INTERIM REPORT OF SURVEY ON COST OF RAISING FUNDS FROM THE NIGERIAN CAPTIAL MARKET (2000 – 2004)

Introduction

The capital market has been globally recognized as an important source of funding development projects by both the private and public sectors. In Nigeria, governments at various levels have over the years accessed the market to finance such projects as housing development, water and roads. Corporate bodies have also purchased machineries and expanded their operations from funds obtained from the market.

In the five years between 2000 and 2004, a total of N186.0 billion was raised by various governments through the issuance of bonds and developmental loan stocks. Similarly, corporate bodies raised the sum of N305.2 billion from the market via equities and debentures during the same period.

While the increasing importance of the capital market as a source of long term funds for Nigeria’s sustainable development is no longer in dispute, the issue of the cost of raising funds from the market has continued to generate concern especially among those who consider the cost to be very high. This belief, albeit generally unsubstantiated, is often cited by some commentators to be the major disincentive for many potential users of the Nigerian capital market and for the market not to realise its full potentials.

OBJECTIVES OF THE STUDY

The foregoing has made it imperative for a proper study to be conducted on the level, components and trends in the cost of raising funds from the Nigerian capital market. Consequently, the Research and Market Development Department on a yearly basis undertakes the exercise to provide empirical evidence through survey and analysis of the issue. This latest exercise in 2004 however, also examines the trend since year 2000. Appropriate recommendations to the Commission’s management for implementation are also made based on our findings.

The specific objectives of the study were:

i) To determine the current average cost of raising funds from The Nigerian capital market (in year 2004).
ii) To establish the trend in the average cost of rising funds from The Nigerian capital market for the five year period between 2000 and 2004.
iii) To identify the major components in the cost of raising funds during the period and the trends of each of the components.
iv) To make recommendations to management as appropriate.

METHODOLOGY

The surveys were carried out through the administration of questionnaires to companies as well as the governments which raised funds from the market during the review period. In order to improve on the response, the questionnaires were followed up with personal visits. This was also aimed at clarifying various aspects that may have seemed unclear to the respondents. The number of new issues and number of respondents covered over the period of the study are as in Table I below:

Table I

In summary, a total of 163 new issues were recorded during the five-year period of study. Out of these, the study captured responses in respect of 100 issues, representing 61.3 percent of the aggregate number of issues.

LIMITATIONS OF STUDY

The returns for the period covered was more than 50 percent of the total number of issues raised both on annual and total period basis. However, the responses covered mainly issues from Corporate as response in respect of Government issues was very poor. Of the 9 Government bonds (including Federal and State Governments) floated between 2000 and 2004, only 1 response in respect of Delta state was received.

DATA ANALYSIS/FINDINGS

I. Average Cost of Issue
(a) The percentage cost of issue is defined as the total cost of issue as a percentage of the gross proceeds. The market average cost of issue for any year is obtained by summing-up the percentage cost of all new issues raised during the year (and captured by the study) divided by the sum of issues involved.

(b) The average cost of issue has generally stabilized at below 6 percent shown over the five year period of study. Thus, although the average cost rose from 4.07 percent in 2000 to 5.69 percent in 2001, there was a decline from 5.82 percent in 2002 to 5.59 percent in 2003 before rising marginally to 5.72 percent in 2004. (See table 2)

The average cost of raising funds in the capital market in 2004, based on returns received so far is at 5.72 percent. During the year, the gross proceeds from 13 new issues in the study were N142, 791.54 million. Out of this amount, a total of N8, 160.53 million was paid out as fees to various parties including regulatory authorities, operators and other professionals. A significant part of this amount, specifically the sum of N1, 794.60 million or 1.26 percent was expended on publicity/marketing. This is the highest percentage expenditure on publicity and marketing over the five year period and may not be unconnected with the stiff competition for funds by banks eager to meet the new minimum capital requirement.

