The Capital Market And The Challenges Of Real Sector Financing In Nigeria.
[A STUDY OF THE PERIOD 2000-2009]

CHAPTER TWO LITERATURE REVIEW

2.0 INTRODUCTION

In this chapter a review of various literatures relating to the area under research will be undertaken. Also, theories, concepts, constructs, studies and tool in this area of study will be reviewed and appraised. The purpose is to examine the usefulness of such bodies of knowledge in evaluating the capital market, its tools and their impact on real sector development. The capital market can be viewed as an arrangement and network of institutions that are engaged in the performance of duties known and described as capital market activities. Within this arrangement of institutional networks are primary and secondary market institutions as well as information, communication and computer technology that facilitate speedy crystallization of transactions conversion circles. Odife (1985), “The capital market is the network of institutions that arrange for long-term financial assets such as shares, debentures stocks and mortgages”. Capital market can be defined also as a market dealings (lending and borrowing) in long term loanable funds. 

For any nation’s economy, the major engine of its economic growth and development is its capital market. It impacts positively on the economy by providing financial resources through its intermediation process for the financing of long-term projects. The projects could be promoted by the Public or private sector institutions. They are usually in such areas as infrastructure, agriculture, and solid minerals, manufacturing etc. Hence, without an efficient capital market, the economy may be starved of the required long term funds for sustainable growth. In Nigeria, the capital market has over the years been performing this traditional role. However, its efficiency and effectiveness in this regard have been greatly limited by various factors notable among which is the structure of the economy, which is dominated by oil production. Yet, not many of the oil producing companies are listed on the stock market. Also, whereas there are presently 202 companies listed on the stock exchange, less than half can be said to be operating directly in the real sector. The economic reforms of the federal government, particularly those that have taken place in the 14 financial sector are therefore intended among other objectives to impact positively on real sector financing. The focus of this paper is to examine the performance of the capital market in relation to the objective of financing the real sector adequately.

2.1 THE ROLE OF THE NIGERIAN CAPITAL MARKET

The Nigerian capital market performs important roles in the development of the economy.

These include: 

• Providing opportunities for private companies to borrow funds for investment purposes including venture capital financing
• Providing an avenue for marketing of existing shares and other securities to the investing public.
• Providing opportunities for government to finance their projects, including infrastructure for socio-economic development.
• Encouraging good corporate government by ensuring transparency, good accounting and management practices.

This is achieved through full disclosure requirements from companies or public institutions accessing the market for funds. This requirement facilitates rational investment decision making by investors and accountability by the borrowing institutions.

2.2 STRUCTURE OF THE NIGERIA CAPITAL MARKET

The capital market exist to provide long term capital to both government and corporate bodies for industrial, social, economic and infrastructural development purposes. There are two categories of market within a capital market structure for publicly held securities.

They are:

• The primary market
• The secondary market The primary market exists to provide the means for directing savings into new investment outlets of long term nature. Two major areas can be distinguished here and they consist of

            (i) New direct investment and
            (ii) New lending activities.

The primary market operates when the initial capital raising takes place. Both the Securities and Exchange Commission (SEC) and the Nigerian Stock Exchange (NSE) are involved in the primary market activities. The Issuing Houses, Stock Brokers, Reporting Accountants and Legal Practitioners also play prominent roles here.

Initial issuance of the securities on the primary market can take any of the following forms:

• Offer for Sale
• Private Placement
• Rights Issues
• Introduction
• Global Depositing Receipts (GDRS)
• Fixed Income Securities such as Bonds

2.2.1 OFFER FOR SALE:

This is a means of selling shares of a company to the public at large with an issuing house acting as agent and or underwriter of such issue as the case maybe. An underwriter is a financial institution usually a bank, stockbroker etc, who agrees to purchase at the issue price any securities which may not be subscribed to such issue by the investing public in an offer. In an offer for sale of new shares, offers may be under or oversubscribed to by the investing public. In the case of an under-subscription, the issuing house has to underwrite the unsubscribed portion of the offer. But, where the offer is over-subscribed, the issuing house and the company can 17 decide to increase the volume on offer to accommodate the extent of oversubscription, otherwise, scale down the individual applications request proportionately to be accommodated within the volume on offer. By this arrangement the excess subscription amount will be refunded to the individual applicant plus interest accruable therein.

2.2.2 PRIVATE PLACEMENT METHOD:

This is an arrangement whereby the shares of a firm on offer are made available for investment to a few high network individual, institutional investors such as Insurance Companies, Pension Funds Managers etc. They may be existing and or non-existing shareholders of the company.

2.2.3 RIGHTS ISSUE METHOD:

This is a method of raising new capital whereby an offer is made to existing shareholders requesting them to subscribe for the rights issue in proportion to their existing shareholding in the company. Right issues are usually issued at a discount to the current market price of the shares on offer and to act as means to secure the acceptance of the existing shareholders to subscribe to the rights.