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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 levels​whilst 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

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