In review: capital markets law in Nigeria – Lexology

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An extract from The International Capital Markets Review, 11th Edition
Introduction
The Nigerian capital market is regulated by a panoply of laws, chief among them being the Investments and Securities Act 2007, as amended (ISA). Divided into 18 parts, the ISA establishes the Securities and Exchange Commission (SEC). The SEC is the primary regulator of the Nigerian capital market and has the power, inter alia:
Consequently, the Securities and Exchange Commission Rules and Regulation 2013 (the SEC Rules), drawn up by the SEC pursuant to its powers, is considered the market’s bible. The SEC periodically releases new rules to complement the SEC Rules.
Two other key bodies established by the ISA are the Administrative Proceedings Committee (APC) and the Investments and Securities Tribunal (IST). The APC is a committee of the SEC established as a quasi-judicial fact-finding body. Essentially, it provides the avenue for market operators against whom complaints have been made (by investors and the SEC alike) to be heard prior to the determination of the complaint by the SEC.⁵ It goes without saying that a decision of the APC will be regarded as a decision of the SEC, and an appeal can therefore be made to the IST.
The IST is established under the ISA to adjudicate on any question of law or dispute involving:
Decisions of the IST are to be enforced in the same manner as a decision of the Federal High Court (FHC). Appeals arising from decisions of the IST lie at the first instance to the Court of Appeal.
The Companies and Allied Matters Act (CAMA)⁷ is secondary in its applicability to the capital market. CAMA governs the incorporation of companies with the Corporate Affairs Commission (CAC)⁸ and, in some instances, the operations of these companies. To the extent that these companies are participants in Nigeria’s capital market, CAMA also applies to them. For instance, Chapter 8 and Chapter 9 of Part B of the CAMA make provisions on the nature and types of shares and bonds to be issued by companies generally. Some of these securities end up being offered and traded in the Nigerian capital market. The extensive modifications by CAMA to the now repealed Companies and Allied Matters Act 1990 that may impact the Nigerian capital market include:
Undoubtedly, there are other sector-specific legislation with a certain degree of relevance to the capital market. The most important of these are those relating to banks⁹ (the Banks and Other Financial Institutions Act 2020), pension fund administrators¹⁰ (the Pension Reform Act 2014) and the Central Bank of Nigeria (CBN)¹¹ (the Central Bank of Nigeria (Establishment) Act 2007).
There is no difference in the regulatory treatment of foreign investment in the capital market when compared to the regulation of local investment in the market. Dealings in foreign exchange are regulated by both statute and the CBN, through regulations, circulars and directives. A key legislation is the Foreign Exchange (Monitoring and Miscellaneous Provisions) Act¹² (the FEMM Act).¹³ Foreign exchange (FX) transactions are also regulated by the Foreign Exchange Manual (the FX Manual), which was revised in 2018 to conform with the foreign exchange practices implemented by the CBN prior to 2018.
There are no regulatory restrictions on foreign investment in the capital market. Pursuant to Section 26 of the FEMM Act:
Nevertheless, a foreign investor seeking to invest in the market must ensure that any foreign currency to be invested in the market is imported into Nigeria through an authorised dealer.¹⁴ The FX Manual now permits authorised dealers to issue an electronic certificate of capital importation (eCCI) to the investor. The CBN initiated the development of the eCCI platform in 2016 to address the problems posed by the issuance of paper certificates of capital importation such as the transfer of paper certificates from one foreign investor to another or replacements of lost CCIs. The eCCI platform for the deployment of eCCIs was finalised in 2017. With the revisions to the FX Manual in 2018, eCCIs will now be issued to foreign investors purchasing Nigerian treasury bills and Nigerian government bonds,¹⁵ and the CBN has introduced a master eCCI for global depositary receipts. Authorised dealers are expected to issue master eCCIs in the amount of the foreign exchange inflow to depositary banks. The eCCI guarantees ‘unconditional transferability of funds, through an authorised dealer in freely convertible currency, relating to dividends or profits (net of taxes) attributable to the investment’.¹⁶ Similarly, foreign exchange purchased from the Nigerian Autonomous Foreign Exchange Market¹⁷ can be freely repatriated from Nigeria without any further approval. The freedom to repatriate must be exercised in accordance with the provisions of the FEMM Act and the FX Manual to avoid running foul of the forex repatriation regime.¹⁸
The SEC Rules also require foreign portfolio investors to appoint a custodian and to file a copy of the letter of appointment of the custodian with the SEC within 10 working days of making the appointment.¹⁹
Nigerian law requires a foreign company seeking to operate in the Nigerian capital market to first incorporate and register a Nigerian company with the CAC.²⁰ Subsequently, the company must register with and obtain the relevant licences or authorisations from the SEC before it can commence operations as a capital market operator in the market.²¹
Similarly, a foreign company can only apply and be registered as a dealing member of the Nigerian Stock Exchange (NSE) (and other securities exchanges) upon registering and incorporating a separate Nigerian entity with the CAC.
