Bola Ajomale is pioneer managing director/CEO of NASD Plc, owners and operators of the Over-The-Counter Exchange, a platform for the trading of unlisted securities. He is at home discussing the capital market, both locally and globally. As a Fellow of the Chartered Institute of Stockbrokers and member of the Institute of Chartered Accountants of Nigeria (ICAN), he packs formidable credentials such that when PHILLIP ISAKPA and STEVE OMANUFEME met with him for this interview, he showed deep insight of the market that will help to demystify it for investors and readers; who will find that his engaging explanation helps to provide further education and clarity about the market. His 20-years experience in investment and financial advisory seems to come in handy.
The NASD OTC market opened in 2012 and we vividly remember when WAMCO FrieslandCampina came on board. en we felt there must be something serious going on here. How has the market played out, what has happened and what is happening?
You are right, WAMCO was first security to come to the market and our model and one of the things we are setting out to do is to create an opportunity for investors to get secondary liquidity on their investment, that when you buy into an investment, you should be able to sell it when it is time to take your liquidity. When you are not able to get the liquidity, you will be discouraged to invest again, and secondly, it means you won’t be able to realize value from your investment, meaning you have locked away your money forever. And we came on stream when there was a certain amount of confusion in the market as well, and people didn’t know the real value of what they were holding if they were not on the Nigerian Stock Exchange. And there were quite a few securities that we have and are not one Nigerian Stock Exchange, even till date. We have approximately 200 securities on the NSE; so what we came in for was to give investors secondary value for their shares.
WAMCO was the first, and again what we wanted to do was to organise a market for that to happen, rather than people having to look round for people to trade for them. We decided that lets us create an opportunity where people know where to go, where there is a price quote and can see what is going on. There is transparency, as well as assurances that the broker operating on your behalf is duly registered and would adhere to certain ethics of the profession.
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It was in murky waters, there wasn’t any structure beforehand. Anybody who claimed to know something about securities could pick up your shares and give you any price. We didn’t have and still don’t have a focus on regulating the companies themselves and that is because the companies we are dealing with are all SEC-registered. They are all directly under the supervision of SEC. All we are doing is extending the arm of SEC and making sure that the trades that are executed are done responsibly by the correct parties.
WAMCO was the first to come in and since then we have had 37 other securities come on to list in the market. One of them, Jaiz Bank, has since migrated to the NSE and of the 36 left a few of them came on the NSE. So, there is actually a flow to and fro. You can actually be on the NSE or OTC market. SEC buttressed that by saying if you want to trade security, and it should be registered by SEC and it can only be traded in a public market. So, you have to nd an appropriate market to trade once the security is registered by SEC; and what to do is to make sure that there is a record and there is investor protection around every security traded.
That was well embraced by the whole market. Again, we had a market that had a certain amount of jobbing involved, where people were unregistered agents, so to speak. What that rule did was to eradicate that very quickly, because it tied the hands of unregistered agents from making arbitrary transfers and it brought a lot more transparency to the market. Another thing SEC did at the time was to start monitoring and encouraging quite enthusiastically, dematerialization so you were not transferring paper anymore; no one can take your shares and go and sell it anymore. Everything has got a digital copy with the SEC and it brought a lot more transparency to the investing environment, and again, what that did is that, it made it easier for investors, both locally and internationally, to look at Nigeria and say that ‘if I decide to go into this environment, at least I can see what would happen to my investments’. Before now you couldn’t see, but now you can. That was pretty exciting to start with and then the recession hit, and with the recession, everything slowed down. 2015 was an excellent year for us. We saw a lot of activity. Of course, we are a growth market and the numbers are small but for us, almost every month, we were hitting new heights. In 2016, virtually everything came to a standstill and it was an extremely concerning year because we had fixed customers and trade were not coming; so what we then found out was that in 2017 our market was less volatile in terms of capitalization than NSE, and that is essential because of the nature of the securities and the nature of investors we have.
