COMPANY SECURITIES

The major characteristic of a public company is that it can offer its securities to the public for sale or subscription.

Section 315 of ISA defines security to mean –

(a)    Debentures, stocks or bonds issued or proposed to be issued by a government;

(b)   Debentures, stocks, shares, bonds or notes issued or proposed to be issued by a body corporate;

(c)    Any right or option in respect of any such debentures, sticks, shares, bonds or notes; or

(d)   Commodities futures, contracts, options and other derivatives as provided in the definition.

It should, however, be noted that ‘a futures contract’ is an agreement to buy or sell a standardised asset (such as a commodity, stock, or foreign currency) at a fixed price at a future time.

METHODS OF PUBLIC OFFER/SALE OF SECURITIES

There are several methods of public offer and sale of securities, but the major ones are –

1.      Direct offer;

2.      Offer for sale; and

3.      Placement.

DIRECT OFFER

This is also referred to as public offer. Under this, the company offers its shares (or debentures) to the public through an issuing house (usually a Bank or other. financial institution) by means of a prospectus (any written or electronic information, notice, advertisement or other forms of invitation offering to the public for subscription or purchase, any shares, debentures or other approved and recognised securities of a company and other issues or scheme). The risk of failure of the issue is born by the company which, in order to protect itself, arranges for the issue to be underwritten at an agreed commission by an issuing house. Thus, the risk of failure lies with the offeror of securities (the company) as the company could spend much more than they eventually got.

OFFER FOR SALE

This is where a company allots its shares or debentures to an issuing house which then invites the public to buy from it usually at a higher price. The risk of failure of the issue is born by the issuing house which usually will underwrite the issue.

An offer for sale needs a prospectus due to the fact that it is an invitation to the public.

PLACEMENT

This means that invitation is not made to the public whether directly or indirectly. The company sells its shares to an issuing house which offers (or places) the shares not to the public at large but to clients or institutional investors; or the company ‘places’ their shares with the issuing house and gives commission for every share sold e.g. Insurance companies and Pensions funds. The company pays brokerage (commission) to the issuing house.

COLLECTIVE INVESTMENT SCHEME

This is provided for under sections 153 and 315 of the Investments and Securities Act (ISA), 2007.

Under section 153 and 513, collective investment scheme is defined thus –

“a scheme in whatever form, including an open-ended investment company, in pursuance of which members of the public are invited or permitted to invest money or other assets in a portfolio, and in terms of which –

(a)   Two or more investors contribute money or other assets to and hold a participatory interest in a portfolio of the scheme through shares, units or any other form of participatory interest;

(b)   The investors share the risk and the benefit of investment in proportion to their participatory interest in a portfolio of a scheme or in any other basis determined in the deed, but not a collective investment scheme authorised by any other Act.

Thus, collective investment scheme is a scheme whereby members of the public are invited or permitted to invest money or other assets in a portfolio. The interest investors have is a participatory interest, and they are neither shareholders nor debenture holders.

NATURE OF COLLECTIVE INVESTMENT SCHEME

The scheme relates to some special types of arrangements whereby people pool their little resources together for profits such as those found in unit trusts and in local community contributions.

TYPES OF COLLECTIVE INVESTMENT SCHEME

Section 154 of the Investments and Securities Act provides for three types of the scheme namely –

(a)    Unit trust scheme; or

(b)   Open-ended investment company; or

(c)    Real Estate Investment Company or trusts.

UNIT TRUST SCHEME

This is an arrangement made for the purpose of providing facilities for participation of the public as beneficiaries under a trust, in profits or income arising from acquisition, management or disposal of Securities or any other property – sections 152 and 315 of ISA.

OPEN-ENDED INVESTMENT COMPANY

This is a company with an authorised share capital whose articles of association authorise the acquisition of its own shares structured in such a manner that it provides for the reissuing of different classes of shares to investors, each class of shares representing a separate portfolio with a distinct investment policy – sections 152 and 315 of ISA.

