WHY SEC WANTS TO DEMUTUALIZE NSE

The Securities and Exchange Commission (SEC) recently inaugurated a technical committee on the demutualization of the Nigerian Stock Exchange (NSE). The Chairman of SEC, Senator Udoma Udo Udoma, who inducted members of the committee in Lagos, emphasized that the committee is expected to advise the Commission on the demutualization of the Exchange.

The 21-member committee is being chaired by Mr. Asuerinme Ighodalo. Some other members include the Dean of Lagos Business School, Enase Okonedo, and the Chief Executive Officer of NSE, Mr. Oscar Onyema, among others. Udoma recalled that at the inauguration of the current board of the Commission, the board members had pledged to make the Nigerian Capital Market more internationally competitive.

In a mutual exchange, the three functions of ownership, management and trading are concentrated into a single group. Here, the broker members of the exchange are both the owners and the traders on the exchange and they further manage the exchange as well. This can sometimes lead to conflict of interest in decision making. A demutualised exchange, on the other hand, has all these three functions clearly segregated, i.e. the ownership, management and trading are in separate hands.

Many exchanges feel that the cozy world of the mutualized exchange does not provide the flexibility to adequately meet these new challenges. Hence demutualization is seen as the panacea for their problems. However, implementing a demutualization program is not trivial. It represents a wholesale corporate cultural transformation – changing every dimension of an exchange.

Exchanges are seen as platforms for creating fair and efficient capital markets, with a duty to protect the public interest. In mature markets, exchanges face competition and are typically not saddled with an exclusive public policy role. Accordingly, demutualization program has a greater probability of success and facilitates a truly global business.

There are a whole range of issues that need to be analyzed and considered before demutualization commences: what does the exchange hope to achieve from demutualization and how far is the management prepared to commit towards achieving complete demutualization? What infrastructure needs to be in place to achieve the desired results? What is the appropriate corporate governance structure for an exchange? How does the demutualised entity provide for stakeholder value and profitability? Can you achieve your business goals, and in particular your target earnings rates when regulators are setting moving targets?

These are just some of the many questions that need to be answered by the SEC technical committee on demutualization. Failure to address these issues properly may result to damaging an exchange's reputation or worse still burdening the demutualization project with problems for the future.

There are obvious advantages to demutualization. Demutualised entities have wider access to capital and can have wider horizons compared with mutualized exchanges. This gives the demutualized exchange a competitive edge in winning business and a better position to embrace the technology evolution.

The major weakness of a mutual exchange is its constitution. Mutual exchanges are ultimately geared to maintaining their members' interests. The interests of the members are not necessarily the same as those of the exchange; they are disparate. The separation of shareholders, management, and users in a demutualised exchange makes for better strategic decision-making, rather than protecting vested interests.

The exchanges that have demutualised in some parts of the world have not done so without crossing numerous hurdles. There are areas of demutualization that proved to be problematic. One of the most difficult aspects of demutualization is the adoption of the correct corporate structure. Corporate structure is the first rung of the demutualization ladder and will adversely affect all other stages unless the optimal solution is implemented. There are no blueprints or templates for this so it's easy to get the wrong structure for the organization.

In considering the corporate structure, some key questions that should be factored in; what type of share structure is going to be put into place i.e. will shareholding be restricted to current members?