Daily Independent Online.
*
Monday, July 26, 2004.
‘Dividend Trust Fund’II stop declaration of
paper profits’
Director-General of
the Securities and Exchange Commission (SEC), Dr. Suleyman Ndanusa, has been at
the helm of affairs at the commission
since 1999 during which the organisation has asserted itself by taking a
firm control of the organised private sector.
This has not been
without its controversies-genuine and spurious.
On July 9, this year,
Ndanusa, in company of his management team, received finance correspondents,
covering the nation’s capital, Abuja, in his boardroom.
Of course, the
occasion was rife for him to respond to current national controversies,
especially the proposed Unclaimed Dividend Commission and some other national
issues. Our Senior Correspondent, Sanya Adejokun,
was part of the entourage, where he captured the proceedings. Excerpts.
Do you think it was a wise decision to
float the Abuja Stock Exchange in the first place?
The
ownership of Abuja Stock Exchange is the government through a number of
agencies-Central Bank, Nigerian Re, NICON and NIDB (now Bank of Industry).
Right now, Abuja Stock Exchange, which is now called Abuja Securities and
Commodities Exchange, which means it can do both securities business and
commodities business.
Bureau of Public Enterprises (BPE) is
the agency that has the responsibility of privatising government investments.
So, the role of SEC is just to licence an exchange and regulate it. What is
happening in Nigeria is a growing wave of deregulation, privatisation and
liberalisation, introducing competition into Nigeria. As far as SEC was
concerned, we did not promote any exchange. We received application in 1996 for
registering a second exchange. In 1996, it could have been Abuja, Port
Harcourt, Ibadan, Sokoto or Kano. The law that came in 1999 allows for multiple
exchanges. Because the law provides that Nigeria can have more than one
exchange, just like Nigeria is having more than one bank. What SEC is charged
with is to register any application that meets the requirements of the law. So,
all we are doing is to implement what the law says. It allows it. So, if an
individual applies tomorrow for a banking licence and he meets the requirements
of the Central Bank, it will be granted. Therefore, if you meet the
requirements for establishing an exchange or a stock broking firm, or an
issuing house, we are under obligation to grant it.
As
at the time Abuja Stock Exchange came in, I am sure those who promoted it took
a commercial decision. Even if it were the government, they must have a reason.
One, because the law allows it, two because they felt Nigeria needed it and it
is going to be a viable enterprise. But, if you are asking us on a theoretical
basis, we believe competition is good. Competition improves efficiency. It
provides more choice and government itself is allowing competition in so many
sectors. For example, in the airline business, we saw what happened with the
Nigeria Airways, we now see what is happening with NITEL in the
telecommunications sector, in the transportation sector, in fact, all the
sectors that the government used to maintain almost natural monopoly. Those
sectors are opened. So, what SEC is saying is that not necessarily for Abuja
but the law allows for multiple exchanges and we believe the more of
competition we have in that area, the better for Nigeria and the better for
Nigerians. It is just like in those days, when we had Barclays Bank and
Standard Bank. Just imagine if the government had said those are the only banks
that should operate in Nigeria. What would happen? That means we would all have
been restricted to only the two or so. But today, we have Guaranty, Zenith,
among others, and the market is competitive. Customers are valued, there is
efficiency and there is improvement in service. You can have 10 bankers come to
your office everyday with each of them marketing their products and trying to
outdo each other. Essentially, what we are setting for Nigeria is a competitive
environment where we get value for money, where we have the best of services,
the best in terms of technology and infrastructure. And the more there is
competition, the more the possibilities of having some of these benefits. That
is the position of SEC.
What are the details about the unclaimed
dividend bill and how long do you think it would take the National Assembly to
pass it into law?