Much like foreign investments, foreign issuers can issue, sell or offer for sale or subscription securities to the public through the Nigerian capital market. Securities may be denominated in naira or any convertible foreign currency.²² The SEC Rules require foreign issuers to file an application for the registration of their securities with the SEC, and the application must be accompanied by a draft prospectus.²³ Importantly, under the Nigerian Exchange Group Plc (NGX) Rules, foreign issuers may apply for the listing of their sukuk and debt securities on the NGX.
Foreign issuers may, at the discretion of the SEC, be exempted from certain securities registration obligations under the SEC Rules if it is ‘in the public interest and where reciprocal agreement exists between Nigeria and the country of the issuer, or the issuer’s country is a member of the International Organization of Securities Commissions’.²⁴
In the past three years, Nigeria has witnessed the rise of several fintech platforms that enable retail investors to have access to both local and foreign stocks. Until 2021, their activities have been unregulated. In 2021, the SEC issued a ‘licence as Digital Sub-Broker/Sub-Broker Serving Multiple Brokers through a Digital Platform to one of the fintech platforms.²⁵ This was after the SEC had issued a circular warning the public that ‘only foreign securities listed on any Exchange registered in Nigeria may be issued, sold or offered for sale or subscription to the Nigerian public.’²⁶ These fintechs have now also come under the scrutiny of the CBN, due to the FX element in their operations. The CBN recently obtained freezing orders against the bank accounts of some of them on the basis that they procured FX in the Nigerian FX market to make purchases of shares, which under extant CBN circulars²⁷ are currently listed as items not valid for FX in the Nigerian FX market.
Nigeria operates a common law system but with a federal written Constitution²⁸ as the basic law. The Supreme Court of Nigeria sits atop the hierarchy of courts, with the Court of Appeal on the next rung. The high courts and National Industrial Court are on the next rung; these courts are referred to as superior courts of record. Of importance to the Nigerian capital market is the Federal High Court or FHC, which has 36 divisions across the country.
The FHC has exclusive jurisdiction over matters:
Most operators in the capital market are limited liability companies incorporated under and regulated by the CAMA. It is arguable that the FHC has jurisdiction over matters that touch on the operation of these ‘CAMA companies’, even if those matters occur in the capital market. Points (b) and (c) above are also relevant to capital market disputes because the SEC, which is the main regulatory body of the capital market, is an agency of the federal government.³⁰
The FMDQ Securities Exchange Limited (the FMDQ Exchange) is the largest securities exchange³¹ in Nigeria by trading volume and focuses on debt and derivative products. The FMDQ Exchange’s listing requirements are similar to those of the NGX, but it is dissimilar in its admission of commercial papers for listing. Furthermore, unlike the NGX, the FMDQ Exchange currently operates only one quotation list. Like the NGX and in furtherance of Part XIV of the ISA, the FMDQ Exchange established its investor protection fund in 2017.
The FMDQ Exchange also has a thriving derivatives platform and plays a vibrant role in the trading of over-the-counter (OTC) FX futures.³² In 2016, the FMDQ, in collaboration with the CBN, launched the naira-settled OTC FX futures. The FMDQ, following a CBN circular dated 21 April 2017, also developed the Nigerian Autonomous Foreign Exchange Rate Fixing (NAFEX), which is a fixing methodology for the settlement of certain FX derivatives in the Nigerian market.³³ Generally, and with the supervision of the CBN, the FMDQ is responsible for the registration and operational regulation of FX options and will spearhead the development of other risk management products and guidelines.
