In this
chapter, which is basically the review of relevant literatures, discussion
would be focused on description of the capital market as it efforts in Nigerian
economic development for the period of 1993 -2002.
In addition,
the effect of other companies and broking firms in the economic development and
by comparing other stock exchange outside the country in term of performances.
DEFINITION OF STOCK MARKET
The stock
market at times called the capital market
was defined by Dangall and Ganmnitz
(1975) as the complex
of institutions and mechanisms through
which intermediate term trade and
long term funds are polled and made available to business, government
and individuals and instruments already outstanding are transpired.
Ajayi O.
(1984) defined a stock market as a market for the mobilization of funds from
the savings deficit sector, However, Burns and Midlay (1979) defiled a stock
market as a market which provides a focus for the activities of buyers and
sellers of securities or services.
Okafor F.O.
(1983) agreed with this definition, but went further to describe the market as
covering all services rendered by institutions and facilities which exist for
mobilization of long term funds and for channeling such funds to ultimate
users.
More so, the
capital market is a network of individuals, institutions and instruments
involved in the efficient channeling of funds from the supply to deficit
economic units.
The capital market
constituencies can be broadly divided into four categories, namely:
(a) Provider
of funds (Investors-Individuals, units trust and other corporate bodies).
(b) Users
of funds (Companies and Government)
(c) Intermediaries (Facilitators-stocking broking firms,
Nigerian stock exchange).
According to
Alike and Amao (1986) the stock exchange actually comprises several markets:
that is within or annexed to a market for existing securities.
There is
again a market for debt securities and market for equities. There is also
market for example the petroleum sector, sector for Breweries, pharmaceuticals,
the exchange is regarded as a market mainly for otherwise known existing
securities as the secondary market.
In the last
decade, the federal governments encourage the state and local governments as
well as their resource gaps. Consequently, five stage governments have raised
loan capital on the market. In 1993, we listed the first Municipal bond-the
Lagos Island Local Government 100 Million floating Rate Revenue Bond 1996/2000.
The proceeds of the issue were part of the financing for the New Sura Market on
the Lagos Island.
However,
with the introduction of the Structural Adjustment Programme (SAP) in 1989 and
the subsequent adoption of policy instrument such as the foreign Exchange
Market (FEM) the deregulation of interest rate structure and divided policy,
the Nigerian capital mark has become a more viable option for strengthening
their capital structure, for modernization and expansion of operations. In the
process, there has been a flurry of right. Issue offers for subscription for
equity and debenture stocks.
The stock
exchange: it started its operation as the Lagos state stock exchange in 1961 as
a non private company limited by guarantee.
When branches
of the stock exchange were append at Port Harcourt and Kaduna in 1978. The name
was changed to the Nigerian stock exchange. The objectives of the Nigerian
stock exchange is the machinery for the mobilization of private and public
savings and making them available for productive investment through stocks and
shares to facilitate the purchase and sale of securities amongst others.
It
is primary purpose and objectives are
(a) To
provide facilities to the Nigerian public and now the international investing
public for the purchase and sale of stock and shares of any kind and for the
investment of money.
(b) To
control the granting of a quotation on the stock exchange in respect of funds,
stocks and shares of any company, government, municipality, local authorities
or other corporate bodies.
(c) To
investigate any irregularity or alleged irregularity in the dealings of members
with their client.
(d) To
investigate any irregularity or alleged irregularity in the dealings of members
with their client (inside dealings), any differences or disputes between
members and their clients, any complaint made against members by other members
of any other parties, provided that such differences disputes or complaints
shall relate to or touch on the stock broking business or activities of such
members or deal with and decide upon such irregularities differences, disputes or complaints shall relate to or touch on the
stock broking business or activities of
such member or to deal with and decide
upon such irregularities difference, disputes or complaints and to take necessary steps for enforcement of its
decision s and awards.
(e) To
promote, support, propose legislature or other measures affecting the above
mentioned objects and objectives.
(f)
To standardize and review from time
to time if necessary of desirable, increase or decrease the fees of other
charges to be made by members for services rendered to their clients or modify
the method of assessing or calculating such fees or charges.
(g) To
calculate the stock broking activities of members and facilitate the exchange
of information for their mutual advantages and for the benefit of their clients
and to offer facilities whereby the public can be informed of prices of shares
dealing by members.