Unclaimed
dividend is presently worth over N3.5 billion in the country. Mr. President has
submitted an executive bill to the National Assembly to be passed into law to
regulate the issue of unclaimed dividend in Nigeria. I know that the bill has
to go through the process. It has to go through so many preliminary readings
and substantive readings and so on. Luckily, I have a former member of the
House of Representatives, as a commissioner here with me, who understands the
process very well. But, I think it all depends on the priorities and how many
draft bills the assembly is working on. It also depends on how much the
Presidency is ready to push but, some bills take less than one month to pass,
some two months while others take almost forever. It is not our bill. It is an
executive bill through the Presidency and not a private bill. I know, however,
that what the bill has already generated, very soon, the National Assembly will
be holding its public hearing on the bill and we hope that before the end of
the year, the bill should pass because it would be good for the market. As for
what it entails, I will just tell you the principles behind those issues of
unclaimed dividend. You know companies do business to make money and any
company that is properly managed and operates very well is also likely to make
profit. And because there are shareholders of that company, profits are shared
while some of the profits are retained for future growth of the company and the
means by which profits are shared to the shareholders is through dividends. As
for public companies particularly, dividend is declared in accordance with the
laws and the substantive law that regulates the declaration of dividend is the
Company and Allied Matters Act, Sections 380 to 385. It makes certain
provisions that one, dividend can only be declared when in declaring that
profit, the company generates some liquidity. So, there is a liquidity attached
to the profit being declared.
Therefore,
you cannot declare dividend if you don’t have cash in your business, you
cannot borrow to pay dividend. So, if you make profit, it should have cash
thrown off for it to qualify for dividend declaration.
Then,
when you declare dividend, there are certain conditions in the sections I
quoted that specify how you go about it. In the past, before you can cash
dividend warrants, you require a second signatory. If you recall, SEC did away
with that requirement because, our uncles, brothers keep going and coming
because of irregular signatures. We felt that was not necessary because the
Cheque Act provides for that. A warrant is like a cheque. You don’t need
a second signatory. So, with the help of bankers, we were able to do away with
that requirement. Similarly, there are a number of short-term problems that we
saw that were making it impossible for people to cash their dividend as at that
time. We decided to address a number of the short-term problems. We realised
that people die and there are no next-of-kin. We also realise that people move
from one location to the other and the change in addresses are not quickly
reflected and, therefore, even if dividend warrants are prepared, there are no
addresses to send them to. We also identify postal problems in Nigeria as an
issue and even the forms that are designed and then, the accounts. Dividend
warrants were only acceptable if you had current account in the banks. Many
people that bought shares during the first privatisation exercise are those
that could not even meet the requirements of opening current accounts. They had
savings accounts.
So,
we had to look at those short-term problems and said why can’t banks
accept warrants into savings accounts so that the illiterates and those who
cannot afford to open current accounts have an access of cashing their
warrants.
All
those short-term measures were put in place. And we have now seen there is a
need for medium to long-term solutions. One of the problems we identified from
the cases we reviewed in the commission is how do we ensure that the profits
that companies make are transparent and genuine. The question was asked because
of the experiences that we had. For example, we noticed that companies are
actually declaring profits and even dividend without having money. So, they go
to borrow, which is illegal. But, they are getting away with it. You and I know
that if a company is making profit and they are declaring dividend, they become
very good companies in our perception. That is the companies that we want to
buy more of their shares because the yardstick is that the company is
profitable and they are declaring dividend, you and I would want to go and buy.
We’ll use our meagre resources to go and buy more of the shares whereas,
the company is declaring paper profits. And then declaring dividend and the
more dividend they declare every year, the more you want to buy their shares.
You know what you are doing? You are just building up a World Com or an Enron
until the day that it will crash.
So,
now we say look, the law disallows it. What can we do to ensure that if you
declare profit and even if it is paper profit, you must cough out the dividend?
You can’t use signatory irregularities again because we have done away
with that. That money as you are declaring it will have to leave you. Today, if
you ask shareholders when a company declares dividend of say N50 million, the
N50 million is supposed to be given out to the registrars so that everybody,
who is an investor, gets his dividend. But, what many of the companies do is
that they pay instalmentally. Out of N50 million, they provide N10 million to
pay first, then maybe after one month, they pay another batch. The law does not
allow for that. Shareholders are supposed to be treated equally. If you have
1,000 shareholders and you declare dividend, the entire naira amount for the
dividend that you declared should be passed to the registrar.
