Demutualization of the Nigerian Stock Exchange (NSE) has been one lingering issue of controversy among stakeholders in the Nigerian capital market. But gradually, the change is coming to reality. In this piece, OLUSHOLA BELLO reports that stakeholders want a transparent process that will boost the confidence in the market
The bill to allow change of ownership of the Nigerian Stock Exchange (NSE) has passed second reading in the House of Representatives. But the main concern of most stakeholders in the capital market community is the need for transparent demutualization process as this is the way forward for the growth of Exchange.
Demutualization is transforming a stock exchange from being a self-regulatory organisation, with no shareholders, to a public company that is shareowner-based and profit-seeking. It allows the shares of an exchange to be quoted on its floor. Some stock markets have had to demutualize, as well as build alliances or consolidate within and across borders, in order to enhance their attractiveness in the face of strong global competition.
Until the early nineties, majority of the world’s stock exchanges were non-profit, member owned, mutual organisations with monopoly power. However, beginning in 1993 with the Stockholm Stock Exchange, leading stock exchanges including the Australian, London, NASDAQ and New York Stock Exchanges began to undergo demutualization.
According to data from World Federation of Exchanges (WFE), the weight of mutuals dropped dramatically from 40 per cent in 1999 to only 15 per cent in 2016. In the same period of time, the number of demutualized stock exchanges increased from 10 per cent in 1999 to 85 per cent in 2016.
Of the 66 WFE members, less than 10 are currently mutual. However, there has been an uneven pace of exchange demutualization observed between developed and emerging market jurisdictions. Within the first 10 years following the first demutualization in 1993, 21 exchanges in developed market jurisdictions successfully demutualized. In Africa specifically, out of the 27 exchanges who are members of ASEA, seven namely the Johannesburg, Nairobi, Mauritius, Seychelles, Rwandan, Casablanca stock exchanges and BRVM are demutualized with several others including the NSE in the process of demutualizing or considering taking on this initiative.
Abdul Razaq, the former president of the NSE, was the first to propose, in June 2002, that the NSE be demutualized. It also received the greatest public attention under the former director-general of the NSE, Professor Ndi Okereke-Onyuike in 2008, but it was stepped down, perhaps, because of the then global market downturn.
Recently at the second reading of the bill in the House of Representatives, which was titled ‘Demutualization of the Nigerian Stock Exchange, Bill, 2017,’ sponsored by Mr Yusuf Ayo Tajudeen, a member of the lower legislative chamber of the National Assembly explained that the demutualization of the local bourse was necessary to better enhance investors’ confidence in the capital market, which has been experiencing rising profile lately.
He argued that with the bill passed and assented to, it will give NSE the opportunity to convert and re-register itself into a public company limited from its present company limited by guarantee.
According to him, the Johannesburg Stock Exchange (JSE), the biggest bourse in sub-Saharan Africa, has already done this since 2006. In his words, the “demutualization will improve liquidity, promote the competitiveness and attractiveness of the domestic capital market, as well as engender good corporate governance and boost investors’ confidence.”
Also, Speaker of the House, Mr Yakubu Dogara had also directed the House Committee on Capital Markets and other Institutions, chaired by sponsor of the bill, Mr Tajudeen, to take further legislative action on it.
Meanwhile, in March 30, 2017, at its Extra-Ordinary General Meeting (EGM) of NSE, the members approved the demutualization scheme of the exchange. President of National Council of the NSE, Mr Aigboje Aig-Imoukhuede, noted that, “The approval of the NSE demutualization plan marks the achievement of an important milestone towards completion of the exercise.”
“The demutualization of the Exchange will bring the Nigerian capital market on a par with other international jurisdictions, result in enhanced governance, transparency and visibility whilst attracting strategic partners, investors and good quality issuers. These are historic times indeed,” he had explained then.
At the same meeting, Chief Executive Officer of the NSE, Mr Oscar Onyema, had also noted that, “The approval of the demutualization 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, whilst also adding value to its stakeholders.”
Highlighting the benefits of demultualized Exchange, Onyema, said this will include facilitating the development of the capital market, improved corporate governance, availability of resources from capital investments, enhanced competitiveness, increased global brand and visibility of the exchange, investor participation opportunities and ability to build a more sustainable institution.
According to him, in addition to the above benefits, it is of particular importance to the Nigerian capital markets and the wider economy that the Exchange be aided to successfully demutualize, as it enables the Exchange to serve the capital markets ecosystem and economy more effectively than it has done in the past.
Speaking also, the first vice president of the NSE, Mr. Abimbola Ogunbanjo said that organisations that choose to demutualize make the decision for reasons that are unique to their growth objectives, to raise additional capital for expansion or for major technological investments, or to reduce control of intermediaries over the strategic growth of the exchange.
