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To strengthen its existing rules, the council of the Nigerian Stock Exchange (NSE) has approved “certain penalties” for dealing with members who violate market rules governing their operations.

The NSE, in a circular to all member firms said, “At its meeting held on 16th March, 2011, the Council of the Exchange approved certain penalties for breach of the Rules and Regulations Governing Dealing Members (Rules).”

The Exchange said it has presented “an exposure draft of the recommended penalties” to market dealers for comments and contributions from last Friday to the 25th of March, adding that “implementation of the recommended penalties will take effect after a review of all comments and contributions.”

Some of the recommended penalties in the draft include issues on unauthorised sale securities, verification of shares in connivance with another, misappropriation of funds, third party transactions, and maintenance of clients’ accounts.

Others include issues on appointment of a compliance officer, rendition of financial statements, and extension of time for submission of annual financial statements.

Sale of fake securities

On the issue of unauthorised sale securities, the NSE said:

“In no circumstances shall a dealing member that sells securities without the authorisation of the owner be permitted to keep any benefits accruing from such sales, including but not limited to bonuses, rights, cash dividends, capital appreciation, and any profit whatsoever.”

It added that a dealing member that sells securities without the authorisation of the owner shall “be required to buy back the securities; and where the sale transaction is N5 million and below in value, be liable to pay a fine of N100,000 and N5,000 for every day from the day of the unauthorised sale until the day the dealing member completes buying back the shares for the owner.

“Or where the sale transaction is above N5 million in value or the dealing member had engaged in such unauthorised sale of securities on a previous occasion, shall have its dealing licence withdrawn by the Council of the Exchange and shall in addition pay a fine of N100,000 and N5,000 for every day from the day of the unauthorised sale until the day the dealing member completes buying back the shares for the owner.”

However, it said that “no dealing member shall have its licence withdrawn unless the Disciplinary Committee of Council has made a finding that the dealing member engaged in the unauthorised sale of securities and has made a recommendation to Council that the licence should be so withdrawn, provided always that during the pendency of any investigative or disciplinary proceedings, the Dealing Member shall be suspended from trading.”

As part of efforts to reduce pressure on the naira, the Central Bank of Nigeria (CBN) will today commence the sale of foreign exchange forwards. The sale was supposed to have commenced last Tuesday but had to be postponed due to the introduction of reserve averaging, which was introduced on March 9.

A statement by Mohammed Abdullahi, CBN spokesperson, while explaining the development on the reserve averaging, said, “Being new to the Deposit Money Banks, they require some time to fully digest it.”

A currency forwards market allows traders to lock in the price at which an entity can buy or sell a currency on a future date. In currency forward contracts, the contract holders are obligated to buy or sell the currency at a specified price, at a specified quantity, and on a specified future date. These contracts cannot be transferred.

Market is ready for it

Akinsowon Dawodu, president of the Financial Market Dealers Association (FMDA), believes it is a good idea, if only the CBN can pull it off successfully.

“Consumers are keen and will be glad to have hedging options. The market is ready for it and I think it will depend on its implementation,” Mr. Dawodu said.

He said the efficiency will determine its outcome, going forward. “The effect should reduce some of the panic buying that sometimes arises in the foreign exchange market and in so doing, it will relieve some of the occasional periodic pressure that the naira finds itself under. In the long run, it should help achieve the aim of exchange rate stability,” he added.

He said the introduction would give customers options to hedge against foreign currency exposure, “which should translate to healthier economic activities and better planning on the part of customers.”

According to guidelines recently released in January by the CBN on forwards trading, all hedge transactions with the customers must be backed by trade (visible and invisible) transactions.

“The maximum tenor allowed for foreign exchange forwards and by implication foreign exchange swaps and cross-currency Interest Rate Swaps is now extended to five (5) years. Authorised Dealers may seek specific approval for longer tenors,” the guideline stated.

According to Mr. Dawodu, the swap option will be useful for corporates, as a five-year requirement would allow market to hedge their exposures further into the future. “In practical use would be for a customer who needs a five-year dollar loan but has naira. He could swap his naira for dollar and pay interest, which will be set every quarter over the period,” he further said.

Razia Khan, regional head of Research, Africa, Global Research at Standard Chartered Bank in London, said the huge spending ahead of the elections next month has been a factor in the strength of demand for foreign exchange.

“For now, we do not expect sustained tightening beyond that level, but much depends on how easily demand for foreign exchange is,” Ms. Khan said.

According to the CBN guideline, all foreign exchange forwards bought from the CBN are not transferable in the inter-bank market while authorised dealers are expected to bid on behalf of their customers. This is in order to discourage round tripping.

Union Bank has signed a memorandum of Agreement (MOA) with the African Capital Alliance Consortium (ACA Consortium ) to invest N112.5 billion ($750 million) in the bank. This is sequel to the earlier announcement that the bank had entered into negotiation with a core investor.

A release from the bank signed by its spokesperson, Francis Barde, added that the MOA will in the main, provide a framework for the process by which the bank will be recapitalised.

“However, the entire process will be subject to the approval of the bank’s shareholders, the Central Bank of Nigeria (CBN), the Securities and Exchange Commission, the Nigerian Stock Exchange, and the Federal High Court,” Mr. Barde further said.