But,
from our experience, that is not what is happening. Secondly from experience,
we also noticed that for companies that do not have the resources and they are
declaring dividend because they know declaration of dividend is good for their
image, they would look at the totality of the naira amount they need to pay if
it is N50 million, they also look at who are the institutional investors among
them, that is the NSITF, NNPC, Pensions Fund and so on, and pay them their
dividend.
Then,
the key shareholders that are very vocal and know their rights like Chief
Asalu, Dr. Farouk and others like that, they will quickly pay their dividend.
But the rest people, they will be using one reason or the other not to pay. The
reason is that for a company that does not have money and have to go and
borrow, it makes sense to borrow less because of the financing payments. So, if
the dividend declared is N50 million, they will go and borrow N20 million if it
can cover for the institutional investors and the noise makers.
The
N30 million they would wait because why borrow when you can use reasons to
delay payment. We believe this is not transparent, that is not accountable and
that should not happen in our market because it is not a good practice.
We
are, therefore, saying that the law should be looked at that makes it very
clear that you can only declare the profit that you actually make, which can be
verifiable. You can only declare dividend that your liquidity can cover and
then, thirdly, the proceeds for any declaration of dividend after a particular
period of time- because if you read the law very well, it says after 15 months
although it did not expressly mention 15 months. But, from what it says, three
months after the notice period from the next annual general meeting, which is
12 months. So, if you add three months to 12 months, it makes 15 months.
Fifteen months after a dividend is declared, it is defined as unclaimed by law.
But, we have 12 years before the dividend becomes statute barred. After the
first 15 months, the company can invest the proceeds of unclaimed dividend in another
business and not in its own business. But, what most of our companies are doing
is to use that money as working capital. In fact, there are fighting between
the registrars and the companies. The registrars want to keep the money but the
companies are saying, “we will cancel your appointment. We want our money
back.” They want the money back either to pay back to the bank the loans
they took or they want the money back so that instead of borrowing for their
working capital, they use it. The law does not allow it. It is very clear. You
cannot even invest the unclaimed dividend in your business. You can only invest
it outside the business.
In
order to check all these things, we said look, why don’t we create a
trust fund. This trust fund is not for SEC. People say all kinds of things that
SEC wants to take our money, the government wants to take our money.
That
is distraction. SEC has never contemplated confiscating unclaimed dividend.
What SEC is saying is that create a trust fund. The trustees are going to be
the stakeholders. The shareholders would be represented, the companies would be
represented, the operator would be represented, and the stock exchange would be
represented. SEC is not even there. What SEC does is to provide the guidelines,
just like we did to pensions fund managers so that we can regulate the
activities of the trustees and of the fund. The benefit is that all dividend
declared after the 15 months that it becomes unclaimed, the money will have to
be remitted to the fund. It is the fund that will establish agencies that will
look for those who have not claimed, meaning that the company cannot now use it
as working capital. This will also cure the problem of declaring paper profit
and paper dividend because there is no incentive anymore to deceive an
shareholder for declaring what you cannot pay. If youdeclare you must pay. You
are either paying to the right person who owns it or you are paying to the
trust fund. And it is the responsibility of the trust fund to look for the
owners. Therefore, no company will have the incentive of deceiving anybody and
this will improve on the transparency et c.
So,
all we are saying is that it is good for the market but the way things are
going and the way it happened, for example, in WorldCom, the company was hiding
its debt. Whenever the accounting period comes, they converted debt to
something else, they moved debt into different kinds of account. The share
prices were increasing but at the end of the day when they got to the wall,
what happened? The company crashed and that is exactly what we want to avoid.
