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International Briefing Series:
Nigeria
Friday 28 May 2010
Nankunda Katangaza
Policy Manager
(Africa, the Middle East and South Asia)
The Law Society of England & Wales
Chair
Peter Stephenson
Director
UK Trade & Investment, Lagos
• POLITICS
• ECONOMY
• OIL & GAS
• OPPORTUNITIES
• SUM-UP
• Good luck Jonathan- first Bayelsa State/Ijaw President
• Vice-President- Namadi Sambo, ex-Kaduna State
Governor
• 2011 Elections- some reform underway but needs free
& fair process this time.
• Some good new ministers- still with Obasanjo & IBB
influence?
• Finance Minister- ex-UK Goldman Sachs
executive- Olusegun Aganga.
• Petroleum Minister- Diezani Allison-
Madueke(ex Director Shell)
• NNPC- more changes –many problems
• Growth good at 6%- but real infrastructure
constraints
• Big budget bucks- 30% expenditure increase
from US$20.6 bn (2009) to US$31bn(2010)
• Track record on quality, efficiency of
development spending- “poor”
• Budget deficit at 6% financed by borrowing/oil round/
Eurobond etc
• Banking crisis still a drag- poor lending patterns to
SME’s. AMC still to emerge
• Foreign reserves and excess crude account revenues
are down- sovereign wealth fund emerging?
• Growth hotspots- agriculture/construction/ retail and
telecoms
• Petroleum Industry Bill & Gas Master Plan,
Local Content and Niger Delta issues.
• Benchmark price $ US 67/output 2.35 mnbpd-
looks ambitious and vulnerable to Delta
militancy and OPEC curbs
• Fuel subsidy equals all of Nigeria’s capital
spend
• PIB to reform the petroleum sector so that national oil
and gas industry will achieve 21st century global
industry performance.
• Re-structuring of NNPC
• Good governance, transparency and sustainable
development.
• Unpick offshore production sharing contracts within
IOC’s ?
• Derived from Nigerian content policy.
• Increase in indigenous participation in Oil & Gas
industry.
• Prescribes minimum thresholds for use of local services
and materials e.g. insurance.
• Promotes employment of Nigerian staff
• China has agreed to spend $23bn to build refineries and
downstream infrastructure.
• CNOOC looking to secure 6bn barrels of oil reserves.
• Sinopec paid $7.2bn for Addax in 2009.
• But IOC’s are digging in and won’t be shifted easily
from renewable leases- Exxon Mobil recently paid
$600m to renew.
• GDP growth- 6.2% in 2010.
• Massive import dependency
• Growing population +middle class
• 2015- Lagos will be the world’s 3rd largest city with 25
million inhabitants.
• 2050- Nigeria will be the 6th largest country in the
world. (Estimated 287 million population)
• Consumer Explosion-
• Cars/housing/tv’s/white goods/travel/private
schools/universities/entertainment/shopping/phones
• Super smart educated elite which treats London as a
suburb of Lagos.
• Nigerians returning home with management skills and
experience
• 70m lines-90%mobile + 80 m potential
• Business systems/ fibre optics/undersea
cable
• 3G –High speed internet/mobile tv
• Takeover possibilities (SA banks showing interest)
• Insurance/pension/brokerage reforms/bond market
• 80%unbanked/ 98% no insurance
• Technology/electronic payment
• Fear of fraud
• Credit agency infancy
• Corporate training: increase in professional
development
• Hotspots
telecoms/FMCG/power/financial/aviation/ports/
o&g/healthcare
• Emergence of private
schools/universities/polytechnics: developed by
corporate/state governments/private individuals.
• Education Ministry: focus on training/education and
quality assurance
• Growth rate 10%/GDP contribution 4.4%
($9.76bn)
• High demand/growing sophistication of
consumers- improving economics
• PZ/Unilever/Procter & Gamble/Nestle/GSK all
investing heavily (PZ £40m GSK £ 20m)
• Construction industry in Nigeria worth US$2.87bn in
2010.(Global Construction Perspectives and Oxford Economics forecast)
• The report named Nigeria the “Global hotspot from
here to 2020”. It puts the nation’s construction
growth as being even faster than India.