Rather than having hopeful investors coming to take positions in and out, what we tend to see and what we have seen is that our transactions are less speculative and the investors tend to be less speculative and they tend to take larger chunks; so it is a bulkier market with less frequent movements in and out.
However, if you want to do a transaction, buyers and sellers are always available. We have seen a bit of that, and we think if that is the case, we must encourage it because that is where the market is, it is the comparative advantage we have. So, we see stakeholders coming in to buy ve percent stake in companies, sometimes 10 percent; so that is the kind of market we are.
The logical thing to ask, especially given the lack of information, is how does the market work?
From an investor’s perspective, you can trade your shares in our platform if you have bought shares from a company that went on initial public offering (IPO) but decided not to list itself on NSE, especially if it has more than 50 shareholders, which automatically means it is a public company. The company would, therefore, have to incorporate itself as a public company with SEC and NSE as required. Once you hold shares in a company that is incorporated with the CAC as a public company and registered with SEC as a public security, then you must have a market where you can buy more of these securities or sell. We have created the kind of environment, and how it operates is that an investor would take his shares to a stockbroker and the stockbroker will decide to bring the shares to National Association of Securities Dealers Plc. It is a free entry and exit market. e company itself doesn’t need to register with NASD, just the individual. at is why it is called an investor-led market. It is the investor who decides, ‘I want to trade my shares.’ So, even if you have a thousand units, of Ajomale Plc., you can bring that to this market and from that point on, there would be a price for Ajomale Plc., regardless of whether the company wants to list or not. Those shares must trade in a public platform because you are taking money from the public. Again, what then happens is that we at NASD have a process; as soon as we see those securities, we dematerialize them to Central Securities Clearing System Limited (CSCS) and notify the registrars of the company that from now on any shares that come into market to be traded must be dematerialized and we would be taking a fee from that. We also get in touch with the company as a courtesy to say, from now on, there is going to be a price for your shares, so even if you think the shares are worth 50 kobo and someone out there thinks they are worth ₦2 or ₦3, we will be putting the price of ₦3 beside your shares. That is what we do, whether the company wants us or not.
That is the law of the country and we are as a company obeys the laws of the country. We have found a lot of the time that companies appreciate that and by the time we write them and tell them we would like to sit with them, we take them through their obligations to their shareholders, and those obligations in a public company is quite simple – you need to publish your financial statement, you need to hold an Annual General Meeting, you need to publish your bi-annual account, which are the basic requirements for any public company. Most comply, but there are quite a few that don’t and we continue to encourage compliance. While we can’t sanction companies for not generating information, we certainly work with them in ensuring their information gets out efficiently.
With us, the investor clearly has a market he can trade and is provided with information as we help companies disseminate the information. Anybody who wants to buy can take an assessment and say I like the look of these shares and I want to buy some. From that point on, trading is exactly the same as the established market. What you would do is allow the brokers and coincidentally, we have 200 to 230 security dealers on the market and they are registered stockbrokers in the country and the traders we allow are members of the Chartered Institute of Stockbrokers We are mirroring the system that has been put in place before; we have all our securities start with the code SD, for example, WAMCO is traded SDWAMCO meaning, it belongs in the OTC market. Every security here starts o with SD, and the same rate is traded on any other market. We put in an o er, someone puts in a paid, and if they match, the match is noted and it goes into the Central Securities Clearing System (CSCS) at the end of each day. We don’t have a real-time system; we have an end of day system, a batch system because we see fewer transactions. So, we sell and buy transactions that are reported to CSCS at the end of the day and then we follow the law, transaction plus three-day circle, where CSCS is advised, CSCS then advises the banks and the registrars and on day three, cash moves as well as securities.
Let’s talk about pricing. How is price made and how active is the environment for price making?