The ACA Consortium is a group of institutional investors led by African Capital Alliance (ACA), a leading independent private equity firm investing in West Africa, principally in Nigeria and Gulf of Guinea.

The ACA Consortium was founded in 1997 with a mission to build Africa’s premier private equity investment firm by mobilising capital, technology, and management resources from local and international sources to unlock Africa’s private sector potential.

The ACA Consortium, which will invest as Union Global Partners Limited, consists of ACA B-Holding Limited, (comprising an ACA managed fund, FMO Netherlands, an international development financial institution, and other co-investors), TRG Management LLP, The Keffi GroupVIII LLC (comprising the Keffi group and other United States-based institutional investors), ABC Holdings Limited (Bank of Botswana) and the Discovery Group.

Status enhancement

The bank said its recapitalisation by the ACA Consortium will enhance its liquidity, corporate governance, and capital adequacy and restore its strong competitive position.

Union Bank is among the banks rescued in 2009 by the CBN, and the chief executive officers sacked. The regulator then injected about N120 billion to save the bank from imminent collapse.

At a meeting held with shareholders in October, the various interest groups in Union Bank agreed that the management should pursue its recapitalisation plans in order to restore the bank to its prime position in the Nigerian banking industry. They agreed that the new core investor should have been in existence for years, with known financial pedigree and global clout that will give the bank leverage in the industry.

“The forum also suggested that the board and management should involve credible shareholders with substantial holdings to be part of the engagement processes with interested investors,” according to a statement signed by Mr. Barde.

This capital injection is so far the most outstanding progress in the effort of the Central Bank of Nigeria to get new core investors for the rescued banks.

Apart from Afribank, which announced the signing of memorandum of understanding (MoU) recently, none of the five other rescued banks have disclosed progress in its agreement with new core investors.

The other banks namely Oceanic Bank, Intercontinental Bank, Bank PHB, Spring Bank, Finbank, Equitorial Trust Bank are yet to announce appreciable success.

Aggrieved shareholders of Bank PHB last week secured a court injunction against the planned sale of the bank to Habib Bank of Pakistan.

Analysts have warned against financial indiscipline in the corridors of power. Speaking against the backdrop of the increase of the benchmark for oil price in the budget last week, they cautioned against fiscal indiscipline.

According to Yvonne Mhango, an analyst at Renaissance Capital, an investment bank, “Strong oil price may lead to fiscal indiscipline. The Senate passed a N4.972 trillion 2011 budget on 16 March 2011, which is almost 20 per cent bigger than that proposed in December 2010. Strengthening fiscal revenue, owing to a high oil price, and the fear that when new governors enter office they will spend aggressively, have raised concerns about loose fiscal policy post-elections, which would be inflationary.”

“This conjecture all depends on how fiscally responsible the president-elect turns out to be. Nevertheless, as fiscal management tends to be less disciplined when revenue flows are buoyant, the risk to inflation is real, which suggests monetary policy should be tightened,” Ms. Mhango added.

The Senate passed the 2011 budget with a total projected spending of N4.97 trillion ($31.87 billion) on March 16, which is almost 20 per cent bigger than the proposed budget in December 2010.

This increase comes on the back of the stronger oil price, which led the Senate to pass the budget at a higher benchmark price of $75 per barrel (bbl), compared with $65/bbl initially.

Fall in windfall oil savings

Apart from the expected rise in inordinate spending, the increase in the benchmark oil price will also reduce the amount of funds that would otherwise have been saved from the strong oil price the nation is presently enjoying. Excesses of the oil windfall are supposed to have been channelled to the nation’s excess crude oil account and help boost the nation’s reserves.

Afrinvest, an investment and finance analysis firm, said the increase in oil price benchmark to $75.0 compared to the proposed figure of $65.0 while maintaining a production level of 2.3mbpd, implies that the rise in total spending is predicated on the bullish outlook for oil.

“This also suggests that windfall oil savings may be lower than proposed, with impact on the potential sources of funds for the Sovereign Wealth Fund,” the firm stated in a report titled ‘Nigeria’s 2011 Budget Figures’.

However, despite the expected increase in fiscal deficit, experts believe the major concern still lies in the economy’s vulnerability to oil price shocks as government revenue continues to be hinged on petro-dollar inflows.

The budget

The approved budget shows a 17.9 per cent increase compared to the proposed budget, but a 5.3 per cent reduction compared to the total approved spending of N5.25 trillion ($33.67 billionn, including supplementary appropriation) for the 2010 fiscal year.

The budget allocates 31.4 per cent of total spending to capital expenditure, lower than 37.9 per cent for 2010, while the share of recurrent expenditure was higher than 62.1 per cent in the 2010.

Compared to the initial proposed figures, the approved budget shows a 55.4 per cent increase in capital expenditure and marginal reduction of 0.6 per cent in recurrent spending. However, there was a marked decrease of 21.6 per cent in capital spending, compared to 2010.

In terms of expenditure mix, the approved budget allocates 31.4 per cent of total spending to capital expenditure, higher than the initial proposed 23.8 per cent but lower than 37.9 per cent for 2010, while the share of recurrent expenditure was moved downwards from the proposed 76.2 per cent to 68.6 per cent, but higher than 62.1 per cent in the 2010.