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Introduction

The Nigerian capital market continues to play a significant role in opening up access to capital for private sector entities in the economy. Despite the progress that has been made in the market under the guiding supervision of the Securities and Exchange Commission (SEC), there has been a continuous demand for reform of the foundational capital markets law: Investment and Securities Act 2007 (the Act). Several attempts at amending this law have been made, the latest being the passage of the Investment and Securities Bill, HB1787, June 2022 (the Bill). While the Bill is yet to be signed into law by the President, it is important to consider some of the important reforms and amendments that are proposed in it.

On the background of challenging conditions for private and public entities trying to access the international capital markets, there is some urgency to some of the proposed reforms in Nigeria’s domestic capital market. In this article, we highlight some of the important amendments proposed under the Bill and their estimated impact on the different capital market stakeholders, if or when it is signed into law.  

Objectives, Powers, and Functions of SEC

•    Section 3(2) of the Bill specifies the expanded objectives of SEC to include the protection of the capital market from market abuse and insider dealings practices, unfair trade practices, and overall reduction of systemic risk in the capital market, among others.
•    Section 3(3) of the Bill enumerates new products/markets which will be regulated by SEC to include market venues, derivative products and markets, collateral management companies/warehouses, and the restriction of mergers and acquisitions supervision to only public companies.
•    Section 3(4) of the Bill further proposes an expansion of SEC’s sanction powers, which will include:
i.    the power to appoint Independent Directors for the Board of public companies that SEC has intervened in or taken a regulatory action against;
ii.    the power to place directors of public companies on probation;
iii.    the power to remove any person associated with misconduct or mismanagement of a public company or capital market operator; and
iv.    other widened investigative and prosecutorial powers, when investigating capital market infractions.

Broader Capital Market Infrastructure

Section 27(1) of the Bill delineates registrable securities exchanges into two types, namely the composite, and non-composite, security exchanges. While composite exchanges will be able to facilitate dealings and trading in all different kinds of securities and financial products, non-composite exchanges will only be able to facilitate the dealing or trading in a specific security such as equities, debt instruments, commodities, etc.

Section 28(4) of the Bill improves the registration process by directing SEC to provide feedback and the right of hearing to unsuccessful applicants that have applied to register an exchange. Some additional changes under Section 29 and 30 of the Bill include (i) the requirement of SEC’s approval for the appointment of a new CEO or principal officers of a securities exchange, and (ii) imposition of responsibilities on securities exchanges to ensure the prevention of systemic risks, and to promote market confidence.

Another innovative addition is that where the listing rules of a securities exchange are to be amended, Section 32(3) of the Bill introduces deemed approvals after the failure of SEC to approve the amended rules within 20 days. Notably, the penalty for a securities exchange failing to comply with SEC directives has been increased under Section 35(3) to N10 million, with a further daily penalty of N500,000 for continued non-compliance.

Section 41(1) of the Bill introduces a regulatory framework for the registration and supervision of Financial Markets Infrastructure. Financial Markets Infrastructure is defined in the Bill as, “…any entity set up to carry out centralised, clearing, settlement, caching or recording activities, or provide a platform for trading securities, and, includes trade repositories, securities exchanges, central counterparties, central clearing houses, central securities depositories, and securities settlements systems”.

The SEC’s supervisory powers over financial market infrastructure entities include the approval of the rules for the discharge of their roles in the capital market, and the approval or withdrawal of approval of their registration with SEC.

Applicability of Insolvency Laws

Sections 45(1) and 46 of the Bill proposes the exclusion of general insolvency law rules to market contracts and entities that fall into certain categories. Essentially, the proposed amendments seek to give precedence to the provisions of the Bill over other insolvency laws in and outside of Nigeria, where insolvency proceedings are taking place against a listed capital market participant that is a member of a Nigerian securities exchange or financial markets infrastructure. For instance, certain market contracts that are in effect will not be jeopardised by insolvency proceedings brought against a listed entity.

However, the proposed amendments also have exceptions. For instance, where a transfer order is entered by a participant after a winding up order was made by the court in respect of the participant, or a creditors’ voluntary winding up resolution has been passed, the insolvency protection under the Bill will not apply (Section 55(1)).

Increased Penalties

Section 61(5) of the Bill increases the proposed penalties for non-compliance of any entity with the requirement for registration of capital market operators. Under the amendments, the possible criminal sanction for non-compliance is a fine of N10 million or three years’ imprisonment, or both. Alternatively, SEC is permitted to impose a penalty of N10 million and a further daily penalty of N200,000 for each day of continued non-compliance.

Inspection and Investigative Powers of SEC

The exercise of SEC’s inspection and investigative powers have been widened under Section 78 of the Bill. By the new amendments, SEC, in addition to other powers, has the power to summon any other persons with valuable information in carrying out its inspection and investigative functions on an affected regulated entity.

Registration of Securities

Section 86 of the Bill provides some general amendments to Section 54 of the Act. The amendments are an attempt to revamp the regulatory regime on the registration of all securities that are issued pursuant to the Bill. The Bill introduces under Section 86(6) a provision that a person who proposes to issue securities of a public company or other securities to be registered; to list such securities on a securities exchange outside Nigeria, such an entity must seek prior approval of SEC and, where applicable, report same to a securities exchange registered with SEC. Also, Section 86(7) of the Bill proposes an increase to the penalty for violations regarding the registration of securities to N20 million.

Filing of Annual and Periodic Reports

Under Section 89(4) of the Bill, a public company that fails to file its audited financial statements or make other periodic returns with SEC is liable to a penalty of N5 million and a further penalty of N25,000 per day for every day the violation continues.

