EXAMINING THE ROLE OF SECURITIES LAW IN PROMOTING INVESTOR PROTECTION IN NIGERIA
Who is an investor?
An investor is an individual that puts
money into an entity such as a business for a financial return. They are those who invest in or subscribe to the
shares or debentures of a company by placing their money or other property with
the ultimate aim of earning financial benefit, usually referred to as dividends.
The main goal of any investor is to minimize risk and
maximize return. It is in contrast with a speculator who is willing to invest
in a risky asset with the hopes of getting a higher profit.
With the advent of the
internet, the eyes of the common man have been opened to what investment is, and
to some extent, how it works. A lot of people have earned huge dividends from
investments, while others have suffered varying degrees of losses from their
investments in company securities.
Legal framework for investment
and investor protection in Nigeria
At inception, the Nigerian
capital market was largely self-regulated by the Nigerian Stock Exchange.
However, Nigerian lawmakers have over time, made laws to protect Nigerian investors
in matters of investment, as the majority of Nigerians are ignorant and
unsophisticated.
The most important law
regulating investment and protection of investors is the Investment And
Securities Act 2007 and the accompanying regulations. It established the
Securities and Exchange Commission as the apex regulator of the capital market.
The SEC regulates the capital market in order to protect investors by
purportedly creating an atmosphere that is devoid of sharp practices of any
kind. The SEC uses the tools of registration, rules-making, monitoring,
enforcement, and compliance to ensure that all market participants play
according to the rules. The roles of the SEC
in the capital market include but are not limited to investor protection
and market development. We are interested in their investor protection roles
and they include:
i.
Protecting the
integrity of the securities market against all forms of abuse including insider
trading.
ii.
Entering into and
sealing up the premises of persons illegally carrying on capital market
operations.
iii. Preventing fraudulent and unfair practices relating to
the securities industry.
The second is the Companies and Allied Matters
Act, of 2020.
There are also traces of laws
in other legal provisions that have an impact on the capital market. Amongst
such are, the Central Bank of Nigeria Act 2007, the Banking and Other Financial
Institutions Act 2014 (BOFIA), which regulates the activities of banks,
including their investment in the capital market, as well as their use of the
market to raise funds. Additionally, the Ministry of Finance provides
supervision by formulating periodical monetary policy guidelines including the
whistle-blowing scheme to ensure improved public and institutional governance.
Furthermore, the ISA
introduced a fund that is aimed at protecting subscribers against loss and
damage arising from the default of issuers and their agents.[1]
Persons that have suffered pecuniary loss can claim compensation from the fund
and take appropriate judicial proceedings against the securities exchange or
capital trade point to establish the claim. The claimant is usually entitled to
actual pecuniary loss suffered including reasonable costs of disbursements
incidental to making and proving his claim. Interest is also payable on the amount
of compensation at 5% per annum commencing from the date of defalcation. There
have been arguments lampooning the application of this fund to actually
compensate investors for pecuniary losses. It is claimed that the fund is not
being applied well to compensate investors who deserve the compensation. A good
example is the case of Ezemgbe v
Nigerian Stock Exchange[2].
The rationale behind
investors’ protection can be categorized into two, as follows; first is the
protection of investors from fraud, and second is to the securities market
works efficiently as it ought to, without being plagued by fraud. It is in the
best interest of the investors and the capital market, as the efficient running
of the capital market gives investors confidence in the system.
Another morale booster is that
the company has an efficient and effective management structure. The law steps
in to aid, by vesting corporate powers on the members and directors to ensure a balance of power[3].
While the board of directors is charged with managerial responsibility, the
investors elect the directors and determine the company’s mandate in its
general meeting.
Why is it important to protect
investors in the securities market?
Investors are the backbone of
the securities market. They not only determine the level of activity in the
securities market, but also the level of activity in the economy. The growth in
the number of investors in Nigeria is something to look out for. However, many
investors may not possess adequate expertise or knowledge to take informed
investment decisions. They may not be familiar with the market mechanism and
the practices as well as their rights and obligations.
A critical look at the
Nigerian capital market will show that it has developed at a rather slow and
unsteady pace when compared to its counterparts worldwide. The market is held
to be small, volatile and illiquid. Regardless of the increment in listed
securities, trading activity is still very thin due to the reluctance of
institutional and retail investors to trade in the secondary market, as well as
the lack of a coherent structure and inadequate structure for the protection of
investors. This is therefore a call to action aimed at the regulatory agencies
to step up in enforcing already existing securities laws, reform the market and
make more regulations that accommodate the changing times, and to ensure we
have a viable market and a return of investor confidence which has since been
lost and seems herculean to recover. No matter the number of laws we have, if
the regulators are hesitant to enforce them or are complicit in unfriendly
activities, aimed at ripping off investors, investors will feel unprotected and would never trust the system to fairly protect their
investments. We need no soothsayer to predict the untold damage that holds for
our capital market which is already in a bad state.
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