You saw what happened to AP here in Nigeria, how they concealed some debts,
which we investigated. In our investigation, we also discovered that some of
the debts were actually taken to pay dividend. In one particular instance, the
money was even raised but dividend was not paid. So, what do you expect a
regulator to do but to look for a solution that will discourage that. And that
is why we have stuck to our guns, saying that the facts have been laid out, not
by SEC alone. If you recall, the committee was a committee of the market. We
have shareholders- those that decided to join us- we have Central Bank,
Ministry of Finance, we have operators from the market. They worked on the
committee report and when we submitted the report to Mr. President, in his
wisdom, he saw the direction we were going and accepted the report.
But,
let me tell you that internationally, they are not sitting. Countries like
South Africa are not just looking at unclaimed dividend. They are looking at
unclaimed certificates. There are shareholders since the 1960s, 1970s, who
still have their certificates lying somewhere. Today, South Africa is looking
at unclaimed pension benefits. You have to look for solutions for these things.
Just imagine if our parents left us these investments and they are unclaimed,
we should have a central place where these investments are and are making money
for us.
One
other thing the law is going to address is why should you earn N500, 000 in
1985 by way of dividend and if they come to pay you in 1999, they are giving
you the same N500,000? We know the worth of N500,000 10 years ago. Therefore,
we are saying that the trust fund will invest this money. Remove administrative
cost of looking for the owner, but if the owner comes to collect it, then he
gets part of the benefit that is accruing. If you have a son that is three
years old and you bought shares for him, by the time he is 16 in the secondary
school and the parents are no longer there and he goes to collect his unclaimed
dividend benefit, he should not be collecting the old value because of the
present inflation.
But,
companies and the shareholder, who are benefiting from the status quo are the
ones that are misleading the public.
What was your reaction when the president
sent the Bill for Unclaimed Dividend to the National Assembly?
We are really excited at SEC and very
proud that we came up with an idea that became accepted by the president.
B,ut
we are not qualified to lobby the National Assembly to ensure the passage of
the law on behalf of the president. What we can do is that during the public
debate on the bill, we will go there and present a case.
What roles did SEC play in the new
Pension Law?
About
three years ago, when the government set up a committee on harmonising the
public pension sector, we at SEC also set up a committee on the management of
private pension schemes in Nigeria. When we submitted our report to the
government through our minister, the need arose to bring both the public and
the private and crash it into another committee work. The government then set
up the Fola Adeola Committee on Pension Reform. So, you may be right to say
that SEC contributed to the Pension Act. We concentrated on that of the private
while the government was trying to harmonise that of the public. SEC also was
in the Fola Adeola Committee. As a matter of fact, our report was one of the
key documents that the Fola Adeola Committee used in its work apart from our
participation. When the first draft bill came, we reviewed and also made our
comments to the committee and today, if you look at the new bill, we are among
those that they considered in the issue of executive chairman and so on.
What are the efforts you are making to
ensure International Best Practices in the country, especially with the growing
economy?
They
are based on best principles, best practices and the objective principles of
securities regulation.
What
you do is that you bring them and try to localise them. But the standards are
very high. For example, the multilateral Memorandum of Understanding (MOU) that
they are now asking us to sign has a very tall pre-qualification requirement
for you to be able to sign a multilateral MOU that makes you a jurisdiction
that can exchange information with any jurisdiction, a jurisdiction that
operates on best practices that is regarded as competitive, accountable and
transparent.
We
need to sign that. Of about 170 countries, only 46 countries have signed. Most
of the countries are developed. Only South Africa has signed from Africa.
We
are among the very few countries in Africa that have now applied but, the
pre-qualification requirement is such that they would check everything. Not
only SEC law or Investment and Securities Act (ISA) even other laws in the
financial sector, to see whether our laws meet best practices, whether we need
to modify or we need to amend.
So,
basically, SEC is now in the middle of fulfilling those pre-qualifications. We
have been dialoguing.
They
will come to us to establish the veracity of some of our claims in the
documentation that we’ve made. So, best practice has become an
international standard and there is no way we can run away from it and that is
why SEC must be properly empowered, equipped with enforcement power, to
regulate this market in a way that will continue to meet the best international
practices.
