The responsibility for the near collapse of the stock market in 2008 has been rightly placed on regulatory failure. This is not an indication of inadequate regulatory provisions to guide the operations of the market and protect investors but a question of non-enforcement of existing rules of the business. This is confirmed by the present steps being taken by regulators of the stock market to enforce regulatory provisions that have been left to lie low for years.
The latest in this dispensation is the decision of the management of the Nigerian Stock Exchange to enforce payment of penalty by companies for delay in payment of declared and approved dividends. The 5% surcharge on the gross dividend amount is not a new provision but a part of the listing requirements to which every listed company consented to at the time of listing. It is quite instructive therefore how long a very important rule as that meant to protect investors has been left idle on the tables of regulators.
The consequence of non-enforcement of this rule is that a good number of companies were given a wide room to play a hide and seek game with dividends of shareholders. They will declare dividends without the intension to pay. In the worst cases, a new year’s dividend will fall due while shareholders are yet to receive the previous year’s approved dividend. A good part of what is called ‘unclaimed’ dividends actually constitutes ‘unpaid’ dividends.
Some companies will declare a dividend without specifying closure of register and payment dates. Such companies are usually the ones that default on dividend payment. If some companies committed to good corporate governance can specify those dates at the time of dividend announcement and keep to the dates, it is possible for all listed companies to do the same. Market regulators should hence forth reject any dividend announcements without complete information as to when it must be paid. In this way, they will enforce a uniform standard of operation for all listed companies in the stock market.
A company usually releases its earnings reports about the same time at the end of every reporting period. Closure of register and payment dates usually fall within the same period from year to year. Only minor changes on the time table are necessary for companies to hold annual general meetings and pay dividends to shareholders within the same month every year. Unless a company is facing a major problem in a year, it is not difficult to specify dividend payment date at the time of declaring the dividend and stick to it. Even so, such a problem will not normally occur from year to year.
The decision to enforce the 5% penalty for non-payment of dividend on schedule now demands that all dividend declarations must come with payment dates. Otherwise companies will escape the regulation by delaying the announcement of closure and payment dates. Payment date may be shifted forward where there is a genuine reason to do so but not more than once.
Regulators should be mindful of cases where some companies might want to put up a semblance of compliance by partial payment of declared dividends. In a number of cases, the dividend cheque gets to the registrars in piecemeal.
Company registrars and listed companies are under the regulatory umbrella of the capital market. That makes it easy to confirm who is to blame for non-payment of dividend on due date and therefore who ultimately bears the penalty.
This equally provides an opportunity to prop up the efficiency of registrars. They will now insist on getting the dividend cheques early from the companies for them to meet the payment date. The ultimate benefit of enforcing the rule on dividend payment will be to strengthen the operating efficiency of stock market transactions down and across the lines of various operators.
Strengthening the regulatory framework of the stock market is the major way of rebuilding investor confidence. Listed companies should no longer be left to hide operating weaknesses and regulators allow trading on their shares at deceitful prices. This was the nature of regulatory failure that caused the free fall of share prices during the last market crash.
Most companies lacked the strength of earnings fundamentals to defend the share prices attained in the pre-crisis trading. Both interim and full year reports that should have revealed their true states of operation were hidden from the investing public for many years. This is a clear case of regulatory failure.
The present management of the Nigerian Stock Exchange has done well so far in correcting past regulatory mistakes. The enforcement of the release of earnings reports within the stipulated time frame is a major milestone already attained. The stock market is information-driven and ensuring that information on earnings performance of companies is available to the market timely is the essence of regulation. This will enable traders to achieve proper valuation of equities, ensure market stability and add a new measure of protection to the investing public.
