AMCON had purchased the margin loans from banks for about N42.6 billion, but the underlying assets, or collateral are worth only N19.96 billion today.
Before this development, a stockbroker had told INVESTOR in a market related conference that: “If by any means a bank gets information that money was paid into a stockbroker’s account, immediately the bank comes for its margin loan to be repaid.”
He also said that stockbrokers preferred relaxing in their offices and dealing with little funds in their coffers and not going out to look for clients or even to convince clients to buy stocks, because “as soon as such money hits their accounts the bank deducts it as part of their loans.”
The worse of it all, according to him, is that “if there is any way the stockbroker opened another account in another bank, they (banks he is owing) will come harassing them with security operatives, claiming that the stockbroker is owing them and now decided to patronise another bank and abandon them.”
By implication, this attitude made most stockbrokers to relax and just watch development, pending when tangible decisions will be taking in that regards by the Federal Government.
What is margin loan?
Before I proceed, what is Margin Loan? Margin loans are loans taken to finance the purchase of securities, usually the purchase of stock (also known as equity). The regulators normally set the maximum value of a margin loan relative to the value of the underlying securities.
Before the Federal Government’s intervention, among other issues, the purported abuse of margin lending in the Nigerian capital market contributed to the illiquidity that pervaded the stock market, thereby creating doubts on possible full recovery of the market.
What led to Federal Government’s action? … any underlying sanction?
Ngozi Okonjo-Iweala, minister of finance, while announcing the N22.6 billion margin debt relief, noted that it was done in accordance with Section 6(5) of the Asset Management Corporation of Nigeria (AMCON) Act, and in line with the recommendations of the Kingsley Moghalu-led committee on the capital market.
Okonjo-Iweala, while announcing the debt forbearance for the 84 stock broking firms, noted some attached conditions - prohibition from services to AMCON, meaning that brokers benefitting from the relief would not be allowed to provide any professional services to AMCON for a period of not less than three years; there must be greater disclosure by the brokers, which would require firms to reveal to the Securities and Exchange Commission (SEC) any dealings in any security at a minimum of N25 million, executed in a single deal or multiple deals on the same day, on behalf of their clients.
Also, there would be a limit on debt financing that is part of their net capital requirement, meaning that no broker that has received forbearance shall permit his aggregate indebtedness to exceed 100 percent of his net capital; stockbrokers taking the debt relief offer would be required to separate their assets and control for brokerage services and/or future margin facilities through the use of custodians, and these stockbrokers would also be prohibited from taking proprietary positions, or trading on their own account, for one year.
Impact of debt relief on stock market
Amid another positive start this week, the impact of the margin debt relief was already being felt in the stock market, which closed positive last week. In Just five trading day, investors at the Nigerian stock market gained about N57 billion last week following a record rally witnessed at the bourse. Both the All Share Index and market capitalisation recorded new highs due to increased buying pressure that pervaded the market.
The Nigerian Stock Exchange (NSE) All-Share Index (ASI) appreciated by 0.67 percent to close at 26,671.72, while market capitalisation of the listed equities increased by 0.67 percent to close at N8.522 trillion.
What stock broking houses say
The Association of Stockbroking Houses of Nigeria (ASHON) has pledged to check the activities of its members to ensure that the Nigerian capital market does not witness such ugly situation again.
ASHON, working along with other stakeholders in the capital market, said it would continue to initiate and pursue processes, procedures and policies in the areas of risk management, investors’ protection, corporate governance and professional conduct, “to ensure there will be no re-occurrence of the situation that led us to this position.”
Emeka Madubuike, president, ASHON, said they were part of the conditions associating the margin debt relief, saying “the ASHON over the last three years has solicited for the forbearance on the margin accounts of some of our members with banks now taken over by AMCON.
“Our request was based on the premise that for margin accounts where parties made contributions, no party looses more than the contribution it had made. The ‘debt’ on the margin accounts came about from the fact that bank failed to exercise the margin calls as required by the arrangement in the face of falling share prices.”
According to him, “The Association wishes to publicly register her appreciation, on behalf of the entire stockbroking community and indeed the capital market, to the President of the Federal Republic of Nigeria, His Excellency Goodluck Ebele Jonathan, and the Honorable Minister of Finance and coordinating minister of the economy Ngozi Okonjo-Iweala acceding to our request and granting the forbearance. We wish to also appreciate the Governor of the Central Bank of Nigeria, Sanusi Lamido Sanusi, the managing director of AMCON, Mustafa Chike Obi, the director-general of SEC, Arumeh Oteh, the chief executive officer of the NSE, Oscar Onyema, and also the members of the ministerial committee on resuscitation of the capital market chaired by the deputy governor of the CBN, Kingsley Moghalu, as well as our colleagues from Chartered Institute of Stockbrokers and Association of Issuing Houses of Nigeria, for their respective roles in getting this request through.”
Akeredolu-ale Akinsola, general secretary, ASHON, said “this singular act by the Federal Government gives us in the capital market a lot of hope that the market will begin to play its pivotal role as the engine room for the transformation of our nation’s economy.”