• Multi billion dollar construction industry.
• Infrastructure development topped the Nigerian
Federal Government agenda in the capital expenditure
budget for 2010 at approximately N506.2bn.
• Major projects underway include Eko Atlantic city and
Pinnacle in Lagos.
• Outperforming all SSA markets on OMIS (paid services)
revenues.
• 14th in world on revenue 2009/2010
• Paid for reports 2009/10 include:
• Oil & Gas
• Education & Training
• Fire/police/security
• ICT
• Financial services
• Agriculture
• Food & drink
• Beauty and fashion
• Construction
• Ports & logistics
• Several launch & customer events
• Business Select (fast-track business visas)
• Royal Assent 8 April 2010
• New laws modernize and simplify existing
legislation
• Criminal offence to offer or receive a bribe
home/abroad including foreign public officials
• Increase penalty from 7 to 10 years
• Introduce corporate offence of failure to prevent
bribe
• Encourages business to introduce adequate
procedures to prevent bribes
• Some political stability- head winds
ahead?
• Growth good at 6%
• Banking crisis-barrier to business growth
• Infrastructure constraints- road, rail,
aviation & power
• Chinese companies active in the economy
• UK investment growing
• Its tough- no short term fixes
• More returnees- internationalized Nigerians
• Oil price/good governance/ power/ anti corruption are
still critical
• Still stunning, unrealized potential………but how long will
it take?
Yinka Agidee
Partner
The Rock and Company (Lagos)
THE ROCK
AND
PARTNERS
SYNOPSIS
1. Historical Overview
2. Oil and Gas Legal Regime
3. Current Developments
a. Amnesty Programme
b. Local Content Law
c. Petroleum Industry Bill (PIB)
4. Business Opportunities
5. Dispute Resolution
a. Litigation
b. Alternative Dispute Resolution (ADR)
6. Summary
HISTORICAL OVERVIEW
• Oil was discovered in commercial quantities in
Oloibiri in Rivers state in 1958.
Nigeria is the 11th largest producer of crude oil in
the world.
Oil represents Nigeria’s economic backbone and
accounts for over 90% of export revenue.
Nigeria has a large untapped gas deposit, which
has largely been flared by oil companies.
• IOC’s have been the major players and practically
dominated every ramification of the oil & gas
industry.
OIL & GAS LEGAL REGIME
• The Nigerian oil and gas industry is principally regulated by:
• 1. The Petroleum Act (PA), Cap P10 Laws of the Federation
of Nigeria 2004;
• 2. The Petroleum Profits Tax Act (PPTA), Cap P13, Laws of
the Federation of Nigeria 2004; and
• 3. The Nigerian National Petroleum Corporation (NNPC) Act
Cap N123, Law of the Federation of Nigeria 2004
The PA was enacted in 1969, the PPTA in 1958
and the NNPC Act in 1977. While these laws have been
amended a couple of times, they remain substantially in the
original forms in which they were enacted.
CURRENT DEVELOPMENTS
The long anticipated reform of the oil and gas sector
is gathering momentum as the FGN puts in place
legislative and administrative regulations, which are
expected to revolutionise the industry. I will take
three key subjects:
1. Amnesty Programme;
2. Local Content law;
3. The Petroleum Industry Bill (PIB).
AMNESTY PROGRAMME
60 day pardon declared by the Federal Government of
Nigeria on 25th June 2009, to militants in Nigeria’s oil
rich Niger Delta;
Ended on 4th October 2009 with major militant groups
surrendering their weapons;
Post Amnesty period to address developmental issues in
the region, skill acquisition for ex – militants and
generally redress issues that led to the militancy;
Fosters peace, stability and security of operations in the
Niger Delta. Lauded locally and internationally but
suffered set back due to political instability in the
country;
Currently being pursued by the government.
LOCAL CONTENT
Nigeria Oil and Gas Industry Content Development Act
2010, was signed into law by the President on 22nd, April
2010.