In 2019, the FMDQ Group (FMDQ) underwent a series of restructurings that resulted in the first vertically integrated financial market infrastructure group in Africa, FMDQ Holdings PLC, made up of several of its wholly owned subsidiaries: FMDQ Securities Exchange Limited, FMDQ Depository Limited, FMDQ Clear Limited, FMDQ Private Markets Limited and iQx Consult Limited. With the restructuring, FMDQ obtained the requisite approval of the SEC to reflect the new status upgrade of the FMDQ Securities Exchange Limited from an OTC market to a securities exchange. FMDQ Clear Limited was also registered as the first central and only clearing house in Nigeria. FMDQ Depository Limited will provide clearing, custodian and settlement services. FMDQ Private Markets Limited will operate a restricted access portal, the Private Companies’ Securities Information and Distribution Portal, an information repository for the recording of activities of private companies in the Nigerian debt and equity capital markets. Through iQx Consult Limited, FMDQ seeks to be a ‘leading provider of financial markets digitilisation in Nigeria by 2025’. Equity securities were not admitted for listing before the restructuring; that is, when FMDQ Securities Exchange Limited operated as a hybrid, both as a traditional securities exchange and as an OTC platform.³⁴ However, with its new status, it appears the FMDQ Exchange will provide a platform for trading not only equities, but also commodities.
A very significant participant in the Nigerian capital market is the NGX.³⁵ Established in the wake of Nigeria’s independence from British colonial rule, the NGX (formerly the Nigerian Stock Exchange (NSE)) operates an automated trading system and is, in conjunction with the Central Securities Clearing System Plc (CSCS), capable of offering electronic clearing, settlements, delivery and custodial services. Headquartered in Nigeria’s commercial capital, Lagos, the NGX has 13 other branches in the country, where trading occurs simultaneously.
The NGX currently operates the Main Board, the Premium Board (which was introduced in August 2015) and the Growth Board (which was introduced in the first quarter of 2020).³⁶ The Premium Board is for gold standard companies that successfully meet the most stringent standards of the NGX. Conversely, the Growth Board is designed to encourage growth-oriented small and medium-sized enterprises and start-ups with good corporate governance standards to list. Importantly, all trading and listing on the NGX occurs through dealing members, which are stockbroking firms so licensed by the NGX. Investors are required to open securities accounts with the CSCS.
In March 2021, the NSE was demutualised, which resulted in the creation of a leading integrated market infrastructure in Africa – NGX. The group provides a wide range of services through its wholly owned subsidiaries: Nigerian Exchange (NGX) Limited, the operating exchange; NGX Regulation (NGX REGCO) Limited, the independent regulatory arm of the Exchange; and NGX Real Estate (NGX RELCO) Limited, the real estate company.
As mandated by the ISA,³⁷ the NGX has maintained an investor protection fund (IPF) since 2013. The IPF is administered by a board of trustees subject to the regulatory supervision of the SEC. The purpose of the IPF is for compensation of investors’ losses arising from:
Claims can be made against a dealing member, and the current maximum amount an investor can receive as compensation in a claim against a dealing member is 400,000 naira.³⁹ The SEC launched the National Investor Protection Fund (NIPF) in 2015. The rules of the NIPF were finalised and became operational in June 2017. The launch of all of these funds (i.e., the IPF, the NIPF and the FMDQ investment protection fund) is in furtherance of the investor protection mandate of the 10-year Nigerian Capital Market Master Plan launched in 2015.
The NASD provides a formal OTC trading platform for unlisted securities of public companies. Unlike the FMDQ Exchange, equity securities can be traded on the NASD platform.⁴⁰ Securities traded on the NASD are categorised as ‘NASD Blue’ (shares with a history of sound financial performance), ‘NASD Pink’ (shares of companies that do not comply with the minimum disclosure and reporting requirements of the SEC and NASD) or ‘NASD Red’ (shares of companies that fail to provide NASD with information).⁴¹
There are a number of proposals to establish exchanges for commodities in addition to the Nigerian Commodity Exchange (NCX) and the AFEX Commodities Exchange (AFEX). The NCX was set up as a stock exchange in 1998 and converted into a commodity exchange in 2001. Major commodities currently being traded are agricultural produce such as cocoa, sesame seeds, palm produce and cowpeas. The NCX announced in 2018 that it would extend the use of its platform to solid mineral-related products. The NCX was the only commodity exchange in Nigeria until 2014 when the SEC registered the first private sector commodities exchange, AFEX.⁴² The SEC granted a full operating licence to the Lagos Commodity and Futures Exchange (LCFE), a platform promoted by the Association of Securities Dealing Houses of Nigeria, on 14 June 2019.⁴³ The LCFE currently provides a platform for trading in four asset classes – agricultural commodities, solid mineral commodities, oil and gas commodities (including by-products), and local and foreign currencies.
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