We stay away from price movements and making. I’m a firm believer, and I think it is correct, that it is only someone who is prepared to buy or sell, that should be making a price. I’ve long believed that companies can do any of the discounted cash flows and financial arithmetic that they want to, but the real price of a security is sometimes the price someone is willing to pay for it or accept for it. Prices are set by the brokers themselves and what tends to happen and, obviously there tends to be a divergence of opinions – while some people might believe a stock is worth N5, others might believe it is worth N2. A lot of the times, for the more active stocks, we nd that there is a sort of convergence of price but for us, we nd that there is a very big difference in price. When we first started, we thought that the market would be able to reach equilibrium price very quickly and that there would be a price everyone would agree on. What we found out, however, was that we need to regulate price movements within a certain band. At first, we didn’t have price bands, and prices could ow as high up or low down as they could because, in the capital market, people make their prices as they wish. We realized that it left a bit too much in the hands of people who, sometimes, were not prepared to do research and were prepared to favour one side of the transaction over another. In order to not favour either the seller or buyer, we put in a price band, and I think where the market is going to, ultimately, those price bands will be narrowed, and as they are being narrowed we would start encouraging a two-put system. It would be a hybrid of an order-driven market and co-driven market. at is where we are headed, but I think we need to see a lot more activity before we can get there and again, it takes a lot of activity to make the volume. So, it would take us another year to get there. at is how pricing will be made in the future. In the interim, however, we do allow for negotiated deals, where buyers have agreed on a financial basis what they want to do with their transactions; and that is the way for the market itself.
There are many companies that do not see those opportunities that exist on the OTC market. What are the benefits for many companies in the East, for instance, to be derived from coming to this market?
The primary bene t is access to capital. You get long-term capital and some people will say, but I can get the same money from bank loans, and our response to them is that a bank loan is not the same as capital. A bank loan has to be paid back, a bank loan has the interest to be paid and financial institutions that are lending really have an obligation to get the money back, otherwise their books will show that they have lent money and not collected it back. Now, unless you can really predict the gestation period of your business, you are putting yourself under pressure that you don’t want. For example, you are taking a three year loan and you thought your business would be stable in three years and generating enough cash ow, and then it just so happens that it is taking longer, like five to six years, to generate cash ow necessary, then the banks, as soon as you hit year three and have not started paying back, will increase interest rate, taking your cash any way they can. This takes businesses away from running their core activities and turns them to money managers because you have to pay back financial institutions. What coming to a market does is that it gives you shareholders. When you get shareholders, they are in the business with you, taking business risk with you; so when the business succeeds they take a share of the pro t and when it fails, everyone has lost some money together.
You have your risk shared in a capital market and that is what we tell a lot of organisations – share your risk and get more capital, by getting more shareholders to come and join you in your business and who knows, you might even get a shareholder who has an idea of how to make your business succeed more and it is more sustainable for a business.
You mentioned many companies in the East and the problem is not just in the East but everywhere. It is being ready to share – being ready to share control, being ready to share trade secrets, and being ready to look at it as not only your bedroom company that has been with you but as something that can be shared across the country. at is something that a lot of Nigerian entrepreneurs have to get their head around, and not just something to be done on the business’ side but also on the investor’s side as well.
A lot of companies are scared of shareholders associations, and so while we are saying that companies should be a lot more open, what we have seen, especially from this side of the market is that there is a real fear of shareholders associations, as there is a possibility that these associations will be constantly disrupting meetings. I think the SEC is doing something to address that. I think they are trying to encourage responsibility, not just on the part of the enterprises, but also on the investors’ and associations’ part as well. I think that as time goes on, that will improve as well. Going back to your question of how we are attracting them, a lot of organisations like Fate Foundation, Elemelu Foundation, and even Bank of Industry (BoI), hold investors sessions, where they communicate this; like how you can position yourself so that investors will be interested in your company, what quota you will need to work with them, and how to share control and sit with financial directors; that putting your entire family as directors, all of that must change. So, there are a lot of programmes that these organisations are putting together to start grooming and telling these companies that this is what you have to do to attract capital.
