How Not to Dampen Investors’ Confidence

The move by the federal government to borrow unclaimed dividends as provided in the Finance Act of 2020, is capable of dampening the rising investors’ confidence in the capital market, writes Goddy Egene

The Nigerian stock market recorded a historic performance last year when its rose by 50.03 per cent after a decline the

previous year. That growth was the best global performance among the 93 markets tracked by Bloomberg. Unlike in the past when foreign investors used to drive the activities in the market, the local investors took the lead last year, contributing significantly to the gain recorded.

For instance, domestic investors accounted for 65.2 per cent or N1.239 trillion out of the total N1.899 trillion invested in equities as at end of November 2020, while foreign investors staked N659 billion or 34.7 per cent.

This is a positive development considering the fact over the years, domestic investors’ participation has been very low and stakeholders have been looking for ways to improve the patronage. Therefore, it is highly encouraging that more domestic investors are now showing interest in the market.

However, the increasing interest by local investors is being threatened by move by the federal government to borrow unclaimed dividends in the capital market and dormant account balances in banks. One of the major reasons investors stake their money on stocks is to get returns in form of dividends. These dividends have sustained many investors over the years. However, some of the dividends have been left unclaimed. Although efforts are being made by regulators and other stakeholders to ensure owners of the unclaimed dividends receive them, the federal government is about to have access to dividends through the Finance Act 2020, which President Muhammadu Buhari recently signed into laws.

Part of act provides that “Any unclaimed dividend of a public limited liability company quoted on the Nigerian Stock Exchange and any unutilised amounts in a dormant bank account maintained in or by a deposit money bank which has remained unclaimed or unutilised for a period of not less than six years from the date of declaring the dividend or domiciling the funds in a bank account shall be transferred immediately to the trust fund.”

The act states that the monies transferred to the trust fund will be a “special debt owed by the federal government to shareholders and dormant bank account holders.”

However, the law exempts official bank accounts owned by the federal government, state government or local governments or any of their ministries, departments or agencies.

It provided that the operation of the trust fund will be supervised by the Debt Management Office (DMO) and governed by a governing council chaired by the finance minister and a co-chairperson from the private sector appointed by the president.

Other members of the governing council shall include the governor of the Central Bank of Nigeria (CBN), director-general of the Securities and Exchange Commission (SEC), managing director of the National Deposit Insurance Corporation (NDIC), a representative of the registrars of companies, two representatives of the shareholders’ association, a representative of the Bankers’ Committee and the director-general of the Debt Management Office as the secretary of the trust fund.

But before the act was passed by the law makers and signed by President Buhari, there has been opposition by shareholders and other members of the capital market community. According to them, the government lacks powers to manage funds belonging to private sector investors.

And more stakeholders, including politicians and rights activists, have raised their voices against the move, urging the government not to go ahead with the plan.

Stockbrokers said the move was unnecessary because capital market regulators and operators had leveraged technology to put in place many initiatives that are already addressing the issue of unclaimed dividends.

For instance, the Chairman, Association of Securities Dealing Houses of Nigeria (ASHON), Chief Onyenwechukwu Ezeagu, said initiatives such as dematerialisation of shares which entails upload of quoted companies’ shares in the Central Securities Clearing System (CSCS) for ease of reconciliation, adoption of E-Dividend and E-Mandate, consolidation of multiple accounts, identity management engagements, introduction of electronic Initial Public offering (e-IPO) are already having a positive impact on the management of unclaimed dividends in the market.

Other initiatives are: the adoption of Minimum Operating Standards (MOS) for operators to enhance efficiency; intensified investor education, continuous stakeholders’ engagements, process reform and streamlining and know your customer (KYC) update on clients’ accounts among others.

“Generally, the incentives for savers and capital providers in the capital market is the expectation of dividends and capital appreciation. It is therefore, our considered view that the proposed legislation, if passed, will be a great disincentive to savings, long-term capital mobilisation and serious disruption of the Nigerian economy since it will take away the only expectation of investors in the market,” Ezeagu said.

Also speaking, the President, Chartered Institute of Stockbrokers (CIS), Mr. Olatunde Amolegbe, described the law as objectionable at this stage of the market.

