Friday, February 07, 2020 / 01.10PM / Teslim Shitta-Bey, Managing Editor/ Header Image Credit: NSE
By Tuesday, March 3, 2020 the Council of the Nigerian Stock Exchange (NSE) will gather to vote for the demutualization of the 59-year-old market. The process will mean that the Exchange will change from a membership owned entity to a Limited Liability Company. The new status would mean that the Exchange would be traded on its floor and will operate like a normal listed private company.
The Nigerian Stock Exchange, with 252 dealing members and 166 listed companies and 154 bonds, will change its name from "the Nigerian Stock Exchange" to the "Nigerian Exchange Group Plc" and on its trading floor.
The demutualization is coming at a time the market is rapidly decelerating from its early gains at the beginning of the year in January 2020. The market's year-to-date (YTD) yield has slumped from a YTD of +7.46% on January 31, 2020 to +4.84% on February 06, 2020, representing a one-week slide of -2.62% and a year-on-year (Y-o-Y) return of -4.76% (see chart 1 below)
Chart 1 Market Movement (%) For Dangote, NSE ASI and NSE 30 Indexes 2019-Jan. 2020
Source: NSE, Proshare Research
In an email message released to market operators, the Exchange noted that, "Going into 2020, the NSE is committed to completing the proposed demutualization," noting that this, "will further provide avenues to diversify our operations and evolve into a more competitive, robust and liberalized stock market."
The Exchange also noted that it had started four new indexes with Afrinvest Securities Ltd. and Other firms are leading the floating of other exchange-traded products. Greenwich Securities, for example, recently launched the Greenwich Alpha ETF, which tracks the top 30 companies on the NSE.
ETFs or Exchange Traded Funds may become an increasing feature of the demutualized trading market with larger brokerage houses offering a wider variety of instruments for trading.
The Unspoken Word
The demutualization of the NSE opens the door for investors to "own" the trading floor which has raised issues of governance and oversight propriety on the part of the Exchanges shareholders. The fact that several high net worth individuals (HNIs) own large equity interests in the companies listed on the Exchange, having these same individuals owning the Exchange itself could bring about issues of conflict of interest, insider dealing and moral hazard. Concerns over these matters were why the erstwhile Director-General of the Exchange, Professor Ndi-Okereke Onyiuke, put a pause on an earlier attempt at demutualizing the Exchange. The Professor of finance's fear was that large corporate organizations with influential Board members could take control of the Exchange and create a "Casino paradigm". Hopefully, the Exchange's Council will address these concerns and the enthronement of best global governance practices will become part of the demutualization process.
With the market in a negative spin, the equity value of the Exchange would be depressed, thereby providing hidden value opportunities for early takers of equity in the Exchange. A rise in stock values would increase the Exchanges market price and lean into a bullish rally that pre-existing Council members may consider favourable.
It may have been useful if the Exchanges e-mail clarified whether the demutualization was "full" implying that existing stockbroking members of the Exchange buy shares in the new public limited liability company like any other prospective investor or whether the process would be "sponsored" meaning that existing Exchange members would be given beneficial shareholdings after the listing of the company.
Proshare will follow up on the demutualization process of the Exchange to provide further market clarity.