What we have decided to do is to work with these organ- isations and associations and put them into a central portal that we have built and then have capital market operators, act as advisors. On the investors’ side, we have lined up private equity and venture capital firms; so, the only investors that will come in are private equity and venture capital firms. What that does is that it ensures that the people coming into your business know how to get in and out of your business without being disruptive. In fact, they know how to help a business grow because they would force a business into growth, and ensure that the people coming into the portal have already been groomed and prepared when they take on a new investor. is would be making direct capital flows into the business more accessible; and that is what we have done and we are launching the portal in March. We went through SEC to get it approved in November, we have signed up PwC, signed MoU with BoI and we have acquired the interest of the other foundations I have mentioned and they have all agreed that they would supply their best alumni, and their best alumni would be the first to come into that atmosphere to take a shot at accessing external funding.
There is a very long process for a private enterprise in Aba (Abia State) for example, to access public money. It is a very big step and I think in the past, we have tried to do this, but the companies are not yet ready to deal with the public. So, there is a mismatch; relationships get strained, the owner of the company doesn’t know why he is paying for an auditor, who is coming to ask him different questions. What we are doing is to say that, if you are not ready to take public capital then you can take private capital. What you need to do to go to the next stage is when private capital is ready to sell we will sell to the public. In the next five to eight years, the company acquires a culture of having third parties; so he now knows that the best way is to have a third party and not necessarily his son or daughter-in-law. It is the best person for the business. I think that is the approach we are taking and we are launching this in March. We have already acquired a lot of interests and I think it will eventually move towards Aba.
Now, if there is an entrepreneur in the Eastern industrial segment that is interested in the portal, we will try and encourage it. It goes through a kind of building process. e company goes through a kind of process because it is a bit of cultural shock. You are running your business and most of your business operations are in your head; that is how most of them operate. We would take them through the process. Most of them are brilliant businessmen and, in terms of business acumen, amazing. ey can manufacture everything you can think of, but in terms of business organisation and reporting to third-party investors, that may be lacking and so, they can’t access funds. We would encourage that they go and get collateral first, and then they can go and access the market and the market is there for them.
What is the route to the market for a company? en speak to the issue of family businesses, how can family businesses understand this and not be scared to go into the market you are offering? You also said pricing is driven by investors, not the company. Can you also talk about investors that are coming in?
We have a two-way entry into the NASD OTC the market.
We have investor-led entry into the market called an admis- sion of securities. In other words, you have 1000 units of any security, you get a broker and if it is not on the NSE, and not on NASD, we create a code for it. In 48 hours, a code is created and it can trade from that point on. Another one is the company bringing itself and telling us that it wants to list; in which case it is the company introducing itself. If the company introduces itself to us, it has obligations to supply us with information we need as a market promoter.
ose are two ways of entering into the market. But worldwide, the line between an OTC market and a listed market is becoming blurred and we are part of that blur- ring process – it doesn’t really matter, you have a security to trade, take it to the market where you can trade it; de- emphasizing the importance of listing and emphasizing the importance of secondary value and price identi cation and discovery. So, the route to public market as a company is to register with SEC and then you bring yourself to the mar- ket. We have minimum requirements; you have to be three years old, a certain share capital, if you are listing yourself you need a minimum of 5% oat rate and so on.
On the issue of family business, a great family business that survived and will continue to survive and be sustained is FCMB; and it is probably one of the easiest to mention. It was a one-man business about 40 years ago, but saw the wis- dom in sharing. Another example is Zenith Bank, the same thing. It was an individual business but it has now grown and spread to other owners and the owners will keep wid- ening the base and the more you widen the base, the more stable the top becomes and also becomes more sustainable. I think convincing the family of the wisdom of it takes work. You can be visionary in your mission to do this particular thing, but you can’t be visionary in how you would sustain it. I think a lot of businesses miss that and you would nd a lot in Nigeria. Companies grow and do extremely well when the founder is alive, and then as soon as the founder dies, it collapses.
Dunlop and Guinness are practical examples, that every business was individually owned, but what they did was they saw the wisdom of sharing spreading ownership. We could have had a company called Gates, but I don’t think the Gates Company would have done very well as Microsoft. So, it is important for the whole market and the nancial industry, to continue to tell businesses that they need to spread and also, that sustainability is required; not pro t- ability but sustainability. Again if you are running a one- man business and is very pro table, you would continue to spend the money. But when you have many shareholders, there is a higher likelihood that you would pour the money back into the business, in such a manner that the business can sustain itself, even in lean times.