According to him, the Securities and Exchange Commission (SEC) would always ensure that unclaimed dividend is transferred to capital reserves of the company for restricted utilisation such as capital expansion and issuance of bonus shares to the company’s shareholders.

The President of the Institute of Capital Market Registrars (ICMR) and Chief Executive of Coronation Registrars Limited, Mr. Seyi Owoturo, the federal government should come up with a holistic legislation on unclaimed financial assets across the economy with the viewing to managing them for the benefit of all stakeholders.

Owoturo said: “We did a study about four year ago that estimated the value of on unclaimed financial assets to be more than N1 trillion. The problem that I see is that the government shouldn’t be using the Finance Bill to takeover unclaimed assets.

“It should go to the National Assembly and do an unclaimed assets law. Let us face unclaimed assets generally. There are unclaimed (banker’s) cheques that are issued by companies. In Britain these cheques will go to the Crown while in the United States of America (USA) they will go to the state of the intended beneficiary’s last known address.

“There are also unclaimed insurance benefits and dormant bank accounts that were estimated at over a trillion Naira four years ago. The unclaimed dividend is only about N150 billion. Really if there is a problem, it certainly is not unclaimed dividends. The real problem here is that they abound all over the place.”

He explained that the enactment of a holistic unclaimed assets law would also resolve the potential conflict that would arise from the finance act which stipulated that the unclaimed assets would revert to the government after 12 years while the amended Company and Allied Matter Act 2020 stated that unclaimed dividend should revert to the company.

“Where will the money go? All over the world, countries seek to institute discipline and transparency around unclaimed assets by letting them go to either the sovereign or the state governments. But what the bill is saying is that after 12 years it would not revert to the company as stated by CAMA but to the government,” he said.

In the opinion of the Registrar/CEO of Institute of Capital Market Registrars (ICMR), Mr. Jonathan Eborah, unclaimed dividends represent the least unclaimed funds across all jurisdictions.

“There are only two countries whose unclaimed benefits fall below the Trillion Naira threshold and they are Nigeria’s unclaimed dividends at N158.44billion and the US’ unclaimed pension benefits of N114 billion. This indicates that there are unclaimed dividends in Nigeria and unclaimed pension benefits in the US, but they are comparatively insignificant to what obtains in their respective classes in other nations and in other classes. For Nigeria, with total dividend payout of 94.84 per cent between 2009 and October 2019, it appears that the effort by the stakeholders to reduce unclaimed dividends is yielding results,” he said.

Eborah suggested the way to handle and reduce the unclaimed dividends instead of moves by the government to take over its management.

According to him, there must be an understanding that unclaimed dividends (like other unclaimed funds) is a global phenomenon.

“The multiple subscription initiative by the capital market community should be sustained to reduce unclaimed shares which will ultimately further reduce unclaimed dividends. The SEC should insist that every new entrant to the capital market must be fully known and provide all that is required for electronic payment. ICMR should establish a Special Depository licensed by the SEC with the responsibility to locate owners of unclaimed accounts or their next of kin and encourage them to activate their claim, take up insurance cover over the funds, and manage the funds which shall remain with the registrars,” Eborah said.

He said this would will become a Nigerian model which may be adopted by other countries, stressing that ICMR (The special Depository), will have a role in addressing the issue of unclaimed dividend funds by collecting data from registrars, building and maintaining infrastructure frameworks that will help reconnect members with their unclaimed funds so as to solve, or lessen the issue of unclaimed dividend/funds on a continuous basis.

“There should be a continuation of public enlightenment by the SEC, the special Depository and other stakeholders. Finally, banks should encourage and assist their customers to embrace the electronic dividend registration,” he said.

On their parts, shareholders said dividends are private wealth of investors, either individuals or corporate entities and the idea of converting such private wealth to Federal Government’s revenue negates the relevant provisions of the rights to own property and asset as guaranteed by the 1999 Constitution, as amended.

In a statement signed by National Coordinator, Mr. Anthony Omojola and Founder, Sir Sunday Nwosu of Independent Shareholders of Nigeria (ISAN), the shareholders noted that to the extent of its inconsistency with the 1999 constitution, the act is null and void as the law expressly states that there shall be no forceful takeover of any private moveable or immovable property of any Nigerian without due and appropriate compensation and or valid court order.

