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The stock market is considering a major amendment to its rules to checkmate boardroom intrigues and block information arbitrage that tend to confer advantages on companies’ directors.
The new rules also expand the scope and authority of corporate financial reporting while eliminating gaps that allow companies to sidetrack relevant rules in stage-managing corporate compliance.
The draft of the extensive amendments obtained at the weekend seeks to provide clarity and greater disclosures on directors’ trading in shares, corporate liability for accuracy and compliance of financial statement, dissuade bogus dividend payment and other boardroom’s maneuverings that tend to favour insiders.
The proposed amendments come on the heels of increased violations of rules on ‘closed period’, when directors are banned from trading in the shares of their companies. Rule 17.17 of the Nigerian Exchange disallows insiders and their connected persons from trading in the shares or bonds of their companies during the ‘closed period’ or any period during which trading is restricted. This period is mostly at a time of sensitive material information, like prior knowledge of financials, dividends or major corporate changes, which places directors and other insiders at advantage above other general and retail investors.
A review of the disclosure violations at the stock market at the weekend showed that all violations in 2021 were related to violation of Rule 17.17 on ‘closed period’. Also, two-thirds of violations so far this year were related to violation of ‘closed period’.
Under the amendments, in addition to the provisions of relevant accounting standards, laws, rules and requirements regarding preparation of financial statements, companies will now be required to include several specific declarations on securities transactions by directors, changes in shareholding structure, self-assessment on compliance with corporate governance standards and internal code for directors on securities transactions, among others.
According to the new rules, in relation to securities transactions by directors, a company shall disclose in its quarterly financial statements, full year audited financial statements, and in corporate governance report contained in its yearly report whether the company has adopted a code of conduct on securities transactions by its directors on terms no less exacting than the required standard set out by the market.
The company is also required to disclose, having made specific enquiry of all directors, whether its directors have complied with, or whether there has been any non-compliance with, the required standard set out in the Exchange’s rules and in code of conduct on securities transactions by directors.
In the event of any non-compliance with the required standard set out by the market, the company is expected to provide the details of such non-compliance and an explanation of the remedial steps taken by the company to address such non-compliance.
Besides, a company shall incorporate in its half-year financial statement its shareholding pattern, and also indicate whether or not its free-float is in compliance with the Exchange’s free float requirements. Non-compliance with free float requirement, a percentage of company’s shares that should be freely available and in the hands of retail shareholders and non-insiders, limits efficiency of price discovery at the stock market.
According to the proposed new rules, a company shall disclose in its annual report the details of shareholders holding five per cent or more of the company’s share capital. The Exchange shall provide a checklist on the contents of companies’ annual report, which may be amended from time to time.
With the new rules, dividend recommendations – including interim and final dividends, shall be accompanied with the relevant quarterly or yearly financial statement. Such dividend recommendations must also have prior approval of the primary regulators. The Central Bank of Nigeria (CBN) and National Insurance Commission (NAICOM) are the major primary regulators.
In addition, a company shall not file any interim accounts without having first filed its last audited annual accounts, and any contravention of this provision shall be deemed to be an unauthorised publication under the rules of the Nigerian Exchange (NGX).
In another amendment that seeks to curb delay and afterthoughts, every company that chooses to audit its quarterly accounts shall within one business day after the board meeting at which such decision was taken, file with the Exchange the board resolution indicating its intention to audit its quarterly accounts and that its accounts will be filed later than the stipulated date.
While underscoring corporate liability for accuracy and authenticity of accounts, the amendments stipulate that a company shall be held liable for the content of all financial statements filed with the Exchange and as such, should exercise all reasonable care in preparing and filing its financial statements to ensure that all information in the financial statements that it submits are accurate; not misleading, false or deceptive; free from error and material misstatements, and do not omit any material facts likely to affect the import of such information.
Financial statements – full year audited financial statement and quarterly financial statement, shall be prepared using the accounting policies and methods that comply with International Financial Reporting Standards and other accounting standards and rules set forth by the Financial Reporting Council of Nigeria or any other relevant regulator, and shall contain the information required by the provisions of the relevant rules and the instructions established by the Exchange.
The draft requires companies to ensure that their financial statements remain available to the public through the corporate websites for at least five years.
The draft also expands scope of scrutiny to companies and entities that issue debt securities as well as fund and portfolio managers of mutual funds, with a mandate for them to file their half-year financial statements through the Exchange’s Issuers’ Portal not later than 30 calendar days after the end of the relevant quarter.
Besides, fund managers shall include in or circulate with each annual report and audited statement of accounts of a collective investment scheme (CIS) or mutual fund, a statement of asset value of the trust and of the investments comprised in the trust. The fund manager shall also include details concerning the total number of units issued and redeemed during the financial year, and the number of outstanding units at the end of the financial year.
