12-02-2018
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BUSINESS A.M. FEBRUARY, MONDAY <strong>12</strong> - SUNDAY 18, <strong>2018</strong><br />
FINANCE & INVESTMENT<br />
15<br />
Governance<br />
Of demutualization, dalliance<br />
and the Nigeria Stock Exchange<br />
Olusegun Joseph<br />
DESPITE THE IN-<br />
NOVATIONS by the<br />
management of The Nigerian<br />
Stock Exchange<br />
(NSE) to make the market more<br />
investor-friendly in the last ten<br />
years, one thing still remain missing<br />
- demutalisation of the market.<br />
The Nigerian Stock Exchange<br />
(NSE) was established in 1960 as<br />
a trust or mutual association. As<br />
at March 7, 2017, it has 176 listed<br />
companies with a total market capitalization<br />
of about N8.5 trillion.<br />
Demutualising the NSE therefore<br />
means changing or transiting<br />
it from a mutual or co-operative<br />
association into a public company<br />
by converting the interests of the<br />
members into shareholdings.<br />
These holdings can then be traded<br />
like the shares of a company. The<br />
idea is to change the structure of<br />
exchanges that were originally<br />
formed as trusts.<br />
The concept typically separates<br />
ownership and voting rights from<br />
the right of access to trading on an<br />
exchange.<br />
It is believed that a demutualised<br />
exchange is a crucial tool<br />
towards boosting liquidity and<br />
growth of the economy.<br />
The first exchange to be demutualized<br />
was the Stockholm<br />
Stock Exchange in 1993. After that<br />
many exchanges have demutualized.<br />
These include the major<br />
stock exchanges like New York<br />
Stock Exchange, Chicago Mercantile<br />
Exchange, London Stock<br />
Exchange, Australian Stock Exchange,<br />
Deutsche Börse, Toronto<br />
Stock Exchange, Singapore Stock<br />
Exchange to name a few.<br />
Advantages of demutualization<br />
The advantages of demutualized<br />
stock exchange are as follows.<br />
Firstly, demutualization results in<br />
more flexible governance structure<br />
fostering decisive action in response<br />
to changes in the business<br />
environment. Secondly, it leads<br />
to greater investor participation<br />
in the governance of the exchange.<br />
Thirdly, it yields an improved<br />
platform in response to potential<br />
competitors in the form of alternative<br />
trading systems. Further,<br />
demutualization allows greater<br />
flexibility and access to global<br />
markets. Fifthly, it also facilitates<br />
faster and more complete consolidation<br />
of stock exchanges to<br />
enhance available synergies. And<br />
finally, it ensures increased access<br />
to resources for capital investment<br />
raised by way of equity offerings or<br />
private investment<br />
This first attempt at demutualizing<br />
the NSE was contained in a<br />
proposal by Ndi Okereke-Onyiuke,<br />
the former director general in<br />
2001. In 2011, the issue was also<br />
raised in an NSE paper – The Roles<br />
and Expectations of Regulators<br />
in the Demutualisation Process,<br />
alongside the inauguration of a<br />
21-member technical committee<br />
to develop a legal framework for<br />
the process.<br />
Oscar Onyema, NSE CEO<br />
In 2014, things appeared to be<br />
moving forward, as the NSE issued<br />
requests for proposals from local<br />
and foreign financial advisers to<br />
assist with the process of demutualisation.<br />
In February 2015, the Securities<br />
and Exchange Commission (SEC)<br />
issued draft rules on demutualisation<br />
of exchanges in Nigeria and<br />
invited comments. The SEC on<br />
the <strong>12</strong>th April 2015 published its<br />
final rules on demutualisation of<br />
securities exchanges in Nigeria,<br />
which as at now nothing has been<br />
heard of the idea.<br />
Historical view of securities<br />
exchanges<br />
Historically, securities exchanges<br />
evolved as organisations<br />
mutually owned by its members.<br />
For instance, cooperative societies<br />
are owned, run and exist<br />
solely for the benefits of their<br />
members. Ownership of cooperatives<br />
is not based on the issue<br />
of shares and thus decisions are<br />
based on the votes of members<br />
on the basis of one-man-one vote.<br />
Again, a member’s interest is not<br />
transferable and ceases on the<br />
termination of membership.<br />
Equally, mutual organisations<br />
are not organised along the line of<br />
profit-making as they exist strictly<br />
to serve the interest of their members.<br />
Consequently, any excess<br />
income over expenditure or surplus<br />
as it could be technically described,<br />
in the course of carrying<br />
out their activities, is distributed<br />
among members. This has been<br />
the structure of stock exchanges<br />
until 1993 when the Stockholm<br />
Ndi Okereke-Onyiuke, the former director general in 2001. In 2011<br />
Nigeria Stock Exchange<br />
Upbeat statement<br />
THE APPROVAL of<br />
the demutualisation<br />
process will generate<br />
substantial motivation<br />
for the development of<br />
an agile exchange<br />
Stock Exchange (SSE) took steps<br />
to change its form and structure.<br />
What are we waiting for?<br />
This question is indeed timely<br />
and germane since members of<br />
the NSE have since approved the<br />
demutualisation process.<br />
