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Investors pay the price for regulatory breaches

In mid-September, the world’s second-largest auto maker, Volkswagen (VW), admitted to designing diesel engines in its VW and Audi cars to cheat the cars’ actual output of environmentally damaging gases when being tested at emissions-control centres. The scandal has cost the chief executive officer of the company his job, and could potentially cost the car-maker multi-billions in fines. In one measure, the fine on the 482 000 diesel cars sold in the US could amount to $18 billion. The company admitted that the device may have been fitted to 11 million of its vehicles globally. VW has lost close to 30% (about $25 billion) of its market capitalisation since the scandal broke. The scandal is deepening as the US Environmental Protection Agency is making further claims that the car maker installed the defective devices in some of its 2014-16 models of the VW, Audi and Porsche vehicles.


Africa’s biggest mobile phone company, MTN Group, was last week fined $5,2 billion by the Nigerian Communications Commission (NCC) for failure to switch off 5,1 million users with unregistered SIM cards from its network. On August 5 2015 NCC gave all network operators in Nigeria a seven-day ultimatum to disconnect unregistered SIM cards or “face severe sanctions”. Nigeria is MTN’s biggest market with 62,5 million subscribers as of end-September 2015. MTN’s share price lost a quarter of its value in days after the news broke, that’s $6 billion in market capitalisation.


NCC has given MTN until November 16 to pay the N1,04 trillion fine, which is based on a charge of 200 000 naira (approximately $1 005) for each unregistered SIM not disconnected. This fine is staggering — it represents 28% of Nigeria’s 2015 budgeted government revenue of N3,6 trillion. It’s also about 1% of Nigeria’s GDP. From an MTN perspective, the fine is close to double the group’s 2014 net income; it also exceeds MTN Nigeria’s 2014 revenues of R54 billion (approximately $4 billion).

Some analysts have raised their concerns that the size of the fine risked reversing Nigeria’s efforts to improve its image with international investors that it is not a risky frontier market. The question is while fines are meant to punish bad behaviour, should they be big enough to bankrupt the offender. On the other hand, the MTN fine, along with smaller ones against two Nigerian banks for violating banking regulations could be seen as entrenching the backbone of Nigerian regulators in enforcing the regulations of the country.

MTN, in its quarterly update for the period ended September 30 2015, reported “the disconnection of 5,1 million subscribers at the end of August 2015 in line with industry-wide regulatory registration requirements”. According to MTN, as of the same date, 3,4 million had been reconnected after meeting the registration requirements.  However, MTN bemoans that it’s “performance continues to be impacted by ongoing regulatory restrictions” in Nigeria.

Even the Johannesburg Stock Exchange (JSE) was not happy with how MTN dealt with the announcement of the fine to the market — last Monday, the JSE suspended the trading in MTN shares for a couple of hours. Investors could have wondered why it took MTN so long to inform the market about the fine. Investors who picked up the information earlier on in the Nigerian press could have benefitted from the material publicly available information.

But in some cases where the regulators do not apply due process, it just tarnishes the objectivity of the regulatory process. The Postal and Telecommunications Regulatory Authority of Zimbabwe (Potraz)’s move to withdraw Telecel Zimbabwe’s operating licence was described in a High Court judgement as having been done “overzealously without due regard to the rights of the stakeholders in this matter”. There are reports that Telecel’s parent company, VimpelCom, has expressed concern over the way their investment was being treated in the country.

In Nigeria, the Central Bank of Nigeria (CBN), condemned sanctions approved by the Financial Reporting Council of Nigeria (FRCN) against the board and management of Stanbic IBTC Holding (SIBTCH), a subsidiary of Africa’s largest bank by assets, Standard Bank. FRCN was alleging material misstatements in SIBTCH’s 2013 and 2014 financial statements. CBN’s condemnation was based on the view that “FRCN did not follow due process”. CBN, therefore, rejected the request by FRCN to take disciplinary action against SIBTCH. The Federal High Court also restrained FRCN from hindering Stanbic from carrying out business.

The multi-million or billion dollar censures point to the importance of adhering to regulations. Investors should expect that all their investee companies adhere to laws and regulations in the countries they operate in. Good governance rules place the responsibility to monitor the company’s compliance with all applicable laws, rules, codes and standards in the hands of the board of directors. The board represents the shareholders, hence the ultimate cost of regulatory breaches is borne by shareholders as the owners of the business. Investors must ask their directors hard questions when it comes to ethics, governance and compliance with laws and regulations.  At the same time, countries that apply regulations without due process only serve to tarnish their image as investment destinations.

It is clear in our minds that ethical and regulatory oversight will become even stricter and common in the future. This would mean that even the fines for breaches will probably be quite deterring. While directors are responsible for the day-to-day operations of a business, it is ultimately the shareholders who carry the actual and consequential financial cost of regulatory breaches.

Nesbert Ruwo (CFA) and Jotham Makarudze (CFA) are investment professionals based in South Africa. They can be contacted on media@opportunvest.co.za

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