Comparing stock exchanges from two countries at different stages of economic development is an interesting case, because it can show what aspects of capital market theory have universal application and what the limitations are. In addition, recommendations could be made for a developing country, based on the example of the developed one. With this perspective, the report reviews the business and regulatory developments of the Nigerian Stock Exchange (NSE) and the London Stock Exchange (LSE) as well as assesses present challenges facing them. All stock exchanges function within the economic, regulatory and general institutional frameworks of their countries, therefore a brief overview of the economic and legal milieu of both Nigeria and UK is provided.
The LSE is one of the largest international securities markets. Dating back to 1801 when it started in a coffee house in London, LSE has a rich history of development both in terms of financial instruments traded and regulatory sophistication. Compared to LSE, NSE is much younger institution, but despite their differences in age and size, both exchanges are developing dynamically. The NSE has been functioning since 1961 and seen fast changing regulatory and infrastructural development. It is the embodiment of the capital markets in Nigeria, the country with a large population and economy making it the "Giant of Africa".
LSE but also NSE enjoys extensive interest from the research community and mass media, both have documentation in English language, which make them good, if not ideal, candidates for this comparative review.
Background and characteristics of the stock exchanges
The forerunner of the London Stock Exchange was organized in the form of a club in
the late 18th century. It was a self regulating organization with rules set by its members.
Along with the New York stock exchange, the LSE has been a remarkable
success story in the history of modern capitalism. Starting from trading mainly in
government debt, LSE has become a very diversified international stock exchange, now
Primary markets, where it has Premium Listed Main Market for the largest issuers and Alternative Investment Market (AIM) for smaller size companies.
The companies can are offered a number of products including stocks, depositary receipts and debt instruments, allowing them most convenient ways to arrange financing.
Professional and specialist markets, where it facilitates capital raising by issuance of specialized debt securities such as Eurobonds or Depositary Receipts to professional investors
Secondary markets where it accepts for trading bonds, warrants, ETFs, GDRs
Presently LSE has listed close to three thousand companies from over 60 countries listed on the London Stock Exchange with the total market value of these listed issuers estimated at £3.9 trillion (LSE, 2014).
Compared to LSE, the NSE is a much smaller exchange having about 200 listed companies with a total market capitalization of about £ 50 billion (NSE, 2014).
Though not as diversified and sophisticated as LSE, NSE is a fast growing exchange, which is considered the hub of the Nigerian capital market. It was originally established as the Lagos Stock Exchange (LSE) on 15th September, 1960 with the mandate to organize capital market in Nigeria. Through primary market operations the NSE facilitates access to the capital for the listed companies. In line with the LSE, since 1985 the NSE has been running a Second-Tier Securities Market (SSM) focusing on small and medium-sized companies in order to tap the opportunities presented by this segment which form the majority of the local companies. Elakama (2004, p. 14) argues that providing facilities to SME companies to raise funds is an important driver of new jobs creation, the argument deemed valid for both UK and Nigeria. On the secondary market NSE presently trades in equities, bonds, ETFs and derivatives.
Regulatory environment of the stock exchanges.
Elliott & Elliott (2009, p. 119) describe the LSE as the originally self-regulated exchange and source of the rules governing listed companies, which is underpinned by the common law framework of the UK. In the course of the centuries many of its requirements, which often came to being as responses to the adverse events, have become part of the UK legal system. Presently the regulatory framework for the LSE is quite sophisticated with the principal regulator the UK Listing Authority (UKLA) being part of the FCA. However, some markets such as Specialist Fund Market are subject to EU regulations.
Main market. Securing listing on this market would expose an applicant to a number of requirements and regulations.
Alternative Investment Market. Started in the 1990s, AIM is specifically targeting smaller issuers that might not qualify for the main market. The regulatory environment is more flexible than on the main market. The documents of the applicants wishing to be listed on AIM are not reviewed by the LSE or UKLA. Instead the admission documents are reviewed by a Nominated Adviser, which provides assurance to the authorities that the listing requirements have been met.
In developing the regulatory framework, the policy makers in Nigeria have to adapt current knowledge of best practice in stock exchange regulations to fit the unique needs of this particular emerging market (Bekaert and Harvey, p. 14).
Guided by the above logic, the Nigerian capital market regulator – the Securities and Exchange Commission (SEC) has been established with overall objectives including ensuring the integrity of the capital markets and protection the investors from malpractices. Unlike the common law environment within which the UK regulations have been gradually developed, the main legal basis was established by the Federal Government of Nigeria in 1999 in the form of the Investment and Securities Act.