REAL ESTATE INVESTMENT COMPANY OR TRUSTS

This is defined under section 193(1) of ISA as “a body corporate incorporated for the sole purpose of acquiring intermediate or long term interests in real estate or property development, may raise funds from the capital market through the issuance of securities which shall have the following characteristics –

(a)    An income certificate giving the investor a right to a share of the income of any property or property development; and

(b)   An ordinary share in the body corporate giving the investor voting rights in the management of that body corporate.

ORGANS OF COLLECTIVE INVESTMENT SCHEME

These are –

1.      Manager.

2.      Holder.

3.      Issuer.

4.      Trustee.

5.      Custodian.

MANAGER

This is the person whom the powers of the management is vested relating to property for the time being subject to any trust created in pursuance of the scheme.

Section 155 of ISA states that the manager shall administer a collective investment scheme honestly and fairly, with skill, care and diligence; and in the interest of investors and the securities industry.

However, no person shall perform any act or enter into any agreement or transaction for the purpose of administering the scheme, unless such person is incorporated under the Companies and Allied Matters Act, and the person is registered as a fund or portfolio manager – section 155 of ISA.

The commission has the power the cancel the administration of a manager – section 174 of ISA.

DUTIES OF A MANAGER

Under section 157 of ISA, the duties of the manager of a scheme shall be to –

1.      Avoid conflict between the interests of the manager and the interests of an investor;

2.      Disclose the interests of its directors and management to the investor;

3.      Maintain adequate financial resources to meet its commitments and to manage the risks to which its collective investment scheme is exposed;

4.      Organise and control the scheme in a responsible manner;

5.      Keep proper records;

6.      Employ adequately trained staff and ensure that they are properly supervised;

7.      Have well-defined compliance procedures; and

8.      Promote investor education.

HOLDER

This is any investor or beneficiary who has acquired units of a collective investment and is entitled to a pro rata share of dividends, in trust or other income of the securities comprised in the unit – section 152 of ISA.

ISSUER

This is a person with the duties to perform that of a manager pursuant to the provisions of the trust deed or other agreement under which the units or securities are issued – section 152 of ISA.

TRUSTEE

This is a person registered by the Commission to so act, and in whom the property for the time being, subject to any trust created in pursuance of an approved scheme or operation, is or may be vested, in accordance with the terms of the trust – section 152 and 315 of ISA.

CUSTODIAN

This is a person who has custody as a bailee of securities or certificate issued in the investor’s name with the investor’s name appearing in the issuer’s register as the beneficial owner of the securities – section 152 and 315 of ISA.

APPOINTMENT OF CUSTODIAN OR TRUSTEE

A manager shall appoint either a trustee or a custodian for any scheme managed by it having regard to the structure of the scheme – section 178(1) of ISA.

A trustee or custodian intending to retire from an appointment shall give to the manager and the Commission not less than three (3) months notice, and during the said period of three (3) months, the manager concerned shall take steps to appoint another trustee or custodian to act as such – section 178(3) of ISA.

Only persons registered under the Commission as trustee or custodian can act as a trustee or a custodian – section 178(2) of ISA.

QUALIFICATIONS AND REGISTRATION OF TRUSTEE OR CUSTODIAN

The commission shall only register a person as trustee or custodian if the commission is satisfied that –

1.      The person is not in relation to the manager, either a holding company or a subsidiary or fellow subsidiary company within the meaning of those terms as defined in the Companies and Allied Matters Act; and

2.      The general financial commercial standing and independence of the person is such that it is fit for performing the functions of a trustee or custodian and that the person is by reason of the nature of its business sufficiently experienced and equipped to perform such functions – section 179(3) of ISA.

