On Monday, Ghana’s capital markets faced an announcement which is generating the biggest industry shake up since its regulator, the Securities and Exchange Commission announced the revocation of the operating licenses of 54 companies operating under its regulatory purview in November last year.
This time around it is the largest increase in minimum capital requirements ever imposed in the history of Ghana’s financial services industry as a whole. Inevitably it has shaken the industry to its very roots.
Capital markets operators of various genres have been given up to the end of 2021 to meet the new minimum capital requirements which, compared with the current minimums are massive.
The new minimums require a broker – dealer to have at least GHc1.5 million in tier one capital; a fund manager, GHc1 million; a corporate investment advisor, GHc1 million and an individual investment advisor, GHc200,000; an issuing house, GHc1 million; a margin trader GHc2 million; a market maker GHc3 million; a nominee GHc1 million and an underwriter GHc2.5 million.
While these are all regular activities for operators active in both the primary and secondary capital markets, the new minimums for operators whose tasks are to protect investors monies are much higher – custodians are to have at least GHc50 million in core capital and trustees GHc50 million. Similarly firms seeking to provide securities trading platforms will require hefty minimum core capital too – to be licensed to run a stock exchange at least GHc10 million is required and to be a securities depository, having electronic custody of the securities being owned and traded the minimum will be GHc50 million. To be a clearing house at least GHc50 million will be required.
But the biggest minimum capital requirement is for primary dealers, who handle governments treasury securities. This is GHJc400 million, which effectively reserves such activities foir licensed commercial banks.
Even as capital market operators are staggered by the increases, some of which are high as 1000 percent, most operators, such as investment banks will require much larger minimum capital than that for any of the above listed activities. This is because where an operator is engaged in two or more of the above listed activities – as is the case for virtually every investment bank in Ghana, the requisite minimum will be arrived at by taking the highest minimum requisite for any of the activities to be engaged in, plus at least 75 percent of the minimum capital required for each of the other activities to be engaged in.
Effectively this means, for example that an investment bank that trades in securities, is an investment advisor, and manages investment portfolios for clients would require at least GHc 4 million will be required. If the company wants to also be an issuing house for new securities issuances and also underwrite such issuances, as many investment banks currently offer to do, the minimum would rise to nearly GHc6.7 million
To be a full range investment bank, acting as margin trader and market maker in addition to those other services, the requisite minimum would rise further to about GHc 10.45 million.
Companies that do not trade but rather provide custodial and registrar services for those that manage investment schemes such as private pension schemes, unit trusts and mutual funds, usually combine the activities of custodian, trustee and registrar. From 2022 to do this would require total tier one capital of about GHc88 million, based on the new regulations for multi-service operations as announced by SEC.
Crucially, unlike in the case of the banking industry, the sheer size of the increases, combined with the much smaller turnovers generated by investment banking means that consolidation is inevitable, with the alternative simply being liquidation.