Capital Market Development Fund: Finding Common Use For Unclaimed Dividends

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The Securities and Exchange Commission (SEC) has a moral duty—to correct the inadequacies of other regulatory frameworks—if that is what it takes to the development of the capital market.

SEC is the government agency mandated to regulate and develop the Nigerian Capital Market. Its activities are currently governed by the Investments and Securities Act (ISA) 29 of 2007.

Under the leadership of an investment banker Mounir Gwarzo SEC has directed its energy towards developing the capital market. It is now falling back on one of its many tools of regulating the capital market—rule making. This is a tool that the SEC evokes as development occurs to ensure the Commission meets up with the standards of global best practices.

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SEC is evoking this tool to address the apparent lacuna in the Company and Allied Matters Act (CAMA) with regards to unclaimed dividends.

Dividends are returns on investment declared and paid by a company to its shareholders out of the company’s profit or reserves. CAMA empowers companies to declare dividends out of their distributable profits. Upon the declaration of dividends by companies, the registrars of companies are mandated by the Securities and Exchange Commission (SEC) to, within 24 hours of the declaration of the dividends, open a separate interest yielding escrow account into which all declared dividends would be paid. The registrar is further expected to, within 20 working days, prepare and dispatch dividend warrants to the shareholders, who are expected to claim the dividends within the life span of the warrants.

However, the reality is that some of these dividends warrants end up never being claimed by shareholders, and end up in the abyss of unclaimed dividends in the Nigerian Capital Market. Where dividends are returned unclaimed, CAMA empowers an issuing company to invest these dividends for its own benefit, while awaiting shareholders to claim same. This is a major inadequacy of the CAMA. Furthermore, CAMA rules stipulate that where a shareholder fails to claim dividends within a period of 12 years, such dividends can no longer be claimed. If barring shareholders from claiming their dividend after 12 years is what the architects of the CAMA felt was right, they were silent on who should have custody of the dividends beyond this point. This is the mother of all lacunae. And this is where SEC seeks to intervene and offer a way out, a law that will fill the gap created by the lacuna in the nation’s companies’ regulatory framework with regards to unclaimed dividends.

A solution is now found, which is in tune with what obtains in other jurisdictions. The solution is a simple one—putting the unclaimed dividends to common use.  Evoking its rule-making powers, SEC has come up with the idea of establishing the Nigerian Capital Market Development Fund (NCMDF) as a company limited by guarantee.

What do other jurisdictions do with their unclaimed dividends? In India the Investor Education Protection Fund (IEPF) was created to receive, among others, unclaimed dividends which have stayed with a company for a period of seven years from the day it is due. In Australia all unclaimed dividend are transferred to the Australian Securities and Investment Commission (ASIC) within a period of six years from the day it is due.

Gwarzo, a 2005 Fellow of the Instituted of Chartered Brokers, and his team at the SEC would not be going outside the provisions of the law if one looks deeply in to the provisions of the ISA. ISA has given SEC the power to prescribe, as it deems appropriate, necessary rules for dealing with unclaimed dividends and unclaimed certificates by public companies and their agents. This provision was wisely inserted by the National Assembly when coming up with the ISA in 2007. What the Gwarzo is doing is just prescribing an innovative way of dealing with the unclaimed dividends and the willingness to implement same.

In the past the issuing companies have profited from the returns on investment of the statutorily barred investors. Now is time to get its act more morally correct, by putting the benefit of these returns to common use. This is by channelling them into a fund that will further develop the capital market, the source of the returns in the first place.

The CMDF was established with the following broad objectives; facilitate the development of the Nigerian capital market; promote financial literacy and encourage an in-depth understanding of the Market; and, finally, carry out infrastructure projects and initiatives.

Gwarzo, whose career path has exposed him to many jurisdictions and how they operate their securities and exchange institutions — from the US to South Africa; and from Malaysia to Singapore, knew what is good for the development of a robust capital market. In 2006 Gwarzo had a study visits to and work attachment at Suruhajaya Skuriti – The Malaysia Securities and Exchange Commission, Bursa Malaysia; the Malaysian Stock Exchange; the AM Bank – one of the top 3 Investment Banking Institutions — and CIMB,  one of the top three Investment Banking Institutions in the world.

.Talking of putting the unclaimed dividends to common use — as opposed to the sole use of it by the issuing companies — the Commission firmly believes the funds would be best utilized if re-injected into the economy. This is true as no economy can develop without a vibrant capital market playing the role of capital accumulation. Capital markets are critical for tackling Nigeria’s biggest challenges of infrastructure deficit and unemployment.

When the NCMDF takes off, the unclaimed dividends will immediately provide the much needed liquidity to the market. Channeling the unclaimed dividends into the capital market could significantly impact market stability, especially at times when it is being threatened by the exit of foreign portfolio investments.

Liquidity from the unclaimed dividends will ensure that market indices do not fall far below fair value, thereby protecting the value of shareholders’ wealth, including the wealth of investors whose dividend is unclaimed since they own shares in quoted companies.

Similarly, the unclaimed dividends can finance the 10-year Capital Market Development Master Plan (2015-25). Implementation of the master plan would come at significant investment costs. Therefore, applying the unclaimed dividend funds for this purpose would imply faster, more effective implementation.

Most importantly, the Commission believes that part of the strategy to curb the recurring issues of geometrically increasing unclaimed dividends will be solved with technology.

Centralised investor data bases, electronic remitting process for dividends and other forms of electronic reporting by market intermediaries and listed companies are key tools to achieve this initiative.  The current e-dividends system is one of such initiatives. The Commission believes the NCMDF can finance the technological needs of the capital market once it comes on stream. And in the end it will be win-win situation as statute barred unclaimed dividends can be utilised to further these initiatives to the ultimate benefit of the investor.

The likely challenges the NCMDF is going to face is not the lack of  takeoff capital —  SEC is ready to inject 5 billion naira — but the willingness of issuing companies and registrars to comply with the new policy. This is because they have been beneficiaries of these unclaimed dividends for long. But on closer look at the way the SEC is run today — carrying all stakeholders along — that may not, after all, pose a serious challenge.

Finding a common use for the unclaimed dividend remains a moral obligation of all—SEC and the stakeholders. The SEC has shown the way; let the stakeholders beat the path.

— Hassan is a financial systems analyst based in Abu