Why a return to demutualisation would be a great relief



In the not too distant past, it would be recalled that the director general of the Nigerian Stock Exchange (NSE), Ndi Okereke-Onyiuke, had explained that the proposed plan to demutualised has been put on hold pending the time the Nigerian stock market recovers fully.

According to her, “ It is important to note that we can only extract maximum value from demutualisation process when we have metamorphosed into the most efficient and agile entity possible. This will happen once we have completed our transformation programme,” she told journalists at a press conference early in the year.

Following in this trend however, investor market observers have noted that whatever differences exist between markets, the prerequisite for a well functioning stock exchange could well be derived from its demutualisation. Demutualisation, it was better explained, refers to the transition process of an exchange from a “mutually-owned” association to a company “owned by shareholders”. In a demutualised exchange, the broker members of the exchange are both the owners and the traders on the exchange and they further manage the exchange as well.

However, market pundits are of the view that emerging trends towards globalisation coupled with corporate governance and regulatory challenges has necessitated the need for African stock exchanges to demutualise. This, they also believed would help our markets to be highly efficient and competitive.This perhaps, explained why the Nairobi Stock Exchange, Kenya, has taken decisive steps to demutualise and adopt strategies that would help their aspirations to be active participant in the global market before the end of 2010.

A visit to the Exchange and the Capital Market Authority (CMA) last week by the Nigeria’s Securities and Exchange Commission (SEC) and some journalists revealed an interesting transformation of an exchange that was hitherto, operating a call-over trading system about five years ago, but now fully automated and waiting for final parliamentary approval for its demutualisation programme.

Kenya’s demutualisation commenced in 2007 and was initially driven by the stock exchange but government later took over. There was a demutualisation steering committee which was sponsored by the International Finance Corporation (IFC). The committee eventually provided a role model and policy framework which was used to establish the demutualisation bill that is currently undergoing parliamentary process.

The Nairobi exchange, which is ranked as the fifth biggest stock market in Africa by total value of listed shares, has existed as a mutual company owned by stockbrokers since its formation in 1954. The long awaited removal of the exchange from the hands of the 20 brokers will see the government gain a 20 per cent shareholding leaving the brokers with a collective 80 per cent stake.

Wycliffe Shamiah, manager, market supervision of the CMA, which is equivalent to Nigeria’s SEC and Crysantus Macheso, head, finance and strategy, Nairobi Stock Exchange explained details of the demuatualisation process to the visiting team.Specifically, it was gathered that a stakeholders’ meeting held in Nairobi agreed to government getting a 10 per cent stake in the bourse and an additional 10 per cent to be held by the Investor Compensation Fund (ICF) – another State-owned agency that is managed by the market regulator, the CMA.

Under the new ownership structure that should pave the way for sale of shares to the public, it was agreed that NSE (dealing member firms) would get 80 percent of the value.The 80 percent is shared among the 20 dealing firms with each getting 4 percent of the shares of the Sh200 million bourse in readiness for an initial public offering (IPO).According to Shamiah, “after the value allocation process, listing is to be done within 1 to 3 years; we are working with a committee which includes Kenya Association of Stockbroking and Investment Banks (KASIBs). We have looked at models that were driven by government and now the exchange is converting from a company that is limited by guarantee to a company that is limited by shares without necessarily forming another company.”

During the IPO, each broker is expected to have ceded at least half of their stake in the next two years which entails that the stockbrokers’ ownership would have to drop to less than 40 percent through an IPO. The new ownership structure is largely in line with the structure that the CMA had tabled before the brokers as a pre-condition to the planned transfer of the market’s ownership into the hands of the investing public under the demutualization process.

Already, the Memorandum and Articles of Association of the Exchange has been amended to provide a board structure that include independent directors, dealing member firms and staff who have worked with dealing member firms for at least 5 years. The director general of SEC, Arunma Oteh said: “Demutualisation of stock exchanges in Africa is quite necessary because the world is a global village. It is the main thing all over the world and African exchanges need to be integrated.”

On the role of SEC as the apex regulator, Oteh maintained that the regulator had to ensure that the exercise was fair and transparent to accommodate all stakeholders adding that, “we at SEC had told the Nigerian Stock Exchange to make the exercise fair and transparent.”Those who support the suspension of demutualisation by Nigeria’s NSE opined that demutualisation remained an important milestone and needed to be handled properly. This school of analysts, who believed that the Kenya exchange is small when compared to the Nigerian Stock Exchange, argued that, being the first in this case does not necessarily make Kenya the best.

Indeed, they are also of the opinion that “the size and interest in the Nigerian market demand that we do it properly”. Truly, we do not want to demutualise our exchange the way the government had privatised some of our public enterprises.There are also those who believed that demutualization of the Nigerian bourse could only continue after the restructuring at the NSE is completed in a fair and transparent manner.


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