Seeks to increase indigenous participation in the oil and
gas industry by prescribing minimum thresholds for the
utilisation of local goods, services and materials as well
as promote employment of Nigerians in the oil industry.
By this law the key element for all transactions in the
Nigerian oil and gas industry is Nigerian content
regarding overall project development, management and
execution.
SALIENT POINTS
Consideration of Nigerian content as a key element for project execution in the Nigerian oil and gas
industry;
First consideration to be given to Nigerian independent operators in the award of oil blocks and
projects subject to the fulfillment of conditions specified by the Minister;
Exclusive consideration to be given to Nigerian indigenous service companies which demonstrate
ownership of equipment, Nigerian personnel and capacity to execute projects;
Submission of a Nigerian Content Plan (NCP) when operators and contractors are bidding for
licences and executing projects. The NCP should state that first consideration will be given in the
procurement of goods and services produced locally as well as in the employment and training of
Nigerians.
The minimum Nigerian content required is set out in the schedule to the Act and must be complied
with strictly;
All project promoters and operators are to consider Nigerian content when evaluating any bid.
Where bids are within 1% of each other at commercial stage, the bid containing the highest level of
Nigerian content shall be selected, provided the Nigerian content in the selected bid is at least 5%
higher than the closest competitor;
Award of contracts shall not be solely based on the principle of the lowest bidder. Where a Nigerian
indigenous company demonstrates capacity, it shall not be disqualified solely on the basis of the
lowest bidder provided the value does not exceed the lowest bid by 10%;
All projects, contracts, subcontracts and purchase orders in excess of $1million shall require the
approval of the Nigerian Content Monitoring Board for adverts, pre-qualification criteria, technical
bid documents and proposed bidders list;
Establishment of a Nigerian Content Monitoring Board (the Board) to ensure compliance with the
provisions of the Act;
Establishment of offices in the project location and communities where the operator has significant
operations, as directed by the Board;
SALIENT POINTS: CONTD
Retention of 5% management positions as approved by the Board as expatriate positions to take
care of investor interests;
Fabrication and welding to be carried out in - country;
Multinational companies working through Nigerian subsidiaries must demonstrate that the Nigerian
subsidiary, owns a minimum of 50% of the equipment deployed for execution of the work;
No insurance risk in the Nigerian oil and gas industry can be placed offshore without the written
approval of the National Insurance Commission (NAICOM) which shall ensure that Nigerian local
capacity has been fully exhausted;
Only the services of a Nigerian legal practitioner or a firm (s) of Nigerian legal practitioners whose
office is located in any part of Nigeria, can be retained for legal advisory services, except for project
management and consultancy services, where the minimum Nigerian content required is 50%;
Retention of the services of only Nigerian Financial Institutions for Financial services, except where
impractical in the opinion of the Board. Maintenance of bank accounts within Nigeria with a
minimum of 10% of the revenue generated from their Nigerian operations to be retained within
Nigeria;
Appropriate fiscal framework and tax incentives for foreign and indigenous companies which
establish facilities, factories, production units or other operations in Nigeria for purposes of carrying
out production, manufacturing or for providing any services and goods otherwise imported into
Nigeria;
Succession plan which shall provide for Nigerians to understudy each incumbent expatriate for
4years and at the end of the 4year period, the position shall be occupied by a Nigerian;
Establishment of an oil and gas e – market place to facilitate transactions in the industry;
The Board in conjunction with the Nigerian Maritime Administration and Safety Agency (NIMASA) to
ensure compliance with the provisions of the Cabotage Act in relation to matters pertaining to
Nigerian content;
POINTS TO NOTE
Definition of a Nigerian company – Interpretation section
The Act defines a Nigerian company as a company formed and registered under the
Companies and Allied Matters Act with not less than 51% of the equity held by
Nigerians.
Offences and Penalties – Section 68
An operator, contractor or subcontractor who carries out any project contrary to the
provisions of this act, commits an offence and is liable on conviction to a fine of 5%
of the project sum for each project in which the offence is committed or cancellation
of the project.
Establishment of a Nigerian Content Development Fund - section 107
To fund the implementation of Nigerian content development, 1% of every contract
awarded is to be deducted at source and paid into the fund.
