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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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