Demutualisation is the process of converting the Nigerian Stock Exchange (NSE) from an organisation which exists for the benefit of its members, to one which is public, and investor owned.
The issues addressed here are not regarding the benefits of demutualisation, as research has shown that in comparison with mutual exchanges, demutualised and publicly listed exchanges certainly operate more efficiently when it comes to size, liquidity and financial performance. However, we are concerned with the context in which demutualisation occurs in Nigeria. That context refers to the corporate governance framework in the country and how amenable it is to successful demutualisation. The author suggests that despite the challenges – legal and business, of demutualisation, the NSE is indeed ready.
Demutualisation - The Nigerian Process
The NSE has had demutualisation on its agenda since 2001, as reflected in a proposal by former Director General Ndi Okereke-Onyiuke. In 2011, demutualisation was also reflected in the NSE paper – The Roles and Expectations of Regulators in the Demutualisation Process, alongside the inauguration of a 21-member technical committee to develop a legal framework for the process.
In 2014, things appeared to be moving forward, as the NSE issued requests for proposals from local and foreign financial advisers to assist with demutualisation. In February 2015, the Securities and Exchange Commission (SEC) issued a draft, Rules on Demutualisation of Exchanges in Nigeria and invited comments. The SEC, on the 12th April 2015, has now published its final Rules on Demutualisation of Securities Exchanges in Nigeria.
Why Demutualise? – Liquidity, Competition and Technology
Liquidity is not usually cited as a primary reason for demutualisation. Rather, it is implied. The benefit is however very explicit - demutualising the NSE will result in the exchange’s ability to generate increased trading volumes. This trading volume translates into significant inflows of capital and hence liquidity for investors. It also translates into profits for the exchange as an independent company. Examples of transactions that will attract liquidity include exchange services for derivatives trading, clearance and settlement. The prominence of exchange traded funds (ETFs) as well, have attracted high trading volumes in most exchanges.
Exchanges demutualise in reaction to competition and technological innovations. On the competitive front, the NSE would be run as an efficient business enterprise.
In this environment, the promise of demutualisation is that, along with the capital necessary for investments in technology, the board of newly demutualised exchanges provide a new corporate governance structure that is more effective in managing conflicts among participants. In corporate lingo, the new exchange would be designed to maximise the “residual” value of the enterprise that accrues to the shareholders.
The financial sector has always been excited by new technology. It should therefore come as no surprise that changes in the structure of stock exchanges have coincided with periods of greater technological upheaval. As a business responding to competition from other exchanges, there is an ever present need to stay ahead of the game on the technological front. Innovation in communication and data processing technologies hold a strong appeal to investors who now understand that data is king.
The Demutualisation Challenge in Nigeria
The NSE is currently registered as a company incorporated by guarantee. In a publication by the law firm, Udo Udoma & Belo Osagie (2\06\15), it is pointed out that supporters of demutualisation have identified this particular structure as a hindrance to the NSE’s success. It is suggested instead, that as a demutualised exchange, the NSE would operate with a view to earning and increasing profits, thereby increasing its operational efficiency.
The challenge lies with the governing law dealing with corporate matters in Nigeria. This is the Companies and Allied Matters Act (2004). It allows the conversion of private companies into public companies and vice versa. However, it does not allow for the conversion of companies limited by guarantee (e.g. the NSE) into a public company.
Legal prudence requires that if demutualisation is to happen, it must be allowed and regulated under Nigerian law. This is sound reasoning and the publication by Udo Udoma & Belo Osagie points out that stockbrokers have indeed argued against the demutualisation process on these grounds, seeing as it is technically against the articles of association of the NSE. If demutualisation is to be implemented, they believe that there should be a members' resolution at a general meeting to explicitly approve the process.
The above challenge is further complicated by the contradiction of having a public interest company owned by private individuals. The NSE effectively becomes part regulator and part profit making company. In financial markets, these tensions cannot always be reconciled, as conflicts of interests are likely to arise.
Demutualisation and Corporate Governance
Demutualisation leads to lesser influence of trading members of the NSE on corporate decisions, as their board representation diminishes. Other type of directors, with expertise in IT systems, product information etc, are brought in to make the exchange more competitive in its strategic outlook. This is the impact of demutualisation on corporate governance – It allows for a more dynamic board that is also investor-controlled. In this regard, past efforts by the SEC to improve corporate governance in Nigeria take centre stage in a demutualised NSE.
If it is accepted that corporate governance is inextricably linked to demutualisation, it can be suggested that the NSE is indeed ready for demutualisation as key initiatives by the SEC continue to foster robust corporate governance.
The SEC has already mandated companies to adhere to the International Financial Reporting Standards (IFRS) with effect from 1st January 2012. This demonstrates a readiness to demutualise, as public companies in Nigeria align with international market standards, thereby attracting foreign investment. The SEC has also been proactive in approving new listing rules that tackle the peculiar concerns of companies (cheaper listings being part of a demutualised exchange). This again suggests a readiness to demutualise, as investors will have more options – options which reflect the dynamic nature of the Nigerian economy. This particular initiative aims to attract more listings from local firms, alongside upstream oil & gas and telecommunications firms.
Cementing the point on corporate governance, in a 2013 Keynote Address concerning Nigerian capital markets, Arunma Oteh, former Director General of the Securities and Exchange Commission, reiterated the integral role of corporate governance standards in fostering investor confidence.
Investor confidence reforms naturally attract foreign investors. It is therefore the case that a demutualised exchange, apart from providing the benefit of increased liquidity, raises the possibility of the NSE being owned by foreign investors. Whether this should lead to an imposition of limits on an otherwise free market is a discussion for another day.