Companies operating in the oil industry will need to introduce
procedures to comply with this law. This would involve a review of
their policies relating to human resources, procurement and
collaboration with third parties.
PETROLEUM INDUSTRY BILL (PIB)
An Act to establish the legal and regulatory framework,
institutions and regulatory authorities for the Nigerian
petroleum industry, to establish guidelines for the
operation of the upstream, midstream and downstream
sectors, and for purposes connected with the same.
Currently before the Senate and scheduled to be passed
into law in August 2010.
The PIB, seeks to consolidate and/or repeal a number of
existing legislation and create a single, comprehensive and
all inclusive piece of legislation in the petroleum industry.
THE PIB: MATTERS ARISING
FISCAL REGIME
A progressive royalty based on production rates and oil price is introduced replacing the existing depth-related royalty. The
PIB proposes higher royalties and increased off - take. It also introduces the Nigerian Hydrocarbon Tax along with other
taxes, rents and royalties existing in the industry.
INCORPORATED JOINT VENTURES
The PIB advocates for existing joint venture contracts to be turned into incorporated joint ventures with the new national oil
company
SEPARATE LICENSES FOR OIL AND GAS
The PIB treats oil and gas separately, licenses will be issued for either oil or gas, and if a contractor wishes to produce both,
two separate licenses are needed. Also, oil and gas are treated separately for cost and taxation purposes, with a lower tax
rate for gas than for oil as a way of incentivizing the development of gas.
DEVELOPMENT OF GAS E & Ps AND THE GAS MASTERPLAN
The PIB actively encourages the development of gas through allocation of licences to prospect for and develop gas in
accordance with the Gas Masterplan.
ACREAGE RELINQUISHMENT AND MARGINAL FIELDS
The PIB provides for the Directorate to take over licenses after ten years of inactivity as part of relinquishment clauses and
marginal fields initiatives.
LOCAL CONTENT MAXIMISATION
Failure to comply with the terms of any local content law shall be a ground for revocation of a
licence, lease, contract or permit that may have been previously granted to the company that failed to comply with the
said terms.
DOMESTIC GAS SUPPLY OBLIGATIONS AND PENALTIES FOR NON – COMPLIANCE
Lessees of petroleum mining leases are to allocate a specific volume (to be determined by the Nigerian Petroleum
Inspectorate) of the gas produced, to the domestic market. Stiff penalties are provided in the event of default including
payment for the gas that was not supplied as provided in the gas sales agreement, a fine of $3.50 for every 1,000 standard
cubic feet of gas that was not supplied to the domestic market and prohibition from exporting its gas during the event of
default. The Domestic Gas Obligation was introduced prior to the PIB and is an existing policy of the government.
GAS FLARING
The PIB provides for payment of penalties as determined by the Minister in the event of flaring. In July 2009, the Nigerian
Senate passed the Gas Flaring (Prohibition and Punishment) Bill (GFPPB). The GFPPB seeks to amend the Associated Gas
Re-injection Act (AGRA) 1979 and prohibit gas flaring in Nigeria. Under the AGRA, it is illegal to flare unless an approval is
given by the Minister of Petroleum Resources.
PIB: FISCAL REGIMES
CURRENT RATES - Presently, the applicable royalty rates are as follows:
On – shore operations – 20%
Swamp/shallow waters (1- 100m) – 18.5%
Offshore
Up to 200m - 16.67%
201 - 500m - 12.0%
501 – 800m - 8.0%
801 – 1000m - 4.0%
Above 1,000m - 0%
PIB - ROYALTY BASED ON PRODUCTION
Progressive royalty linked to production rate and oil price is introduced replacing the
existing water depth – related royalty.
