Demutualisation of the NSE: Implication for Stakeholders

Technological advancement in the financial world, over the last two decades, has significantly increased competition among stock exchanges, globally. This competition has pressured many exchanges to adopt business models which have, greatly, improved their efficiencies and effectiveness.

Some stock markets have also had to demutualise, as well as build alliances or consolidate within and across borders, in order to enhance their attractiveness in the face of strong global competition. Demutualisation 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.

For example, in 2006, the Australian Stock Exchange merged with the Sydney Futures Exchange to form the Australian Securities Exchange (ASX), one of the world’s top-10 listed exchange groups. The New York Stock Exchange (NYSE), in 2007, also merged with Euronext, the European electronic stock exchange based in Netherlands, to form NYSE Euronext, the world’s largest stock exchange.

Access to More Capital
Demutualisation has provided exchanges access to more capital that they were incapable of raising. Such capital has enabled them meet their needs and stay competitive without necessarily placing additional financial burden on participants. Since the first demutualisation of a stock exchange in 1993, by Stockholm Stock Exchange in Sweden, over 25 stock exchange demutualisations have taken place; predominantly, in developed market jurisdictions. Furthermore, over 80% of members of the World Federation of Exchanges (WFE) are currently demutualised, with some publicly listed while others are not.

The monopolisation of the Nigerian Stock Exchange (NSE), by some individuals, appears to be the reason for the several unsuccessful attempts, by the previous and current managements of the Nigerian capital market and its regulator, to demutualise the nation’s bourse. And with its monopoly state, the NSE cannot enjoy more capital, as well as become a full member of WFE. Most of the exchanges that have been admitted as full members of the WFE are all demutualised.

Abdul Razaq, the former president of the NSE, was the first to propose, in June 2002, that the NSE be demutualised. Ndi Okereke-Onyiuke, the sacked NSE’s Director General, later represented the proposal in 2008, but it was stepped down, perhaps, because of the then global market downturn.

NSE/SEC’s Delay Tactics
Meanwhile, the present leadership of The Exchange, led by Oscar Onyema, the NSE’s Chief Executive Officer, has dispelled the insinuation that the management of the Nigerian capital market is not sincere in its intention to demutualise the NSE.

When Mr. Onyema was asked, earlier in the year, why the NSE seems to be delaying on its demutualisation plan, or if The Exchange is depending on its regulator, the Securities and Exchange Commission (SEC), to be demutualised, he said:

“On if The Exchange is depending on the SEC to be demutualised, the answer is No! If you recall, a technical committee was set up last year to come up with a framework that the SEC can approve, which will then allow anybody that wants to demutualise to go through and implement the process.

“For example, if we decide that we don’t want to wait for the rule of SEC before demutualising, and we come up with a document that says we are now demutualised, if we take such document to SEC for approval, on what basis are they going to be doing the approval? So, the technical committee’s report is with the SEC, waiting for their board to review and come out with the guideline on how demutualisation will occur. Then, the NSE will take a decision whether to demutualise or not, and then follow the law that has been set down to achieve the demutualisation process. So, that is the state we are now.”

In Pursuit of a World-Class Market
The Director General of the Securities and Exchange Commission, Arunma Oteh, had also maintained that the demutualisation of the Nigerian Stock Exchange, as well as the Abuja Securities and Commodities Exchange would be an important step in the overall reform and transformation of the Nigerian capital market into a world-class market, noting that the SEC has a major role to play in the transition.

Ms. Oteh explained that demutualisation has been driven by the desire to strengthen governance as shareholders’ activism can be an effective means of improving transparency, accountability and management performance. “Mutual organisations operate like clubs and tend to be more inclined to addressing members’ interest than the interest of other stakeholders. The mix of shareholders and members, which demutualisation often brings, neutralises the dominance of the latter. Besides, with improved management structure and financial muscle, demutualised exchanges appear to be better positioned to innovate, embrace market changes and meet customers’ demands,” she said.

In July this year, The Chairman of the SEC, Dr. Suleyman Ndanusa, gave a boost to the long-awaited demutualisation programme when he promised that the Exchange Commission will be coming out, in few weeks, with rules governing the process. Dr. Ndanusa also said that the Commission did not play any other role in the demutualisation process beyond its statutory roles of setting guidelines and operating rules for capital market activities.

Going by the professed intentions of the managements of the NSE and SEC, if the NSE eventually demutualised, stakeholders who should have the largest percentage of the nation’s bourse should be stockbrokers, institutional investors, settlement banks –involved in the clearing and settlement of shares, and the general public.

Call for Speedy/Transparent Process
While it is not yet certain when the planned demutualisation of the NSE would take place, it is essential that the process must be speedy and transparent to fully restore investors’ confidence in the market, particularly indigenous investors.

Presently, all international signals from foreign investors are giving optimistic projection in the Nigerian market. Therefore, transparency in any process in the market, will allow the confidence seen internationally filter down to local investors and make the market more buoyant.

The Association of Stockbroking Houses of Nigeria (ASHON) has also reiterated that the role of SEC, in the demutualisation process, is limited to approving the guidelines prepared by members for the exercise and nothing more.

ASHON said it expects the whole process to be transparent and quickly concluded so that all the major players involved can benefit, instead of allowing some individuals corner the shares of the NSE.

Recommendations
Without a transparent demutualisation process that will be open to the public, all the messages of restoration of investors’ confidence, that the present NSE’s administration and its regulator are promising, will be futile.

However, demutualisation of the stock exchanges is currently sweeping across the globe and stakeholders in Nigeria want to join the train, there is need for all concerned stakeholders to look critically into the process and strengthen corporate governance in their various organisations. This is important because, if corporate governance is not well strengthened in the management of the NSE, for instance, moving from a mutual structure to a demutualised structure may harm a self-regulatory structure. Demutualisation, alone, will not solve all the problems in the Nigerian capital market.

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