Both countries face regulatory challenges, some of which are common, but some are very different. E.g. corporate governance is of concern both for UK and Nigeria. Of course, the UK has a long tradition of corporate governance development resulting in a Combined Code. However, recent financial crisis has brought to light problems with high executive pay, inactive position of the non-executive directors etc.
Another concern (RAID, 2012) is that in the UK the UKLA, while focusing on competitiveness, has compromised the UK transparency regulations, as it accepted for listing the companies which are linked to the parties with unsavory reputation.
As regards Nigeria, poor corporate governance mars its stock market with codes of conduct being followed only by 40% of the listed companies (Wilson, 2006).
Apart from that, general economic and legal environment is of concern for the investors. As Wilson (2006) describes, the regulator can redress the situation only up to a point and it is difficult to maintain high standards if the general legal framework is corrupt.
The LSE examples shows that its success was underpinned by the strong investor protection provided by common law type legislation as opposed to civil law of less successful exchanges of continental Europe (Davis, Neal & White, 2003).
The reforms in Nigeria have certainly had positive impact on the market in recent times in terms of market capitalization, turnover, and return on investment. Its development track record was impressive: “between 2000-2006, the NSE delivered over 600% dollar returns” (Adeigbie-Quaynor, 2007, p. 2).
However, the issue of creating optimal regulatory environment in the realities of emerging market is widely discussed in the extant research (Bekaert and Harvey, 2002, p. 12). It is argued that simple replication of the regulatory environment of a developed country such as the UK, without taking the economic realities of a developing country such as Nigeria may be counterproductive.
Specific issues for Nigeria inhibiting stock market development relate to the well known weaknesses of Nigeria such as inadequate infrastructure (power , water supply etc), general security of people and property.
The UK stock market has well developed legal and regulatory infrastructures though it also faces certain challenges in respect of transparency at AIM and problems in corporate governance. At the same time the Nigerian capital market as represented by the NSE is still in the process of setting up basic regulatory and legal framework. Its pillar institutions such as the Securities and Exchange Commission (SEC), corporate governance model, investment laws and tribunals must be fine tuned and cleaned up to make existing infrastructure work.
The LSE example clearly shows that strong investor protection plays an important role in the success of a stock market. With this in mind, the clean up and fight against corruption in both public and private sector is necessary for the Nigerian capital market to attract substantial foreign participation.
Certain corporate failures have and will have taken place even under UK developed system of corporate governance, given that human nature is what it is. It must therefore be constantly fine-tuned in line with the society developments in UK, and more so in Nigeria. As such the basic legal framework of this developing country, especially Investment and Securities Act though well suited for the market now, should be revised on a continuous basis so as not to become out of date.
Developing country’s regulators have to work to implement international corporate governance codes into the Nigerian system adapting them where necessary for local use.
The recommendation for the LSE is to address the concerns of RAID and ensure its long term sustainable development.
Adeigbie-Quaynor, S. (2007) “Integrating Nigeria into the Global Capital Markets”, Conference paper to the 11th Chartered Institute of Stock Brokers Annual Conference, Nov., 2007, Lagos
Bekaert, G. & Harvey, C. (2002) Research in emerging Markets Finance: Looking to the Future. National Bureau of Economic Research, Cambridge, MA 02138, USA
Davis, L., Neal, L., and While E.N. (2003) How it all began: the rise of listing requirements on theLondon, Berlin, Paris, and New York stock exchanges. The International Journal of Accounting. 38 (2003). pp 117–143.
Elakama, M. (2004) Globalization of the Nigerian Capital Market, A paper presented by the Assistant Director-General of the Nigerian Stock Exchange (NSE) to selected Nigerian Military Officers, Abuja, Nigeria
Elliott, B. & Elliott, J. (2009) Financial accounting and reporting. 13th ed. UK: Pearson Education Limited.
London Stock Exchange (2014) Company overview [Online]. Available from http://www.londonstockexchange.com/home/homepage.htm (accessed: 7 December 2014).
Nigerian Stock Exchange (2014) Corporate overview [Online]. Available from http://www.nse.com.ng/aboutus-site/about-the-nse/corporate-overview (accessed: 7 December 2014).
RAID (2012) Asset laundering and the AIM: Congo, corporate misconduct and the market value of human rights [Online]. Available from http://www.raid-uk.org/docs/AIM/AIM_Report_2012.pdf. (accessed: 7 December 2014).
Wilson, I. (2006) Regulatory and Institutional Challenges in Nigeria. Nigerian Economic Summit Indicators April-June 2006 12(2).