Onshore
Fields producing up to 4,000bpd - 5%
Over 4000 to 8,000bpd - 12.5%
Over 8,000bpd - 25%
FISCAL FRAMEWORK
Offshore (water depth of 200m)
Fields producing up to 8000bpd - 5%
Over 8,000 to 16,000 - 12.5%
Over 16,000bpd - 25%
PIB - PRICE BASED ROYALTY
Ranges on an incremental basis from 0% to 25% starting from $70bbl with a price
cap of $160 as follows:
$0 to $60 - 0%
$60 to $100 - 0% plus 0.4% royalty percentage for every $1 increase in value above
$60bbl
$100 to $130 - 16% plus 0.2% for every $1 increase in value over $100bbl
$130 to $160 – 22% plus 1% for every $1 increase in value over $130
Over $ 160 - 25%
PIB: WHY IOCs ARE COMPLAINING
IOCs are not pleased with the higher costs imposed on deep offshore
projects, including taxes and royalties.
Nigerian deep offshore projects have been highly profitable for IOCs
because unlike onshore there were no royalties and few security issues.
The Nigerian National Petroleum Corporation (NNPC) does not partner
IOCs in offshore projects, making it easier to access investment from
other IOC partners.
Although deep offshore terms may be similar to competitors, like Angola,
experts have said they are not comparable due to Nigeria's unique
working conditions, often hampered by secondary costs related to
corruption and security problems. Some of the IOCs have viewed the
previously generous deep offshore terms as compensation for these
problems.
Government’s intention is to create a win – win situation for all
stakeholders and will try to harmonise conflict areas before it is passed
into law.
Opportunities for International
Lawyers
Are there still opportunities for foreign
lawyers in view of the Nigerian Content
Act?
Tremendous opportunities still exist for
foreign firms to partner with Nigerian law
firms through loose partnerships,
correspondent relationships, alliances etc.
INVESTORS CONCERNS
• Geology/Security Issues
Nigeria has proven and viable reserves of oil and gas
to keep the industry running for a long time.
• Fiscal Terms
Whether Taxes, Royalties and other costs are such
that will keep the investor in business
• Legal Regime
Whether the local legal/regulatory regime and
practice creates favourable investment environment
DISPUTE RESOLUTION – spotlight on
Lagos State
Litigation
States High Courts/Federal High Court
Court of Appeal
Supreme Court
Alternative Dispute Resolution (ADR) – The Lagos Multi –
Door Courthouse
Established in 2007 vide ‘’A Law to Establish the Lagos Multi-
Door Courthouse and for other connected matters, Law 21’’,
Laws of Laos State;
Situate at the premises of the High Court of Lagos State;
Has been adopted by other states including Kano, Akwa -
Ibom, Abuja
LITIGATION
The most recognized and established form of dispute
resolution system in the world;
Based on the Common Law system adopted from
England;
Adversarial and long period of determination
Trade Practices
Parties Physical presence is required during Pre Trial
Conference (PTC) and trial
FORMS OF ADR
1. Arbitration:
Arbitration is more aligned in many respects to litigation.
2. Mediation
It is a voluntary private dispute resolution process in which an
impartial third party assists parties to reach a negotiated
settlement.
3. Conciliation
It is a voluntary private dispute resolution process in which an
impartial third party assists parties to reach a negotiated
settlement.
4. Early Neutral Evaluation (ENE):
This is a technique whereby an impartial senior lawyer or retired
judge or magistrate may evaluate the likely outcome of a case if it
were to proceed to trial. This is expected to lead to more
realistic negotiation between the parties, without any influence on the
path or process of negotiation, nor any binding judgment imposed.
ARBITRATION AND CONCILIATION
ACT: SALIENT PROVISIONS
Form of Arbitration Agreement - In writing;
A court before which a suit, subject of an arbitration
agreement is brought, SHALL, if any party request
when submitting first statement, order a stay of
proceedings and refer the parties to arbitration.
However, arbitral proceedings and suits may run
concurrently;
Number of arbitrators determined by parties to the
agreement or deemed 3, where no provision is made;
Foreign arbitral awards are recognised and
enforceable
MEDIATION
Walk – ins
Any party to a dispute may initiate ADR service by
writing to the Director of the LMDC or visiting the
centre.
