those who have oversight of their companies are more diligent and the management tries to understand its responsibility. People are reassessing internal control systems, because they worry about what could potentially happen to them.

Q: How have you responded to the global financial crisis?

A: The impact of the global financial crisis, while devastating for the Nigerian capital markets, has given the Commission an opportunity to reposition the Nigerian Capital Market. The financial crisis led to a dwindling of government revenues, affected the Nigerian currency, weakened the banking sector and fuelled an unprecedented stock market crash, undermining confidence in the financial sector. In part, the effects of the crisis were however mitigated by the dividends of sound macroeconomic management, particularly the stringent fiscal policies of the government which were embarked upon in 2003. Nonetheless, the Commission’s immediate response was to fast track implementation of the outlined reform agenda based on the findings of the diagnostic review committee.

Q: How has the SEC Nigeria leveraged technology?

A: There is no doubt that technology has completely changed the workings of capital markets all over the world. In today’s world, transactions are consummated in a virtual world of binary codes. It has considerably increased the volume of transactions, accelerated the speed of transaction processing and improved the mode of processing.

Technology is essential to the world-class market we aim to build. Whilst our technology platform is yet to attain the standards we crave, I am happy to state that considerable investments have been made to improve our existing platform for online real-time monitoring of the market and to facilitate e-processing of all market transactions. We estimate that by early 2012, all our analogue processes would have been migrated to an e-processing platform.

Q: Are you planning to expand the range of products in the markets?

A: World-class markets are characterised by rich pools of product offerings. Product diversity will increase our propensity to attract long-term capital internationally and also to retain domestic interest in the market.

We are developing and introducing more products. We believe that by enriching the pool of products, we would invariably address the current concentration on equities, which is dominated largely by banking stocks.

For us, focusing on fixed income, in particular, is extremely important. Fixed income is an asset class that suits asset managers. For example, insurance companies looking to match duration profiles of their liabilities with their assets need fixed income securities. The country has $13bn worth of pension funds available for investing which could potentially be channelled to fixed income products.

Historically pension fund managers favour investing in money market over fixed income markets. However, our outreach programmes are starting to yield dividends as pension fund managers are now gradually diverting their investment to the fixed income market. We remain committed to galvanising sufficient patronage for the fixed income market through our outreach programmes.

Q: Do you favour demutualisation on the Nigerian Stock Exchange?

A: I believe demutualisation confers many benefits on an Exchange. Amongst other things, it allows for more flexible governance structures, encourages greater investor participation in the management of the exchange, promotes operational efficiency, lends itself to increased resources for capital investments, allows for faster and more complete consolidation of stock exchanges to enhance available synergies and more importantly, it permits access to global markets

Invariably, the full value of the Exchange can only be realised when it is run like a publicly quoted company with a properly constituted board. More so, statistics show that the value of stocks listed on such exchanges is geometrically higher than those on exchanges that are yet to be demutualised. Demutualisation is a competitive tool. For demutualised exchanges, the enhanced access to funds allows for investments in technology and people which invariably sustains efficiency on the Exchange and contributes to the appreciation of the prices of its listed equities.

Despite its many upsides demutualisation is not without its challenges. Most notably, is the issue of conflict of interests. Where such exists, it needs to be systematically managed. Prior to demutualisation, the exchange must be assessed for readiness and prepared for migration.

Q: How can you encourage more Nigerians to invest on the Stock Exchange?

A: The potential to grow the investor base is huge. The challenge, however, is to give people the confidence to return to the markets after the shock of the financial crisis. The domestic investors had never known a crisis or downturn, and this dealt a huge blow to confidence.

On one level, we need to reassure domestic and foreign investors alike that the Exchange is well managed and that companies listed on the Exchange abide by the principles of good governance. Also, the market needs sufficient liquidity to facilitate investor entry and exit. Second, we need to boost collective investment schemes. In Nigeria, we have a maximum of 230,000 investors in collective schemes. The implication is that so many investor portfolios are yet to be diversified.

We are very keen to promote collective schemes but we have to make sure that these are managed by qualified professionals. We must make our regulatory framework stringent with excellent trustees, custodians and fund managers. We also need to promote transparency in collective investment schemes.

Q: What will be the impact of Nigeria’s move to international reporting standards?

A: International Financial Reporting Standards (IFRS) are principles-based accounting standards which have been adopted by over 120 countries and territories worldwide. IFRS will replace the subsisting accounting standards known as the Generally Accepted Accounting Principles.

The adoption of International Financial Reporting Standards (IFRS) by listed companies and regulated entities will considerably improve the quality of financial reporting in the country. As the country prepares to migrate to IFRS in 2012, it is my belief that  Nigeria will transition to a reporting regime that augments our world-class capital markets aspirations. The transition to IFRS a laudable initiative and we must welcome it.