He pointed out that the process can be cumbersome and expensive, taking several years to complete, and it is generally assisted by policies and regulations specific to the jurisdiction in which the company is registered. Nonetheless, the process has many rewards that far out way short-term challenges.
According to him, one of such rewards is the improvement in flexibility of governance structures that come with demutualization. The for-profit model empowers management to make strategic decisions more efficiently, giving utmost priority to the interests of customers and the exchange itself.
“Demutualized exchanges are also able to restructure, merge and form alliances with other exchanges and capital market institutions to maximise economies of scale and scope, accessibility and market reach. In addition, more agility and flexibility enable exchanges respond more swiftly to increasing competition arising from the emergence of alternative trading systems and globalisation.”
He added that the primary factor that has driven the demutualization of exchanges is the increased pressure on capital market traditional sources of income, saying technological advancements that have resulted in drastic reduction in trading costs and enabled exchanges to overcome national boundaries have also reduced the intermediary role of exchange members, thereby forcing exchanges to seek other revenue opportunities.
He noted that academic research on the effect of demutualization on the financial performance of 20 demutualized exchanges between 1996 and 2008, suggests that the return on equity increases by an average five per cent to 20 per cent, with the average net profit margin increasing by 14 per cent to 30 per cent.
He pointed out that the fact that majority of the world’s leading exchanges have embraced demutualization is indicative of the significant benefits that accrue to the entities that have undergone the process, however a proper understanding of all the issues, openness to new approaches and a high level of co-operation amongst an exchange’s stakeholders are fundamental to any successful demutualization.
Market operators, who spoke in an interview with Leadership, noted that transparent exercise would significantly increase confidence of local and foreign investors and enhance activities in the stock market.
The president Institute of Capital Market Registrars (ICMR) Bayo Olugbemi said, “Demutualization has been on the front burner for a long time now. It is not a government initiative but that of the stock exchange itself. What it means is that the shares of NSE will be opened to all interested investors thereby showing example. It is good for the market and investors.”
The president of Charter Institute of Stockbroker (CIS), Mr. Oluwaseyi Abe said, “African Exchanges are moving towards demutualization. We have been on this for quite some time now. The way is now. The Exchange is on the path of growth, in line with what is obtainable in other Exchanges.”
The managing director of APT Securities and Funds Limited, Mallam Kurifi Garuba said that “It is a positive development for the stock market because it is in line with what happens at other Exchanges.”
“With this approval, a lot of people will like to invest in the Exchange and it will inject new vigour, trigger more innovation and product deepening. Demutualization will enhance the Exchange’s capacity to bring more innovation into the market. As Nigeria’s economy grows, it requires more innovation in the market, in terms of products, like derivatives. The Exchange has done a lot in product development, like listing of Exchange Traded Funds (ETFs), more will be expected from its shareholders after demutualization which makes it a for-profit-organisation.”
The managing director of Highcap Securities Limited, Mr. David Adonri, stated that, “Demutualization or mutualization are structures that have existed in different jurisdictions based on the peculiarity of their history, and there is no guarantee that a demutualized exchange would be more efficient and cost-effective than a mutual exchange.
Adonri said that, what is important is for the process to be done professionally. He stated, “Let all the stakeholders be carried along and know all the fundamental issues upfront. They should avoid actions capable of causing negative impact on the market, or that will defeat the purpose and target benefits of the initiative in the final analysis.”
A senior stockbroker with Calyxt Securities and Funds Limited, Mr. Tunde Oyediran stressed that the most important thing in this demutualization process is that adequate preparation must be made to ensure that investors and, indeed, Nigerians benefit maximally from it.
He said, a deliberate effort should be made to fully restore investor confidence in the market, investors should be assured of transparency and the regulators’ zero tolerance for exploiting insider knowledge and other forms of malfeasance.
He added, for the idea of demutualization to be successful, regulators must live up to their responsibility of putting in place checks and balances that could identify fraud before it happens.
Market stakeholders however noted that demutualization appears to be the logical next step for African exchanges especially if they are to remain relevant in their role of powering Africa’s economic growth and development.
Stakeholders pointed out that African stock exchanges must proceed cautiously, as certain key pre-conditions such as critical mass of stock exchange trading and related services as well as a sufficiently liberalised market are necessary to drive a financially viable operation post demutualization. Other pre-conditions include existence of rule of law, high financial literacy rates and sound corporate governance practices, absence of which would undermine any demutualized regime. Therefore, African stock exchanges that do not currently meet these pre-conditions may wish consider demutualization as a long-term objective. In the interim, these African stock exchanges should prioritise financial deepening, promoting professionalism and expertise, and enhancing macro-economic stability necessary for building critical mass of listings and trading activity.