The Effects of Regulation & Innovation on the Efficiency of the Nigerian Equity Markets

The year 2017 is witnessing an unprecedented increase in the number of listed companies on the Nigerian Stock Exchange (NSE) that either released their financial results on their respective due dates or gave a cogent reason why the release of the results would be delayed. Before now, market participants were accustomed to the corporate announcements and financial results of many listed companies being delayed without any reason provided by the companies. An analysis of the date of filing of the financials of 49 companies listed on the NSE revealed that the average lateness date (the average of how late, from the regulatory deadline, the accounts of the companies were) declined significantly from 30 days in 2014 and 24 days in 2015, to 7 days in 2016.

While many participants have rightly attributed these changes to improved corporate governance practices by listed companies, these improved practices are, to a large extent, enforced rather than voluntarily adopted by the companies. Except in cases where there were incentives for promptly releasing corporate announcements or in the not-so-common cases where management genuinely valued a high corporate governance culture, the management of many listed companies neglected their responsibility of providing regular financial data and other corporate updates to the markets.

Source: The Nigerian Stock Exchange

In a bid to rid the market of these unwholesome practices, the NSE put in place strategies aimed at making listed companies more investor-centric. Among other strategies, the NSE delisted a sizable number of listed companies that failed to comply with its listing rules after the expiration of a grace period. From 2002 to 2016, 85 companies had been delisted from the Daily Official List of the NSE; 55 of those companies were delisted for not complying with the listing rules of the NSE.

More recently, on 5th July, 2017, the NSE suspended share trading of 17 companies due to failing to file their relevant accounts after the initial expiration of the deadline for submitting the accounts and the expiration of a grace period of 90 days beyond the deadline. As at 14th July, 2017, the NSE had lifted the suspension on one of the 17 companies after the company released its 2016 audited financials.

To forestall avoidable delays in the release of information by listed companies, the NSE launched a series of innovations (rightly termed X-Innovations) that included the provision of a dedicated portal known as X-Issuer for the automatic filing of financials and other corporate announcements by listed companies.

The NSE also introduced Compliance Status Indicators (CSI) against the security codes (the symbols used to identify stocks on the NSE website and its trading machine) of listed companies that showed their level of compliance with its listing rules. There are 11 different CSI codes that represent varying degrees of compliance. For instance, a security without any code signifies that the company has complied with the relevant rules of the NSE. The code MRF (which means Missed Regulatory Filing) against a security indicates that the company missed a regulatory filing deadline. DWL (Delisting Watch List) indicates that a company has been served with a delisting notice.

The NSE also started the weekly release of the X-Compliance report which provided information on early filers of audited accounts, delinquent filers, companies slated for delisting, etc.

However, despite all the improvements and the efficiencies that result from them, one hurdle that remains is the delay caused by the regulatory actions of some industry-focused regulators. In 2017, the release of financial results of some banks was delayed beyond the NSE mandated limit of 90 days as the Central Bank of Nigeria (CBN), the apex regulator in the banking industry, did not conclude its check before the limit’s expiration. The case is even more severe in the Insurance Industry where the 2015 results of some insurance companies were released after more than 2 years in 2017. In many cases, the factors responsible for this delay are caused by the companies due to the ill-preparation of their financials.

As regulations are amended and enforced, many companies have come to realize that the days of inefficiencies and lax regulations are gradually giving way for a new dawn in corporate reporting. Some of them, especially those in regulated industries, have overhauled their accounts and compliance departments while others are in the process of doing so. In the long run, the entire Nigerian financial markets, including the management of these companies, will realize that enforcing regulations are indeed necessary to upholding the integrity of the markets.

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