|Chinonyelum Uwazie||Vincent Iweze|
In a bid to address the demand by investors and other capital market participants for a more efficient securities clearing and settlement system, the Nigerian Securities and Exchange Commission recently made provisions for the dematerialisation of securities in a newly revised Consolidated Rules and Regulations 2011.
This development followed years of complaint from market participants, especially shareholders, of hardships ranging from risk of loss or theft of certificates to delay in issuing certificates which most often resulted in the shareholder's inability to deal with allocated shares prior to receipt of certificate. Issuers also faced mounting costs of printing and dispatching certificates to subscribers in addition to other administrative costs.
The newly revised rules and regulations defines dematerialisation as "the elimination of physical certificates or documents of title that represent ownership of securities so that securities exist only as book entry records."
The rules however does not contain conclusive provisions on the issue; instead it requires a depository (defined as a custodian who holds securities on behalf of known investors) to, state in its rules, the specific securities which are eligible to be held in dematerialised form including shares, scripts, stocks, bonds, debentures, units of mutual funds, rights under collective investment schemes and venture capital funds, commercial papers, certificates of deposit, securitised debt, money market instruments and government securities.
The depository rule shall among others provide for certificated securities to be converted to uncertificated securities and for issuers to issue uncertificated securities.
Typically, only paper instruments were required as evidence of ownership of securities under traditional Nigerian law. The Nigerian Companies and Allied Matters Act of 2004 makes it mandatory for companies to deliver certificates of all shares allotted or transferred within three months of allotment or transfer unless some other condition applies to render delivery impossible.
Only such a certificate, issued under the common seal of the company, serves as prima facie evidence of title to the shares under the Act. In 2007, the Investment and Securities Act of Nigeria made provisions for electronic entry of securities under prescribed terms. However, a subsequent rule made pursuant to the Securities Act required issue of securities certificates upon such electronic entries.
It is important to note that while the newly revised rules and regulations encourages securities in dematerialised forms, there is nothing to suggest that the use of paper instruments has been abolished. It would appear that the dematerialisation is optional and an investor may still chose to hold security in physical form.
In fact, the revised rule stipulates that part of the duties and responsibilities of the central securities depository is to "balance and reconcile the aggregate of the central securities accounts with the record of the relevant issuer in respect of each kind of certificated security, not less than once every six months, as well as in respect of each kind of uncertificated security..."
It is however likely that parties seeking to sell on the exchange will be required to dematerialise the shares before any sale can be made through the exchange.
It is anticipated that adequate compliance with the revised rules will enhance the efficiency of the Nigerian capital market. Investors will no doubt be relieved of the problem of delay in delivery of certificates, fake certificates, risk of loss, as well as cost of stamp duties.
There is however need for the government to embark on harmonisation of laws that may hinder the full implementation of the rules, especially relevant portions of the Nigerian corporate law.
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