At an extra-ordinary general<br />
meeting (EGM) of the Nigerian<br />
Stock Exchange in March 2017,<br />
members approved the demutualisation<br />
scheme of the Exchange and<br />
authorised the National Council<br />
and Management of the Exchange<br />
to proceed with the process leading<br />
up to the demutualisation of<br />
the Exchange subject to applicable<br />
laws and regulations and obtaining<br />
the approvals of members and the<br />
relevant regulatory authorities.<br />
They also ratified the engagement<br />
of financial advisers, legal<br />
advisers, tax advisers and any<br />
other adviser that may be required<br />
for the demutualisation of the<br />
exchange.<br />
Oscar Onyema, the chief executive<br />
officer of the NSE had<br />
indeed noted that “the approval of<br />
the demutualisation process will<br />
generate substantial motivation<br />
for the development of an agile<br />
exchange thereby consolidating<br />
its innovativeness and strengthening<br />
its leadership both at local<br />
and international levelswhilst also<br />
adding value to its stakeholders.<br />
“As a demutualized entity that<br />
is profit-seeking, the NSE will be<br />
in a better stead to capitalize on<br />
new income opportunities, free<br />
from any limitations arising from<br />
conflicting member interests and<br />
existing laws and more importantly<br />
be able to better support the<br />
economic growth of Nigeria”.<br />
National Assembly to the<br />
rescue?<br />
At a joint public hearing organised<br />
by the Senate and House<br />
of Representatives Committees<br />
on the Capital Market on a bill for<br />
an Act to facilitate the development<br />
of Nigeria’s capital market<br />
by enabling the conversion and<br />
re-registration of the NSE from<br />
a company limited by guarantee<br />
to a public company limited by<br />
shares and for related matters,<br />
2017, stakeholders agreed that the<br />
move was long overdue in order to<br />
stimulate liquidity in the system<br />
among other things.<br />
Leading deliberations on the<br />
legislation, the sponsor, Senator<br />
Foster Ogola, who is the acting<br />
Chairman, Senate Committee<br />
on Capital Market, said the NSE<br />
plays a critical role in the country’s<br />
financial market, arguing that the<br />
conversion and re-registration<br />
into a public company limited by<br />
shares is essential to developing<br />
and strengthening the market as<br />
well as enhancing the formation<br />
of capital for the expansion of the<br />
economy.<br />
He said: “It is anticipated that<br />
the demutualisation of the NSE<br />
will reinforce the continuous<br />
growth and development of a<br />
dynamic, fair, transparent and<br />
efficient capital market and thus<br />
significantly contribute to Nigeria’s<br />
economic development.”<br />
He said the planned demutualisation<br />
was in line with the<br />
2015-2<strong>02</strong>5 Capital Market Master<br />
Plan taunted to promote efficiency<br />
in the creation and harnessing of<br />
capital, as well as creating liquidity<br />
in the market, adopting and<br />
strengthening corporate governance<br />
best practices.<br />
Taiwo Oderinde – National<br />
Coordinator at Proactive Shareholders<br />
Association of Nigeria<br />
said it is better to demutualise<br />
the Exchange because it will be a<br />
good news for shareholder activists<br />
who have been advocating for<br />
the demutualisation of the Stock<br />
Exchange.<br />
“If you look at some jurisdictions,<br />
some of their Exchanges are<br />
quoted while they try to adopt different<br />
models which we are trying<br />
to adopt presently. Demutualization<br />
will really help the investors<br />
because when people know that<br />
their own exchange is also quoted,<br />
there are some of the ways they<br />
will regulate better than when they<br />
have no stake.<br />
“They are now aware that any<br />
regulation they are bringing will<br />
also affect them too. It will make<br />
them to be more proactive and it<br />
will make them to be able to do<br />
things in a businesslike manner.<br />
“Aside from that, you discover<br />
that it will attract more companies<br />
to our Exchange and moreover<br />
it will encourage more investors,<br />
most especially the core investors<br />
and the institutional investors<br />
such as PFA’s and international<br />
investors. This is one area that will<br />
help the stock market and we the<br />
investors. This is thinking in the<br />
right arrangement”, Oderinde said.<br />
Another shareholder activist,<br />
Adetokunbo Gbadebo, said the<br />
demutualisation of the exchange<br />
would bring the Nigerian capital<br />
market at par with other international<br />
jurisdiction, resulting in<br />
enhanced governance, transparency<br />
and visibility while attracting<br />
strategic partners, investors and<br />
good quality issuers.<br />
From the above, it appears Nigerians<br />
are ready and raring to go<br />
on the demutualization of the NSE<br />
but only waiting for who to bell the<br />
cat. I think the National Assembly<br />
should be in the forefront to legislate<br />
and compel regulators like<br />
SEC to actually act on the legislation.<br />
We cant wait for longer.<br />
They are now<br />
aware that any<br />
regulation they are<br />
bringing will also<br />
affect them too