By Victor Ogiemwonyi
About twenty years ago, Professor Chukwuemeka Charles Soludo, (now civilian Governor of Anambra state) was Governor of the Central Bank of Nigeria (CBN).
He started a revolution that positively changed the Financial landscape, in Nigeria by strengthening our Banks and the Banking system.
He had insisted that the minimum Capital for Banks must now go up to N25Billion, taking it from a current capital requirement, of just
N2 Billion. This was a very high hurdle for many Banks at the time, to climb. Those who were obviously, not going to make it, critiqued the policy. They said, the “one size fits all “ policy, was bad. They argued that there should be room for different sizes of Banks, small, medium and large. Like what has emerged now, after many years.
Professor Soludo’s insistence on that shock treatment, was valid. If you gave any room for variation of the Capital requirement, at the time, many of the Banks will not do the right thing. They will shape shift, and nothing will be achieved.
The Banking Industry at the time, had many shaky Banks, and were a risk to the entire Financial system. The indiscriminate issuance of Bank licenses, at the time, resulted in 89 Banks, most of them glorified Finance Houses. Worse still, many of them were floated with debt Capital, making them highly leveraged.
The top 10 of the Banks, were responsible for 90%, of the deposits and profits of all the Banks at the time. There was not enough Capital, for many of them to finance any business. This was a disaster, needing urgent attention, and quick rectification, before it throws, the Economy into turmoil. There was need, to have solid Banks that will finance the Economy.
While there were good arguments, for allowing for small, medium and large Banks, drastic action was needed at the time to ensure success with the recapitalisation goal.
There were also options, for Banks, who could not raise money, to merge with other Banks. But, the mentality of everyone wanting to own their own Bank and remaining CEO did not allow some, to see this option.
The N25 billion minimum Capital forced many of them, to either raise money or merge with other Banks. The capital raising option, from the Stock Market, was the best route, for many. It was a bold action, that expanded our Capital Markets and also allowed Nigerian investors, to share in the growth and the profits, the Banking industry represented at the time.
Those who used the Nigeria Stock Exchange to raise the needed Capital, had a wide range of investors, both domestic and international.
It was also a test for our Capital Markets and specifically for the Nigeria Stock exchange, to see how they will cope. Up to that point, the market, has not raised anything close to what the Banks needed to raise. The Nigerian Capital Markets and the Nigeria Stock exchange, vindicated themselves, with the large sums that was raised later .
There was however, one major loop hole, that was to bring tears and ramifications of great proportion with implications, later, and still reverberates today.
At the time, it was customary for Companies, that was having any corporate action, that may likely influence their share prices, to be suspended from trading, until the corporate action was over. This was so for years, so it was not something new, or any deliberate action to manipulate the market. Nobody at the time, saw how the smart Alecs, will use it. The CBN, further enabled this, because of the long drawn out, Capital verification exercise, that elongated the issuing time table, sometimes adding several months to the offer period, before the issue can be finalised and the new shares listed, for investors to be able to sell, if they wanted to.
This loop hole, created with this “time lag widow,”….suspending
Trading …on the shares of the Companies raising money, allowed for the creation of “Bubble Capital “ …it allowed those share prices, to rise above their real valuation and in some cases, allowed for deliberate inflation, of prices of those shares , giving unscrupulous insiders, opportunity to take advantage.
A good example of this manipulation of share prices, was a case of the Bank, that calls itself, the West Africa Bank. It set out to raise $2.5billion at the time. Though the market was booming, it was obvious that the N38 share price, set for this Offering was inflated. There were claims that this particular Bank, had previously bought a lot of empty Banks, to add and inflate its Balance sheet, to appear big. The Bank, even built and counted as branches, “match Box like” Bank offices, they called Branches.
The underlying Fundamentals for this Bank, could not support the N38 price valuation. Because of the very high price, that these shares were issued, discerning investors, avoided buying in, with the result that, the offer actually failed, but for, the unscrupulous nature, of the smart Alec “Group lead” at the time, they had to do anything and everything to conclude the offer. They were already sucked in, and no way out. To start the manipulation process, for the Bank’s share price, they plundered their Nigeria’s Subsidiary’s Depositors Fund, by taking out over N35billion, first to acquire the existing shares of the Bank in the Stock market, thereby pushing the price to the unsustainable level it reached. They did this, by recruiting some StockBrokers and giving them non – recourse loans from this Depositors funds, to acquire and warehouse shares bought on their behalf. When, they could not get enough subscribers, after the offer closed, they took more money from the Depositors Funds, to buy some of the new issued shares, to enable them reach 30% subscription level. This was to ensure, that the prescribed threshold, by the Securities and Exchange Commission ( SEC) for success of the offer, was reached, and the offer declared successful.
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This was pure securities fraud.
Using its subsidiary’s Depositors Funds, to acquire its own shares, is not allowed. When the offer closed, the world was experiencing a financial crisis, and the $2.5billion could not be raised. They now had their own crisis, because they needed to return Depositors money they used in “under writing” their own issue and the shares they bought and warehoused. As they sold down their warehoused shares rapidly, they forced down the price to N8, within 180days of finalising the issue. This created huge losses, for the investors who bought their shares. Even the Bank, was unable to completely sell down their own warehoused, shares. It remains in their Books , and is described as “ Other Nigerian Legacy Assets” in their Balance Sheet..whatever that is.
Let me state, that what is written here, is not fiction. It happened exactly, as described here. It is also now very well documented with a Board ordered forensic Audit report, from EY the Accountants. Even, some Court filings exist. The Arrow head of this crime was identified. But those who could do something about it, at the time, chose not to do anything.
I am hoping that, the SEC and EFCC will someday realise that, this is Securities fraud on Nigerian Investors, and is also criminal. It needs to be properly investigated, even if, not for prosecution, but a proper study, to understand what happened and ensure it never happens again, particularly as we are going into another season of Bank recapitalisation.
There are still victims in the investor community that were hurt, some of them have never returned to the market.
Those who bought shares valued at N38,
saw them rapidly fall to N8 within a very short time. The shares even traded to, as low N5 at some point. Even today, 15years after, the price, is yet to get to N38 per share.
Investors are still nursing their losses.
I am glad for the new Rule change, that has allowed for continuous trading on shares, even when Fund raising was going on. This Rule change, has made all the difference, by ensuring that the recent Fund Raising by Banks, is going on well, while trading is going on, with their shares in the Market. This has allowed, orderly capital raise and ensured, so far, that none of the Banks, raising money from the Stock market, has seen its share issue prices, rise more than 10% of the issuing price . This is made possible, as Stock Brokers and Traders in the market, are ready to correct any irrational exuberance and price bubbles. Closing this loop hole, made all the difference.
Victor Ogiemwonyi
Is a retired Investment Banker, and writes from Ikoyi, Lagos.