II. Components of the Cost of Raising Funds

The cost structure of raising an issue in the Nigerian capital market is classified into the following broad components:

• Fees to Regulatory Authorities, including fees to the Securities and Exchange Commission, The Nigerian Stock Exchange, stamp duties and filing fees
• Fees to Market Operators
• Fees to Professionals; and
• Others including: Publicity/Marketing, Printing and Distribution, etc.

a) REGULATORS’ FEES

Analysis of these components show that after accounting for 1.37 percent of gross proceeds in 2000, regulators fees rose to 1.58 percent in 2001. It however declined impressively from 2.11 percent to 1.76 percent between 2002 and 2004.

It must however be emphasized that of the various cost elements in this group, some have declined while others have increased. Particularly worthy of mention is the fact that SEC fees declined from 0.69 percent of gross proceeds in 2000 to 0.60 percent of gross proceeds in 2004. On the other hand, fees to The Nigerian Stock Exchange almost doubled in percentage points from 0.5 percent in 2000 to 0.94 in 2004. However, after peaking at 1.09 in 2002 the fee declined to 0.96 percent and 0.94 percent of gross proceeds in years 2003 and2004 respectively.

b) FEES TO MARKET OPERATORS

Fees to operators also fluctuated during the period under review. It rose from 2.06 percent in 2000 to 3.2 percent in 2001. After declining to 2.60 percent in 2002, it rose again to 2.73 in 2003 before declining to 2.53 in 2004.

c) FEES TO PROFESSIONALS

Fees to professionals were relatively stable during the study period; it was 0.16 percent for both 2000 and 2001 and 0.18 percent of gross proceeds for 2002 and 2003. It however declined to 0.17 percent in 2004.

d) PUBLICITY/MARKETING.

The analysis of our data shows that the cost of publicity/marketing is very significant in the issuance of securities in the Nigerian capital market. This component has consistently and significally risen through out the study period, except in year 2003.

Cost of Publicity/Marketing stood at 0.48 percent of gross proceeds in 2000 and rose to 0.93 percent in 2002 before declining to 0.61 percent in 2003 from where it more than doubled to 1.26 percent in 2004. In summary, the cost of publicity/marketing as a percentage of gross proceeds almost tripled from 0.48 to 1.26 percent during the five -year study period.

See tables II & III for break down/analysis.

CONCLUSION/RECOMMENDATIONS

The study of the level of and the trends in the cost of raising funds from the Nigerian capital market have become imperative in view of the interest it has generated in recent years and its impact on the perception and efficiency of the capital market.

The findings from a five-year study based on responses from issuers indicate that the average cost of raising funds from the market has generally remained stable at below 6 percent during the period. SEC fees as a percentage of gross issue proceeds has declined by 0.10 percent between 2002 and 2004, apparently in response to the recent downward review of its fees. Another major finding of the study is the fact that publicity/marketing costs have been rising significantly over the years.

This is particularly important since it is a variable that may be regarded as generally outside the control of the market but due to inflationary trends within the economy. The sharp rise in the cost of marketing and publicity in 2004 may however also not be unconnected with the media blitz embarked upon by banks which accessed the market for funds to meet the CBN deadline on minimum capital requirements.

Consequent upon the foregoing, it is recommended as follows:

i) Having succeeded in reducing its fees and subsequently its component of cost of raising funds from the market, the Commission should prevail on others to do likewise. In particular, The Nigerian Stock Exchange should be strongly advised to further reduce its fees.

ii) While efforts should be intensified to ensure further downward review of the fee structure in the primary market, adequate public awareness about the prevailing low and some times declining average cost of raising funds in the market should be created.

iii) The Commission needs to be persistent in seeking government funding of its activities. This will drastically bring down the average cost of raising issues in the market.

iv) Copies of this final report may be sent to the Hon. Minister of Finance, CBN, Debt Management Office, Corporate Affairs Commission, NDIC etc.

Table II

SUMMARY OF FEE STRUCTURE IN THE PRIMARY MARKET OF THE NIGERIAN CAPITAL MARKET 2000 - 2004

Chart 1

Chart 2

Chart 3

Table III

COST OF RAISING ISSUES IN THE NIGERIAN CAPITAL MARKET(2004) STUDY

The following securities were registered during the period

REGISTERED BONUS ISSUES (JULY - SEPTEMBER, 2005)