The Securities & Exchange Commission (“SEC”) on the 22nd of September 2023, published a statement (the “Press Release”) informing the public that the Federal Ministry of Finance has approved a further extension of the validity period of the Investment and Securities (Exemption of State Governments, etc.) Order 2019 (the “Order”) by three (3) years, commencing from 27th December 2022 to 27th December, 2025. Prior to this Press Release, the validity period according to Section 4 of the Order was for three (3) years, to commence from 27th December 2019 to 27th December 2022.


In line with Section 224 of the Investments and Securities Act (ISA) 2007, State Government and the Federal Capital Territory (FCT) (For ease of reference, States will be used to qualify the States and the FCT) are restricted from issuing registered bonds and promissory notes from the capital markets for infrastructural development, except it complies with Section 224a (i-iii) of the ISA. The Order was made to enable ease and access to funds by States for infrastructural development. Therefore, the State Government can issue debts subject to compliance with the conditions enumerated under the Sections of the ISA, primarily Section 224a (i-iii) of the ISA as delineated below, the conditions are;

(i) a copy of the law authorising the issue of the bond specifying that a sinking fund to be fully funded from the consolidated revenue fund account of the issuer be established;
(ii) a copy of a rating report by an accredited rating agency registered by the Commission; and
(iii) an irrevocable letter of authority issued by the Accountant-General of the State or any person performing that function in the Federal Capital Territory, to the Accountant-General of the Federation, to deduct at source from the statutory allocation due to the issuer in the event of default by or failure of the issuer to meet its payment obligations​”

The above conditions appear cumbersome and led to the amendment of the ISA. The Order amended the ISA to exempt State Governments from the application of section 224 of the ISA. Further to the Order, the States can only raise capital through the Nigerian Capital Markets upon meeting the below ten (10) conditions.

Section 2 of the Order provides that the conditions to which the exemption is subject to are;

a. The internally Generated Revenue (IGR) of the State or FCT shall not be less than sixty percent (60%) of its consolidated revenues for three (3) years.
b. The total annual debt service obligation arising from such proposed issuance shall not at any particular time exceed forty percent (40%) of the total revenue that accrued to its consolidated revenue fund in the twelve (12) month period immediately preceding the proposed new issuance.
c. The proceeds of the bonds to be issued pursuant to this exemption shall only be applied to verifiable capital projects.
d. The State or FCT shall provide a feasibility report prepared in consultation with or by the contractor of the relevant project.
e. The State or FCT shall provide an independent third (3rd) party guarantee for the repayment of the repayment of the debt in the event of default and the guarantor’s rating shall not be below investment grade.
f. In the case of a revenue bond, the assets of, and revenue from the project to which the securities relate are “ring-fenced,” where applicable.
g. Where the state or FCT intends to issue a bond without Irrevocable Standing Payment Order, it shall be required to provide an independent third (3rd) party guarantee for the repayment of the debt in the event of default and the guarantor’s rating shall not be below investment grade.
h. The guarantor shall comply with the Commission rules and other requirements as may be specified by the Commission from time to time.
i. The State Governments or the FCT shall comply with the Revised External and Domestic Borrowing Guidelines for Federal and State Governments and their Agencies.
j. For each borrowing request, the Debt Management Office (DMO) shall review compliance with the Borrowing Guidelines for Federal and State Government and their Agencies.


Notably, these conditions do not apply to State Governments where they seek to issue revenue bonds or sukuk for the purposes of executing verifiable projects as it is limited in application to infrastructural development. Consequently, all State Governments in Nigeria cannot raise funds from the Capital Market for infrastructural development except it meets all ten (10) conditions stated in the Order as highlighted above.

In conclusion, the Order is a good step in the right direction considering that so many States in the country are bedeviled with a lack of infrastructure and economic growth, as such enabling the States to approach the capital market to raise capital whilst fulfilling these conditions as stipulated under the Order will increase access to funds by the States and ultimately lead to improved infrastructural development across the country.