By Victor Ogiemwonyi

About twenty years ago, Professor Chukwuemeka Charles Soludo (now civilian governor of Anambra state) was the Governor of the Central Bank of Nigeria (CBN).

He started a revolution that positively changed the Financial landscape in Nigeria by strengthening the nation’s banks and, indeed, its banking system, while insisting that the Minimum Capital for the banks must go up to N25 billion, taking it from the then capital requirement of just N2 billion.

Expectedly at the time, the new minimum capital was a very difficult hurdle for many banks to scale at the time to climb. Those who were obviously not going to make it heavily criticized the policy for being a “one-size-fits-all,“ and bad. In its place, they argued that there should be room for different sizes of banks- small, medium and large, like has emerged now after many years.

Soludo’s insistence on that shock treatment was valid because if you gave any room for variation of the capital requirement at the time many of the banks would not have done the right thing. Instead, they will shape shift and nothing will be achieved.

Of a truth, the Industry at the time had many shaky players that were risks to the entire Financial system. The indiscriminate issuance of banking licenses at the time resulted in 89 banks in the fray, most of which were glorified finance houses.

Worse still, many of them were floated with debt Capital, making them highly leveraged.

The top 10 of the banks were responsible for 90% of total deposits and profits of all the banks at the time. There was not enough capital for many of them to finance any business.

This was a disaster that required an urgent attention and quick rectification before it threw the entire economy on a downward spiral. There was need for solid banks capable of financing the economy.

While there were good arguments for allowing the small, medium and large banks to coexist, drastic action was needed at the time to ensure success with the recapitalisation goal.

There were also options for those unable to raise the required funds for standalone to merge with others. But the mentality was that banks chief executive wanted their brands to survive so as to remain CEOs.

The N25 billion minimum Capital forced many of the banks to either raise fresh capital to standalone, or to enhance their bargaining power during merger talks with other banks. The capital raising option from the Stock Market was the best route for many. It was a bold action that expanded our Capital Market significantly, while also allowing Nigerian investors some share in the growth and profits from the Banking industry at the time.

Those who used the Nigeria Stock Exchange to raise the needed Capital had a wide range of investors- both domestic and international, just as it was also a test of the elasticity of our Capital Markets, and specifically the Nigeria Stock exchange to see how it would cope. Up to that point the market had not raised anything close to what the banks needed in fresh capital. The Nigerian Capital Markets and the Nigeria Stock Exchange (as it was called then) successfully vindicated themselves with the large sums raised within the two-year period.

There was however one major loophole that brought tears of great proportion with implications later and still continues to reverberate today.

At the time it was customary for shares of companies having any corporate actions that could likely influence their share prices to be placed on technical suspension until the corporate action was over. This was so for years and was neither something new, or any deliberate action to manipulate the market. Nobody at the time, saw how the smart Alecs will use it. The CBN, further enabled this because of the long drawn out Capital verification exercise that elongated the issuing time table, sometimes adding several months to the offer period before the issue could be finalised and the new shares listed for investors wishing to sell.

The loophole created by this “time lag widow,” during which there was suspension of trading on the shares of the companies raising money allowed for the creation of what is known as “Bubble Capital, “allowing the share prices of such companies to rise above their real valuation. In some cases, it allowed for deliberate inflation of prices of those shares, giving unscrupulous insiders, opportunity to take advantage.

A good example of such share price manipulation was a case of a bank that called itself, the West Africa Bank. It set out to raise $2.5 billion at the time. Though the market was booming, it was obvious that the N38 share price set for this offering was inflated. There were claims that this particular bank had previously bought a lot of empty banks to inflate its balance sheet, making it appear big. The bank even built and counted as branches “match Box-like” bank offices and called them branches.

The underlying fundamentals for this bank could not support the N38 price valuation, and because of the very high price at which these shares were issued, discerning investors avoided it with the result that the offer expectedly failed to meet the minimum tolerable threshold for success. However, due to the unscrupulous nature of the smart Alecs “group lead” at the time, they had to do ‘anything and everything’ possible to conclude the offer. They were already in and there was no way out.

To start the manipulation process, they plundered Depositors’ Fund of their Nigerian arm by taking out over N35 billion first to acquire the existing shares of the bank in the stock market. In the process, they pushed its price to an obviously unsustainable level by recruiting some stockbrokers, giving them non-recourse loans with the Depositors Funds to acquire and warehouse shares. When they could not get enough subscribers after the offer closed they took more money from the Depositors Funds to buy some of the newly issued shares to reach the 30% subscription threshold prescribed by the Securities and Exchange Commission (SEC). The offer was therefore declared successful.

This was pure securities fraud

Using Depositors Funds to acquire own shares is not allowed. By the time the offer closed, the world was experiencing a financial crisis, following which the $2.5 billion could not be raised, leading to a self-inflicted crisis as they now needed to return Depositors money used for “underwriting” the issue and the shares acquired and warehoused. The warehoused shares were sold rapidly, forcing down the price to a mere N8 per unit within 180 days of finalising the issue, which created huge losses for investors who participated in the offer. Unfortunately, also, even the bank was unable to completely sell down the shares it warehoused and remained in its books, classified as “other Nigerian Legacy Assets” on the Balance Sheet (whatever that was).

Let me state that what is written above is not fiction. It happened exactly as described here and also now very well documented in a board-ordered forensic audit report prepared by Ernst & Young, the external auditors. Even some Court filings exist on the case. The Arrow head of this crime was identified. But those who could have done something about it at the time chose to do nothing.

I am hoping that the SEC and Economic & Financial Crimes Commission (EFCC) will someday realise that this is securities fraud committed against Nigerian Investors, just as it is also criminal. It needs to be properly investigated even if not for prosecution, but the purpose of a proper study to understand what happened and ensure it is never repeated particularly as we have started another season of bank recapitalisation.

There are still victims in the investor community that were hurt, some of who have never returned to the market, who bought shares at N38 per unit and saw the price crash to N8 within a very short time. Even afterwards, the shares traded for as low N5 at some point. Today, 15 years after that occurrence, the price of that bank is yet to trade at N38 each.

Investors are still nursing their losses.

I am happy about the Rule that allows for continuous trading of the shares of company undertaking capital raising. This has made all the difference by ensuring that the recent Fund Raising by Banks is going on well while trading is going on, with their shares in the Market. This has allowed for orderly capital raising, and ensured so far that none of the banks raising funds from the Stock Market has seen their price rise by more than 10% of what they were issued. This is made possible as Stockbrokers and Traders in the market are ready to correct any irrational exuberance and price bubbles. Closing this loophole made all the difference.

Ogiemwonyi, a retired Investment Banker wrote from Ikoyi, Lagos.