DUTIES OF TRUSTEE OR CUSTODIAN

A trustee or custodian shall –

(a)    Ensure that the basis on which the sale, repurchase or cancellation of participatory interest effected by or on behalf of a scheme is carried out in accordance with the Act and the trust deed or custodial agreement;

(b)   Ensure that the selling or repurchase price of participatory interests is calculated in accordance with this Act and the trust deed or custodial agreement;

(c)    Carry out the instructions of the manager unless they are inconsistent with this Act or the trust deed or custodial agreement;

(d)   Verify that, in transactions involving the assets of a scheme, any consideration is remitted to it within acceptable units of market price;

(e)    Verify that the income accruals of a portfolio are applied in accordance with the Act and the trust deed or custodial agreement;

(f)    Enquire into and prepare a report on the administration of the scheme by the manager during each annual accounting period, in which it shall be stated whether the scheme has been admitted in accordance with the provisions of this Act and the trust deed or custodial agreement – section 181(1) of ISA.

Section 181(2) and (3) of ISA stated additional duties which are –

A trustee or custodian shall report to the manager any irregularity or undesirable practice, concerning the collective investment scheme of which it is aware; and he shall satisfy itself that every income statement, balance sheet or other return prepared by the manager in terms of section 169 fairly represents the assets and liabilities, as well as the income and distribution of income, of every portfolio of the scheme administered by the manager.

At the request of the trustee or custodian, every director or employee of the manager shall submit to the trustee or custodian any book or document or information relating to the administration by the manager of its collective investment scheme which is in its possession or at its disposal, and which the trustee or custodian may consider necessary to perform its functions – section 181(4) of ISA.

LIABILITY OF TRUSTEE OR CUSTODIAN

Under section 168 of ISA, any provision in the trust deed or custodial agreement is void if it has the effect of exempting the trustee or custodian from or indemnifying it against liability for breach of trust or where he fails to exercise the care and diligence required of it as trustee or custodian.

Section 183 of ISA went further to state that the trustee or custodian of a scheme shall indemnify the manager and investors against any loss or damage suffered in respect of money or other assets in the custody of the trustee or custodian and which loss or damage is caused by the negligent act or omission of the trustee or custodian.

CREATION AND MANAGEMENT OF COLLECTIVE INVESTMENT SCHEME

1.      The manager, trustee or custodian must –

(a)    Obtain incorporation under the Companies and Allied Matters Act (CAMA).

(b)   Register with Securities and Exchange Commission (SEC).

(c)    Have the capital and reserve fund as may be prescribed by the SEC – section 160(3)(b) of ISA.

2.      Preparation of Trust Deed or Custodian Agreement in compliance with the Act and regulations of the SEC – section 160(3)(d) of ISA.

3.      Registration of the Scheme. For the scheme to be carried on, it must be authorised by and registered with the SEC – section 160(1) of ISA.

4.      Registration of Units or Securities. It is unlawful for any person to deal in units or securities of a scheme unless they are duly registered with the SEC – section 161 of ISA.

5.      Approval of prospectus and other offer documents of the scheme. Any letter, notice, circular or document prepared by the manager for the purpose of offering units or securities of a scheme to the public must be approved by the trustee or custodian, and submitted to the SEC for approval before such letter, notice, circular or document is published – section 164 of ISA.

6.      Determination of market price. A unit or security must be valued at its fair market price and the SEC may by regulation prescribe the mode and method of determining the fair market price – section 170 of ISA.

7.      Investment of a collective scheme. A scheme fund must be invested by a manager in accordance with the provisions of the trust deed or custodian agreement with the objectives of safety and maintenance of fair returns on amounts invested – section 171(1) of ISA.

8.      A manager may invest the funds and assets of a scheme in units of any investment funds, provided that such investment fund may only be invested in the categories of investments set out in real estate.

9.      The SEC may, by regulation, impose additional restrictions on investments by a manager where such additional restrictions are imposed with the objects of protecting the interest of scheme or its beneficiaries.

10.  For the purpose of complying with any guideline set by the SEC as to the quality of instruments and banks that scheme fund assets may be invested in, and to ensure the safety of scheme assets in general, a manager shall have due regard to the risk rating of instruments that has been undertaken by a rating company registered under ISA – section 171 of ISA.