What is your take on the role of institutional share- holders, since the activism you talked about is largely driven by them?
Not to lose sight of the question you asked, in terms of compliance, institutional investors are quieter than I sus- pect they should be. But it also depends on the character of the share ownership. If the institutional investor is the ma- jority, then obviously, the company would be doing what the shareholder wants, and that doesn’t mean that is what the rest of the shareholder group wants. An institutional investor might own 10 percent and he has in uence over every decision. It is only when you have institutional inves- tors who own less than two to three percent and there are many of them, that’s when that scenario comes in. Of what are they doing to encourage the company? Having said that, if you have an institutional investor in a company that is failing to comply with one rule or another, that institutional investor will have to quickly make sure that the company complies or they sell out; that I’m sure of. ere is hardly any institutional investor who would condone his company contravening the rule. We have seen the cost of contraven- tion with MTN and other companies; so penalties can come very suddenly and very heavily, and a lot of institutional in- vestors are aware of that. ey tend to comply and tend to encourage companies to comply and the more power they have over the company, the faster the company complies.
It would seem that in our environment, they must have a lot of power?
Yes, they do have a lot of power and again, the institutional investors you and now, are pension funds and the pension funds are really aggressive about compliance. If they nd out that the company is not complying they report it.
What are the challenges the NASD OTC market faces in this tough business environment?
The level of nancial literacy is one major challenge. Looking at the level of entrepreneurs coming into businesses, and to bring the business to the market, we wish and hope that the apex regulators will be more focused on enforcement. There are quite a number of public companies that have been, for some reasons, omitted from registering their shares with the SEC and we need to do a bit more enforcement in shaming those companies. They need to do more to ensure the companies are registered, because right now they exist as legal security, and for as long as they remain legal security they can’t trade in this market, at least not on the public market. ere may come a time when we would create a separate segment for them to trade legal security, and they would be engaged as that since they are not registered with the SEC. Unfortunately, the shareholder is the one suffering for it. We would like to see more shareholders team up, and I don’t mean shareholders associations coming in and disrupting an annual general meeting, asking for audit committee and so on, but shareholders that notice that their companies are not registered appropriately and are breaking the law. e shareholders would be the ones holding the management to task and they tell the management that they are doing something wrong, that they are facing a risk so we would like to see a bit more of that.
If we continue to make rules for every new circumstances things would change and the market would expand. For example, we are talking about crowd funding, and the possibility of having a crowd funding industry in the country. I know there’s a lot of work going on, how we can work it into our current state, how can we make room for crowd funding: do we use the existing law or get a new law for crowd funding from the SEC? I know that is going on, so the earlier we see that, the quicker we see activities on the market; those are just some of the things we thought we could change.
It comes with a financial literacy package and the idea of educating ourselves, and it is part of our duties as operators of the market, to spread the idea of how things would work.
What’s the future like for the market in, let’s say, five years’ time?
Five years is a long time and we have been at this for almost ve years now; so it is not that long. But in ve years’ time, I think we would have fully entrenched the growth end of the market. I don’t see any reasons why in ve years’ time, we shouldn’t have over a thousand securities in various forms trading on this platform. I anticipate, as well, that we would have investors, both local and international, invest- ing on this platform. I suspect very strongly, that we would also have international securities trading on this platform in terms of the number of instruments because as an over-the-counter market, we have traded most, so I won’t limit them by naming them. I think for every instrument traded, there is a demand to trade them in the country and for as long as the operators have the capacity to trade and operate in the country, then they would be traded on the platform.
We are going into our second division now, we are creating a couple of new divisions, and we would probably have more divisions that would be active and we would be looking at other directions to see how we can assist economic growth. Our mission in five years will still be the same, we would always remain focused on creating liquidity for investors and transparency in the capital market.