By Chinenye Anuforo and Chinwendu Obienyi
Technological advancement in the financial world over the last two decades, has significantly increased competition among stock exchanges globally and this competition has pressured many exchanges to adopt business models, which have greatly improved their efficiencies and effectiveness.
For instance, in 2007, the New York Stock Exchange (NYSE) merged with Euronext, the European electronic stock exchange based in Netherlands, to form NYSE Euronext, the world’s largest stock exchange, and recently, the Nigerian Stock Exchange (NSE) joined the bandwagon by announcing that its members have approved the demutualisation programme of the Exchange.
The decision was reached at the Extraordinary General Meeting (EGM) of its members held on Thursday, March 30, 2017, at the Stock Exchange House, Lagos.
According to the NSE Council President, Mr. Aigboje Aig-Imoukhuede, “the demutualisation of the Exchange will bring the Nigerian capital market at par with other international jurisdiction, resulting in enhanced governance, transparency and visibility while attracting strategic partners, investors and good quality issuers. These are historic times indeed.”
Speaking after the successful meeting, Aig-Imoukhuede noted that, “the approval of the NSE demutualisation plan marks the achievement of an important milestone towards completion of the exercise.
Also commenting on the development, the Chief Executive Officer, NSE, Oscar Onyema, noted that, “the approval of the demutualisation process will generate substantial motivation for the development of an agile Exchange, thereby consolidating its innovativeness and strengthening its leadership both at local and international levels while also adding value to its stakeholders.
As a demutualised entity that is profit-seeking, the NSE will be in a better stead to capitalise on new income opportunities, free from any limitations arising from conflicting member interests and existing laws and more importantly, be able to better support the economic growth of Nigeria.”
However, as part of its efforts to transform the Nigerian capital market in accordance with global practice, the Securities and Exchange Commission (SEC) had said it is determined to demutualise the Exchange.
SEC explained that with demutualisation, the NSE should be exposed to robust corporate governance, enhanced efficiency and transparency associated with publicly quoted companies.
“Demutualisation is important for market growth and development. It boots competitiveness, broadens investors’ access to the market, improves corporate governance and instills global best practice while promoting strategic partnership and alliances. These, in a nutshell, are the benefits of a demutualised securities exchange.”
But what is demutualisation and how does it affect you as an investor?
Securities Exchanges evolved as organisations mutually owned by its members. For instance, cooperative societies are owned, run and exist solely for the benefits of their members. Ownership of cooperatives is not based on the issue of shares and thus decisions are based on the votes of members on the basis of one man one vote.
A member’s interest is not transferable and ceases on the termination of membership.
Mutual organisations are not organised along the line of profit making as they exist strictly to serve the interest of their members. Consequently, any excess income over expenditure or surplus as it could be technically described, in the course of carrying out their activities, is distributed among members. This has been the structure of stock exchanges until 1993 when the Stockholm Stock Exchange (SSE) took steps to change its form and structure.
The SSE therefore became the first stock exchange to demutualise and ever since demutualisation has become the model for Exchanges such that over 80 per cent of members of the World Federation of Exchanges (WFE) are demutualised Exchanges.
Demutualisation then is the process by which a mutually-owned organisation transforms to a shareholder-owned entity. Put in another way, it is the changing from a not-for-profit organisation to a limited liability company where members of the mutual organisation become shareholders and ownership and management are separated. When the legal structure of a Stock Exchange is transformed through the process of demutualisation, the ownership, the management and the trading rights at the Exchange are segregated.
Thus, a demutualised NSE will become a company limited by shares, having share capital and subscribers to the share capital or shareholders, a board of directors, management that is separate and independent from the board and subject to rules and regulation of company operations in Nigeria.
Benefits to investors
In addition to what is highlighted at the beginning, a demutualised NSE will be in line with global best practice. It will ensure that the Nigerian market becomes more efficient and competitive as it will remove conflict of interest in decision making, which characterises mutual organisations.
The NSE as a commercial organisation will be more aggressive as it becomes profit driven. It will be liable and responsible to its shareholders in terms of return on investment unlike the previous status quo where funds were internally generated and profit making was not a defined objective.
Finally, since ownership rights can now be exchanged through shares, it will improve investor participation in the ownership of the Exchange. You, as an investor, can become a part owner of the NSE by investing in the shares of the company and the Exchange will be in a position to raise funds for new projects by issuing relevant classes of shares and securities to the investing public.