Merchant Banking Regulations
Merchant Banking involves the rendering of financial services focused around underwriting, fundraising, financial advisory, and loan services for large corporations and High Net Worth Individuals (HNWIs).
In Nigeria, merchant banking is regulated by the Central Bank of Nigeria (CBN) through its 2010 Merchant Banking Regulations.
This article will be looking at some of the most important provisions of these regulations as well as some of licensing and operational requirements for merchant banking in Nigeria.
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What are the permissible and non-permissible activities for merchant banks in Nigeria?
Permissible Activities
– Taking deposits of not less than 100 Million Naira or such other prescribed minimum amount from natural or legal persons .
– Providing finance and credit facilities to non-retail customers.
– Dealing in foreign exchange and providing foreign exchange services subject to the relevant laws of Nigeria.
– Act as an issuing house or otherwise manage, arrange or coordinate the issuance of securities for or on behalf of any person, subject to the provisions of the Banks and Other Financial Institutions Act (BOFIA).
– Providing treasury management services including the provision of money market, fixed income and foreign exchange investments on behalf of clients.
Non-Permissible Activities
– Accepting deposit withdrawals by cheque.
– Granting retail loans or engaging in retail banking.
– Holding for more than 6 months any equity interest acquired in a company while managing an equity issue.
– Insurance underwriting services.
What are the minimum operating standards for merchant banks under the CBN Regulations?
A merchant bank shall maintain the following minimum standards under the CBN Regulations :-
– Maintain a minimum paid-up share capital of 15 Billion Naira or such other amount as may be prescribed by the CBN.
– Comply with all prudential guidelines and regulations issued by the CBN on the required level of capital adequacy, liquidity and cash reserve.
– Observe all applicable corporate governance standards as may be prescribed by the CBN and other financial service sector regulating authorities in Nigeria.
– Design, comply with and implement an internal control framework in accordance with the standard that the CBN may prescribe from time to time.
Can merchant banks own subsidiaries?
Yes they can, but subject to the limitations placed by the CBN Regulations.
Commercial Papers in Nigeria
In the course of business operations, many businesses go for short to medium and long-term credit facilities in the form of financing options that can be channelled to business expansion or diversification projects.
One of the more recent financing options available to businesses are Commercial papers for a number of reasons.
This article will be looking at what commercial papers are, the regulatory framework governing commercial papers in Nigeria, the necessary parties to a commercial paper transaction and the necessary documentation required in a commercial paper transaction.
What exactly is a commercial paper?
A commercial paper is a short-term debt security instrument that is typically unsecured and which carries a maturity period of usually not more than 270 days. A commercial paper is not a debenture in the strictest sense as debentures are typically convertible, secured and having a longer maturity period.
What are the components of the regulatory framework governing commercial papers in Nigeria?
Commercial paper transactions are under dual-regulation by the Securities and Exchange Commission (SEC) as well as the Central Bank of Nigeria (CBN) through its approval of the Quotation rules of the FMDQ Over The Counter Securities exchange.
Are commercial papers money market instruments?
Yes they are , though they are traded specifically at Over The Counter (OTC) markets.
Can private companies issue commercial papers despite the FMDQ OTC market being regulated by the SEC?
Yes they can.
What are the requirements for the issuance of commercial papers under the CBN Guidelines and FMDQ rules?
The requirements for the issuance of a commercial paper are :-
– The issuer must have a 3-year audited financial statement
– The issuer must have been in existence for at least 5 years post-incorporation and must have a share capital of 500 Million Naira or must be supported by a guarantor that meets these requirements.
– The issuer must have a line of credit with a Nigerian bank.
– Guaranteed commercial papers granted to an obligor must not be above 30% of a bank’s unimpaired shareholders fund.
What is the minimum prescribed value of a commercial paper in Nigeria?
Commercial papers at issuance are required to have a minimum value of 100 Million Naira and subsequent values of 50 Million Naira.
Who are the parties to a commercial paper issue?
The parties to a commercial paper issue are :-
- The issuer
- The Issuing & Placing agent (IPA)
- The collecting and paying agent (CPA)
- The Credit rating agency
- The guarantor
- The underwriter
- The solicitor
- The promoter
What are the most necessary agreements required for the issuance of a commercial paper?
The necessary documentation for a commercial paper issuance includes :-
– A Deed in favour of the holders of the paper.
– An underwriting agreement.
– A Deed of Guarantee where applicable.
– A custodial agreement which is executed between the issuer and the issue custodian (who must be licensed by SEC).