Unclaimed Dividends

While the Act did not provide for the regulation of unclaimed dividends of public companies, Section 93 of the Bill introduces a provision regulating how unclaimed dividends of public companies under the supervision of SEC are treated. The Bill provides that the treatment of unclaimed dividend must be in line with SEC’s prescribed rules and regulations. It is further stipulated that contravention of the rules on unclaimed dividends will attract a fine of N10 million or imprisonment for a term not less than 5 years or both.

Control of Invitations to the Public

Under Section 95(1) of the Bill, new categories of issuers, for example collective investment schemes, entities licensed by Central Bank of Nigeria (CBN), and other corporate entities, will be permitted to issue securities to the public, subject to the approval of SEC. Notably, Section 95(3) of the Bill precludes the requirement for pre-emptive notification rights under Section 142 of Companies Allied Matters Act from applying to the issuance of shares by public companies.

Restructuring, Mergers and Acquisitions

Under the changes recommended in Section 139 of the Bill, SEC’s jurisdiction for restructurings, mergers, takeovers, and acquisitions, is limited to public companies, and not applicable to all companies, such as private companies, as was the case under Section 118 of the Act. The proposed amendments clarify the regulation of mergers and acquisitions in Nigeria, as the Federal Competition and Consumer Protection Council will be tasked with overseeing the mergers and acquisitions of private companies.

Administration of Collective Investment Schemes

Sections 149 and 150 of the Bill introduces an amendment of Section 153 of the Act, expanding the scope of Collective Investment Schemes (CIS) that will be subject to SEC’s regulation. The additional proposed features of a CIS include (i) contributions that are pooled, and such portfolio of the scheme is to be managed as a whole; and (ii) contributions that entitle such investors to hold a participatory interest in the portfolio of the scheme through shares, units, or any other form of participatory interest.

The Bill also expands on the types of CIS to include specialised or alternative schemes, or other schemes as may be approved by SEC from time to time. Additionally, the Bill proposes the prohibition of unregistered foreign CIS, and imposes a penalty for violation, which is 10% of the gross value of the securities or units of the scheme or of deposits received, and a fine of N2 million in the case of an individual.

According to Section 194 of the Bill, free registration of community savings schemes, including Esusu, for statistical purposes, is mandated with SEC. Local and traditional savings schemes will only be required to notify SEC of their existence and will not be subjected to any additional regulatory requirements.

Ponzi or pyramid schemes are clearly proscribed under the Bill. The proposed penalties for promoters and operators of entities engaged in the proscribed schemes include a fine of N20 million or a prison term of 10 years or both, as well as other sanctions which may be imposed by SEC.

Commodity Exchanges and Ancillary Entities

Section 222 (1) of the Bill proposes that all commodities exchanges be registered with SEC. The Bill defines commodities exchange as including “any market (whether in Nigeria or any other jurisdiction), electronic system (whether operating in Nigeria or elsewhere), or platform that facilitates the trading of commodity contracts”. However, the definition does not extend to platforms that merely provide price or other information relating to commodity contracts.

Also, by specifying ‘operations within Nigeria and outside jurisdiction’ it suggests that, provided the commodities exchange in some way facilitates the trading of commodity contract for people within Nigeria, such market, electronic system, or platform must be registered by SEC.

Section 224(1) of the Bill provides for the registration of clearing houses for facilitating the performance of commodity contracts. Section 226(1) provides a framework for the registration of other commodity stakeholders such as commodity brokers, commodity broker’s representatives, commodity trading advisers, commodity pool operators, spot commodity brokers, spot commodity pool operators, any other professional or entity as may be determined by SEC.

In addition, Sections 230 and 234 provide for the registration of other ancillary entities, such as warehouse storing commodities linked to a commodities exchange or issuing warehouse receipts tradeable on an exchange, and collateral management companies, with SEC.

Public Sector Issuance of Debt Securities

A proposed amendment in Section 259(f) of the Bill suggests that the Federal Government of Nigeria will only be able to issue debt through its agencies, principally the Debt Management Office, with the Federal Government as a sponsor/guarantor. Section 260(1) expands the types of debt instruments that Federal Government agencies, State and Local governments, and their respective agencies can use to raise financing. In addition to bonds and promissory notes, the debt instruments include non-interest financial instruments and other instruments approved by SEC.

Section 289 of the Bill imposes a general six-year limitation on actions brought against a public sector issuer over certain types of securities.  

Private Sector Issuance of Debt Securities

A key addition under Section 301(3) of the Bill is that no company, local or foreign, supranational body, or other approved entity can issue debt securities with SEC where the entity is in default of payment of interest or repayment of principal of previous debt issuances. Furthermore, the restriction will extend to promoters, sponsors, or persons in control of a defaulting entity that are seeking to issue a debt security through another entity under their control.

Jurisdiction of the Investment and Securities Tribunal

Section 320 of the Bill provides clarity on the exercise of jurisdiction by the Investment and Securities Tribunal (IST). In the proposed amendments, matters within the IST’s exclusive jurisdiction will be limited to complaints against a direct action of SEC, and a matter referred to the capital market regulator which it has failed to act on within 60 days.

On the other hand, the appellate jurisdiction of the IST will be limited to matters arising out of the decisions of SEC on collective investment schemes, review, restructuring, mergers and acquisitions of public companies, and any disputes between SEC, capital market participants, investors, and other stakeholders.

Detail Commercial Solicitors is distinct as Nigeria’s first commercial solicitor firm to specialise exclusively in non-courtroom practice. Based in Lagos, Nigeria’s business capital, DETAIL is totally committed to its clients’ business objectives and reputed for dealing with the minutiae. Email: info@detailsolicitors.com.