Court Referrals
The presiding judge in a matter already in litigation or
in the course of PTC may in appropriate
circumstances, refer parties to the centre
Direct Interventions
The LMDC may, in certain circumstances where public
interest or interest of disputing parties demand,
approach parties with a view to assisting in the
resolution of their disputes
PROCEDURE
Request for mediation
Submission to mediation
Execution of a mediation agreement
Appointment of a mediator by the LMDC
Date, time and Place – each mediation session shall not
exceed 10 days from the date of the last session and
parties are encouraged to reach a settlement within 3
mediation sessions
Settlement Agreement is binding, has the force of law
and is deemed enforceable as a judgment of the High
Court of Lagos State.
SUMMARY
• Conduct business due diligence and obtain relevant information
in respect of the sector of interest;
• Identify preferred business vehicle and take steps to comply
with necessary requirements for legalisation of the same;
• Partnership and/or Joint Venture agreements should be put in
place;
• Make provision for dispute resolution;
• Change has come.
CONTACT DETAILS
THE ROCK AND PARTNERS
GLOBE BUILDING, 3RD FLOOR
25 ADEYEMO ALAKIJA
VICTORIA ISLAND, LAGOS.
TEL: 002341 4611334, 2715582
FAX: 002341 4610746
E-MAIL: trp@hyperia.com
WEB: www.trp-ng.com
Kalu Abosi
SPA Ajibade & Co
REVIEW OF THE UNIVERSAL
BANKING MODEL IN NIGERIA:
ISSUES AND PROCESSES
By:
Mr. Kalu Abosi
S. P. A. Ajibade & Co.
Suite 301, SPAACO House, 27A Macarthy Street,
Onikan, Lagos.
Email: kabosi@spaajibade.com
Website: www.spaajibade.com
Introduction
The Central Bank of Nigerian (CBN) is the primary banking
regulator of 24 banks operating in Nigeria most of which are listed
on the Nigerian Stock Exchange.
The Banks and Other Financial Institutions Act and the Central
Bank of Nigeria Act are the primary banking legislation with the
latter dealing with the powers, functions and responsibilities of the
regulator. CBN regulates the industry through circulars and
guidelines issued from time to time.
56
Introduction
Present Banks are the survivors of the “banking consolidation” of
2004 -2005 as a consequence of regulator mandated increase in
share capital. Banks that did not meet the requirements had their
banking licenses withdrawn.
All three foreign owned banks at the time chose not to merge with any
banks. Their parent companies increased their capital through direct
injection of funds to meet the regulatory requirement.
It is estimated that about 80% of the capital raised during the “banking
consolidation were fresh issues.
57
Introduction
This is an overview of the banking sector in Nigeria from
the CBN:
Loans & Advances £14,584,500,000.00
Shareholders’ Funds £6,943,000,000.00
Total Assets £ 46,544,900,000.00
Depositors Funds £31,252,500,000.00
Gross earnings £4,860,100,000.00
Branches 4329
58
Universal Banking &
Reforms
Current universal banking model was introduced in 2000 and
allows the banks to engage in a wide range of financial services
spanning insurance, asset management, investment advisory,
capital market transactions as issuing houses and underwriters
etc.
Sometimes these businesses are conducted by the bank itself as
the operating entity (where the sector regulator permits such), but
mostly through subsidiaries.
59
Universal Banking &
Reforms
(Cont’d)
Most financial service businesses in Nigeria today are owned
and controlled by banks e.g. Pension Fund Administrators,
Pension Fund Custodians, Insurance Underwriters and Brokers,
Trustees, Securities Registrars and Financial Advisory firms.
There is a perception that this close relationship between banks
and other financial service businesses exposes the banks and
the whole financial system to stability challenges and systemic
risks.
60
Universal Banking &
Reforms
(Cont’d)
The main issue underlying the risks are poor corporate
governance practices and absence of “arms length” transactions
and transparency within the group. In some cases the actions of
the banks and their affiliates border on the downright illegal.
Many non-performing loans, in some cases, close to 50% of an
institution’s loan portfolio. Insider credit and poor credit
administration processes. Majority of loan exposures were to the
“unsecured” securities (listed & private) and the petroleum
marketing sector.