“It is nothing short of expropriation which the constitution forbids. Dividends, including unclaimed dividends, are fund generated by private companies and made available to its shareholders in line with the provisions of Companies and Allied Matters Act (CAMA) and the Company Memart. That these funds are available only after the company has paid a host of taxes, including Companies Income Tax Act (CITA), Educational Trust Fund (ETF) and tax of about 32 per cent of gross profit is paid to the federal government and 10 per cent withholding tax on the shareholders for every dividend declared,” ISAN stated.

According to them, it was clearly overreaching and unacceptable for government to seek to expropriate the unclaimed dividends under the subterfuge of any revenue, noting that companies and individuals have a right to private properties and assets of which unclaimed dividends funds falls into.

They said the the philosophy behind the decision to appropriate unclaimed dividends is wrong, as returns on investments cannot be time barred by any progressive government.

They noted that the thinking that the cancellation of rights after 12 years is unconstitutional and the notion that expropriation is to cure an alleged unconstitutional wrong is also wrong, describing this as an inverse legal thinking that will lead to another unconstitutional mess.

“The unclaimed dividends belong to shareholders of companies and there is adequate provision that in the event of failure to claim; that such fund should revert back to the operations of the company. There are good structures around this position. Further, recovery by shareholders has thus been seamless. Rather than try to expropriate, government should enhance the structures,” ISAN said.

Also condemning the move by the government, Socio-Economic Rights and Accountability Project (SERAP), said the act does not ensure full respect for Nigerians’ right to property.

In a letter dated January 9, 2021, signed by its Deputy Director, SERAP, Kolawole Oluwadare, said: “The right to property is a sacred and fundamental right. Borrowing unclaimed dividends and funds in dormant accounts amount to an illegal expropriation and would hurt poor and vulnerable Nigerians who continue to suffer under reduced public services and ultimately lead to unsustainable levels of public debt.

“The right to property extends to all forms of property, including unclaimed dividends and funds in dormant accounts. Borrowing these dividends and funds without due process of law, and the explicit consent of the owners is arbitrary, and as such, legally and morally unjustifiable.” The letter, read in part “The borrowing is neither proportionate nor necessary, especially given the unwillingness or inability of the government to stop systemic corruption in ministries, departments and agencies [MDAs], cut waste, and stop all leakages in public expenditures. The borrowing is also clearly not in pursuit of public or social interest. “The security of property, next to personal security against the exertions of government, is of the essence of liberty. It is next in degree to the protection of personal liberty and freedom from undue interference or molestation. Our constitutional jurisprudence rests largely upon its sanctity.”

SERAP said that rather than pushing to borrow unclaimed dividends and funds in dormant accounts, the government ought to move swiftly to cut the cost of governance, ensure review of jumbo salaries and allowances of all high-ranking political office holders, and address the systemic corruption in MDAs, as well as improve transparency and accountability in public spending.

“The borrowing also seems to be discriminatory, as it excludes government’s owned official bank accounts and may exclude the bank accounts of high-ranking government officials and politicians, thereby violating the constitutional and international prohibition of discrimination against vulnerable groups, to allow everyone to fully enjoy their right to property and associated rights on equal terms. “SERAP is concerned that the government has also repeatedly failed and/or refused to ensure transparency and accountability in the spending of recovered stolen assets, and the loans so far obtained, which according to the Debt Management Office, currently stands at $31.98 billion.

“SERAP notes growing allegations of corruption and mismanagement in the spending of these loans and recovered stolen assets. “We would be grateful if your government would drop the decision to borrow unclaimed dividends and funds in dormant accounts, and to indicate the measures being taken to send back the Finance Act to the National Assembly to repeal the legislation and remove its unconstitutional and unlawful provisions, including Sections 60 and 77, within 14 days of the receipt and/or publication of this letter.” “If we have not heard from you by then as to the steps being taken in this direction, the Registered Trustees of SERAP shall take all appropriate legal actions to compel your government to implement these recommendations in the public interest, and to promote transparency and accountability in public spending,” it stated.