(h) To
co-operate with the Association of stock-Brokers and stock exchanges in other
counties and to obtain and make available to members, information and
facilities likely to be of advantage to them or clients.
CENTRALS SECURITIES CLEARING SYSTEM LTD
The
organization was established in 1992 to provide the capital market with an integrated
clearing, depository and settlement system. It commenced operation on Monday,
14th April, 1997. It was looked on-ling to the Routers Electronic Contributor
System (ECS) through which our market information are disseminated globally.
TYPES OF SECURITIES `
Securities are primarily of two
types: Debt and Equity
(i)
Debt instrument are financially
claims with an obligation by the issuer to pay interest at stated internals and
to redeem the issue at a future date. The types available on the Nigerian stock
market are divided into two groups.
(a) federal government development stocks, Bonds
or Gilt Edged
(b) Industrial
loans, preference stacks and bonds federal government development stocks, bonds
or Gilt edged are usually issued annually. They are long term loans with
maturity ranging between 6-25 years. Industrial loans preferences stocks and
bonds are corporate loan stocks that are standard forms for financing long term
capital requirement. Sometimes there is no need to raise a charge on the assets
of the firms an unsecured loan stock, may be issued if the financial propite of
the firm is sound. At other times, the loan stock may be secured by a floating
charge, specific change or even a general lien. The stock may be specific as to redemption date,
thus the company has a definite number of years to plan the repayment,
usually, there is a sinwing fund made up
of specific periodic, amount set aside
from profits to meet the repayment at maturity, Okereke Onyinke (1984)
Another
feature is the tax shield effect of interest payment. Here, the interest that
is paid on the loan stock is charged against the operating profit and so the
cost of interest payment. Her, the interest that is played on the loan stocks
is charged against the operating profit and so the cost of obtaining the fund
is effectively reduced by the amount of
tax sequel the cost of loan capital is further reduced when allowance is made for
inflation says Philip Toyin (1983)
Although a
company can raise its level of debts to
the maximum of the directors borrowing powers, Modigliani and Miller (MM) 1958
however suggested that “the
existence of tax advantage does not necessarily mean that corporation should at all times
seek to use the maximum possible amount of
debt in their capital
structure” the limitation of high leverage
are multi-dimensional coming from the
lenders and the exchange in the
process of preserving flexibility and a reduced
risk impact .
Equity
capital refers to the capital of the owners of the firms i.e. ordinary shares
or common stocks the ownership of a share confers on the holder some rights
including the right receive notices of meetings. These and other things are
stated in the memorandum and articles of association of the modern
company. The ordinary shareholders are
entitled to any surplus of income in the company after the prior rights of creditors
have been satisfied.
Odife
O (1985) noted that equity claims
are viewed as a source of permanent
capital with no contractual payment by
the firm for the company, the flexibility
offered by equity as far as dividend payments, earnings
and cash flows are uncertain, and
its other potentiating are
protection against the
vulnerability which can occur as a result of a rapidly rising
interest when the company’s debt
/equity ratio rises. However the
shareholders experts a specific after tax return from their investment and this is the
minimum return which a company must seek to earn in order to fulfill the
shareholders expectation. In respect of this, the exchange expects management
to run the company in the interest of
the shareholders and to enhance growth in Nigerian economy
In addition to the above, however, economic
development is not achieved in a vacuum, the policy environment must be
conducive and significant financial investment must be made in infrastructures
development, including his construction of access roads, boreholes and
provision of electricity
In
line with the above, government of Nigeria had taken a bold step
by abrogating the restrictive
exchange control act 1962 and the Nigerian enterprise
promotion decree 1989, and its
replacement in 1995 with
foreign exchange (monitoring and miscellaneous provision) decree 1995
and the Nigerian investment
promotion commission decree
1995 respectively, we are beginning to notice an increasingly
active foreign presence in our market
process
Conclusively,
there are indications that this trend will continue, all things being equal.
Finally, many quoted companies have raised money in recent years, through
rights and public offers. The Nigerian stock exchange has also been providing facilities
for indigenous companies and foreign to raise long term capital to finance
their expansion and modernization. Typical example is the recent pronouncement
by the central bank of Nigeria to banks to increase their capital base to the
tone of N25 billion by December, 2004.