61
Universal Banking &
Reforms
(Cont’d)
The “meltdown” in the Nigerian Capital market that saw the
loss of over 70% of the value of equities listed on the
Nigerian Stock Exchange (it is the only stock exchange in
Nigeria) was the wake up call to a re-evaluation of the
financial system in Nigeria.
62
Universal Banking &
Reforms
(Cont’d)
Change in leadership of the CBN in June 2009 brought about
several reforms and proposals for the banking industry including:
o Replacement of the executive management of “troubled
banks” and capital injection to banks with issues of capital
adequacy.
o Enforcement of board term limits for non executive directors.
o Imposition of 10 year term limits for bank CEOs (to take effect
retroactively).
63
Universal Banking &
Reforms
(Cont’d)
o New rules on margin trading have been put in place.
o A new credit and risk management system for banks is in
place.
o Reprieve from margin loan exposures of banks through the
Asset Management Corporation of Nigeria.
64
Universal Banking &
Reforms
(Cont’d)
A new Chief Executive resumed at the Securities and Exchange
Commission in January 2010 and there is a general move
towards more transparent dealings and a firmer enforcement of
laws and sanctions.
A number of institutions and individuals are facing the
enforcement action from both the SEC and the CBN.
Primary securities legislation is under review.
End of universal banking is a key reform element.
65
New Model & Transition
Process Requirements
Under the new model banks will conduct only core banking
businesses. Banks that conduct prohibited businesses through
subsidiaries companies will have to divest from such entities.
Aim is to “ring-fence” banking from other non banking
businesses.
The change will occur through the introduction of a new
licensing regime. CBN will withdraw existing licences and issue
new ones that spell out the regime.
S.P.A. Ajibade & Co. 66
New Model & Transition
Process Requirements
(Cont’d)there will be two classes of
In place of the Universal banking license
monoline banking licenses as follows:
o Commercial Banking made up of National and Regional Banks,
o Specialised Banks including Non-interest banking, Micro finance
banks and Primary Mortgage Institutions.
Permissible activities for commercial banks under the proposed new
licence include:
o Taking Deposits
o Provision of credit and finance facilities
o Custodial Services
o Ownership of non operating equity investments in non financial
firms.
o Provision of financial advisory services
S.P.A. Ajibade & Co. 67
New Model & Transition
Process Requirements
(Cont’d)
Prohibited activities for banks include:
o Insurance underwriting
o Loss adjusting services
o Re-insurance services
o Asset Management
o Broker/ dealer in the securities market
o Issuing house /underwriting (securities)
o Proprietary trading
Banks that intend to continue prohibited lines of businesses may
make a business case for continuation to the CBN. Where the case is
compelling the CBN will require that bank and its subsidiaries should
transit to a group structure.
68
New Model & Transition
Process Requirements
(Cont’d)
Elements of group structure- A holding company will own the bank
and the other distinct legal entities through which business will be
conducted.
Any new business that intend to own at least two banks or one
bank and hold up to 20% equity of any other financial institution
will adopt a group structure.
The holding companies are to be regulated by CBN and will be
non operating entities. Extensive corporate governance and other
rules on relationships and transactions within the group will be
enacted. 69
Possible Scenario
Holding
Company
Possible layer
Issuing House Primary
Commercial Securities
and Mortgage
Bank Trading
Underwriter Institution
S.P.A. Ajibade & Co. 70
Possible Scenario
Holding
Company
Issuing House Primary
Commercial Securities
and Mortgage
Bank Trading
Underwriter Institution
S.P.A. Ajibade & Co. 71
Possible Scenario
S.P.A. Ajibade & Co. 72
New Model & Transition
Process Requirements
(Cont’d)
• Upon the proposed rules becoming law, banks have 3 months
to decide their preferred option.
• Those that choose to divest from prohibited business have
another 9 months to divest from or “spin-off” the businesses.
• Banks that meet regulatory approval to transit to a group
structure will have a further 15 months to complete the
processes.
S.P.A. Ajibade & Co. 73
New Model & Transition
Process Requirements
(Cont’d)
• The Group structure is the way most banks will go. Already
one institution has said it would go that way.
