The capital market refers to a market where the financial instructions mobilize the savings of the people and lend them for long term period for raising new capital in a country.
In other words, the Capital Market refer to the long term borrowing and lending of capital funds. In another perspective, it is market in which financial securities such as stocks, bonds and government loan instruments are bought and sold.
Division of Capital Market
The Nigerian capital market is divided into two segments –
- The Primary market and
- The secondary market;
While the primary market provides the vehicle for raising fresh capital by government and corporate bodies, the secondary market provides a mechanism for investors to buy or sell existing securities.
Functions of the Capital Market
The following are the functions of the capital market:
- Capital formation, by gathering savings and making them available to companies and public authorities that need them.
- The capital market offers access to a variety of financial instruments that enable economic agents to pool, price, and exchange risk
- It encourages saving in financial form through assets with attractive yields, liquidity, and risk characteristics.
- Through the stock exchange, the market gives long term leaders the opportunity to convert their holding into cash. It also offers companies with securities the opportunity to obtain cash without reducing their liquidity.
- The capital market plays an important role in mobilizing funds and resources needed for development and offers the forum for implementing its policies relating to stabilization, monetary controls and regulation of the banking system.
Requirements For Enlisting In the Capital Market – Stock Exchange Requirements
First Tier Security Market
- Company must be registered as a public limited liability company under the provisions of the Companies and Allied Matters Decree 1990.
- Companies must submit the financial statements or business records for the past 5 years.
- Date of the last audited accounts must not be more than 9 months
- Amount of money that can be raised is unlimited depending on the annual quotation fees based on market capitalization.
- At least 25% of share capital must be offered to the public
- Number of shareholders must not be less than 300
- After listing, company must submit quarterly, half yearly and annual accounts.
- Securities must be fully paid up at the time of allotment
- Un-allotted securities must be sold on Nigeria Security Exchange Trading floors.
- Provision for issue of managers, acquisitions, unit trust and mutual funds must be made.
- For second tier security market, companies must financial statements and business records for the past 3 years.
- Also, Date of last audited accounts of second tier security market must not be more than 9 months
- Amount of money that can be raised for second tiers may not exceed N100 million
- Annual quotation fees is a flat rate as specified by the regulatory body.
- For third tier security market, annual quotation fees is based on market capitalization.
- Also, for third tiers, at least 15% share capital must be offered to the public and number of shareholders must not be less than 50.
Regulation of Capital Market and Objectives
Financial market regulation can be strictly defined as a framework of rules, laws, and principles which guide the operation of these markets as well as the institutions and individuals that conduct business in them.
The Prime objectives of the capital market regulation are:
- Investor protection
- Ensuring that the markets are fair, efficient and transparent
- Reduction of systemic risks
- Creative accounting
The government actually have certain stated financial and economic objectives and to ensure that they are achieved, proper regulatory framework has to be laid in place to prevent institutions and individuals from engaging in acts which are capable of hampering the realizations of the set objectives.
In summary, regulation of the capital market is meant to protect public interest which operates on the need to promote economic development and confidence which in turn should bolster inward investment.
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Reasons for Market Regulation
The following are reasons for capital market regulation:
Financial Stability
To ensure financial stability which is paramount to economic stability, regulations are necessary to prevent or withstand unintended fluctuations and shocks in the economy.
Economic and Political Development
An overriding factor in the regulation of financial market is the significant importance of these markets to the economic growth and development, and indeed political stability of any country.
Investor Protection
A third basis of capital market regulation is investor protection. Investors awareness that they’re are well protected could definitely stimulate confidence and consequently increase participation in the market.
Promotion of Market Confidence
Regulation is necessary to promote efficient financial system capable of facing the challenges of innovation by adjusting promptly and easily, to changing economic and financial circumstance.
As such, the system must encourage competition and guard jealously, all measures that facilitate the sustenance of confidence in the market.
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Types of Market Regulations
There are two types of regulations;
- Statutory regulations and;
- Non-statutory regulation
Statutory Regulation
These are laws created by a legislative enactment. There are four basic statutory financial market regulatory agencies in Nigeria.
These regulatory agencies are the Federal Ministry of Finance, Central Bank of Nigeria, Securities and Exchange Commission, and Nigeria Deposit Insurance Corporation (NDIC).
The SEC falls under the direct supervision of the Federal Ministry of Finance, while the Central Bank of Nigeria reports directly to the presidency.
Non-Statutory Regulation
The Nigeria’s stock exchange regulates their members for the purpose of meeting the aspirations of the financial markets in Nigeria.
They draw up rules and regulations that govern the conduct of the market that are under their supervision and the operators.
The rules and regulations are to be cleared with the regulatory apex – institutions for desired effects.