• A number of the banks with suspect health are most likely
going to divest through an outright sale.
• Even before the new model was proposed one of the
“troubled banks” had already ceased to control its investment
banking and securities trading subsidiary.
S.P.A. Ajibade & Co. 74
Implications
Investment opportunities
o Banks with proprietary investments in real estate, petroleum
marketing, shipping etc. will have to sell to new investors.
o Some banks will go through a partial sale of subsidiaries and
may be looking for strategic partners with technical expertise to
take equity in some subsidiaries.
o Ongoing review of securities legislation may result in new
requirements by the SEC for ownership of capital market
operators - Issuing Houses, Trustees, Asset Managers and
Underwriters.
S.P.A. Ajibade & Co. 75
Implications (Cont’d)
o Some commentators have suggested that bank holding
companies should not be allowed to own controlling interest in
certain capital market operators regulated by the SEC.
o Other sector regulators like the National Insurance
Commission could come up with rules on ownership
requirements for group based Insurance companies.
o The ownership requirement of the group structure mandates
broad based ownership. An example is that one entity cannot
hold more than 15% of the voting rights of the Holding
Company.
o No shareholder other than the Holding company can hold
more than 15% of the voting rights of a bank in a group
structure.
S.P.A. Ajibade & Co. 76
Implications (Cont’d)
Advisory opportunities for local and international firms
o The transition process is short and many involved parties will
need to be hand-held through the process to satisfy the following
requirements:
- Deal and transaction structuring to ensure maximum protection of
shareholder value.
- Structure that preserves existing obligations and creditor
confidence.
S.P.A. Ajibade & Co. 77
Implications (Cont’d)
Contractual:
o Contractual obligations will be preserved and transferred to the
Holding company by order of court – a scheme of arrangement
structure that will have the Holding company issue shares and
exchange same with the existing shares of the bank.
o The shareholders of the bank will become the shareholders of the
holding company in the same proportion of the shareholding in the
bank.
o The Holding company becomes the owner of the bank.
Under this arrangement present holders of a bank’s GDR will
become holders of the holding company’s GDR.
In the case of a spin-off or a sale, obligations will remain with the
entity as will existing assets and lines of business.
S.P.A. Ajibade & Co. 78
Implications (Cont’d)
Creditors:
o Debt obligations will also pass to the Holding company or remain
with the entity where there is a change of ownership. Key
structuring requirement will be to ensure that assets do not move
without collateral obligations.
79
Implications (Cont’d)
Change in typical non-compete and confidentiality clauses in
transactional documents – impact of “arms length” relationship
and ownership requirements.
o Parties in the same group structure may not be subject to a
general non-compete clause unless “associated companies” is
defined in particular agreements to include group structure.
o Depending on bargaining power, such an extension may not pass
with companies in a group who ideally should pursue different
business plans.
S.P.A. Ajibade & Co. 80
Implications (Cont’d)
o The general exemptions of related parties in some
confidentiality clauses would have to be reconsidered. The
standard should remain that disclosure should be on a need
to know basis and assumption of the same confidentiality
obligation.
End of one stop shop contractual arrangements- so called
“boutique” financial services contracts.
Holding companies will be non-operating and will not enter
into operations or service contracts.
S.P.A. Ajibade & Co. 81
Implications (Cont’d)
A consequence will be that business relationships that span
several service areas will, as a matter of law, require different
contracts.
Access to capital and funding of projects- contrasting views.
Capital Market Transactions – unrelated transaction parties.
o “insider dealing” in capital market transactions will come to an
end.
S.P.A. Ajibade & Co. 82
Implications (Cont’d)
o Foreign investors using local Custodians (all the major ones
are owned by banks and that will continue under the new
banking model) should bear in mind that unrelated
Broker/Dealers will have to be used for a significant portion of
transactions.
S.P.A. Ajibade & Co. 83
Conclusion
Imperatives for success:
o Effective regulation.
o Enforcement of arms length transactions.
o Proper corporate governance rules
S.P.A. Ajibade & Co. 84
END
Thank you
S.P.A. Ajibade & Co. 85
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