The proposed conversion of the Nigerian Stock Exchange (NSE) from a member-owned entity to share-based public limited liability company got a major lever few days ago with the publication of the much-awaited rules and regulations that will serve as guidelines for the demutualisation. Capital Market Editor, Taofik Salako, examines what may be the biggest change in the history of the 55-year-old stock exchange
The Nigerian stock market, like the traditional African market, is a hub of trading desks brought together by the mutual interest of each trader. Selling and buying and the marketplace have thrived for centuries on mutuality, with all the stakeholders bounded by the common values being derived from the market. Although the sovereign usually plays important roles in establishing a market, the growth of the market, its integrity, regularity and aesthetics depend on the efforts of all.
The stock market, institutionally represented by the Nigerian Stock Exchange (NSE), has thrived for decades on the traditional mutuality of a marketplace. Now, the NSE appears set on a new trajectory where the marketplace will be owned by shareholders and the marketplace itself combines the functions of providing amenable space for profit-making to traders with that of making profit itself to distribute to its shareholders. This is the concept of demutualisation. The NSE has been locked in intense grip of demutualisation in recent years, with various views on the necessity, procedures and timing and other details of the exercise as widely divergent as the multitude of different backgrounds that trade on the market.
The demutualisation of the marketplace got a major lever few days ago with the publication of the much-awaited rules and regulations that will serve as guidelines for the demutualisation. The release of the rules and regulations by the Securities and Exchange Commission (SEC), the apex regulatory body for the Nigerian capital market, concluded a four-year exercise to provide amenable template for the demutualisation. SEC had in February released the draft rules and regulations on demutualisation for comments and review by stakeholders.
Demutualisation is the process of changing a member-owned stock exchange, otherwise known as mutual exchange, to a corporate entity owned by shareholders. In a mutual exchange, the three functions of ownership, management and trading are concentrated into a single group, hence the broker members of the exchange are both the owners and the traders on the exchange and they further manage the exchange as well. In a demutualised exchange, the three functions of ownership, management and trading are clearly separated. The new rules by SEC simply defined demutualisation as “the process through which a member-owned organization becomes a shareholder-owned company.”
A volte face from voice vote
Established as Lagos Stock Exchange (LSE) in 1960, the Exchange started as a private company limited by shares. It was renamed Nigerian Stock Exchange in December 1977 and was re-incorporated as a company limited by guarantee in December 1990. As a limited by guarantee not-for-profit organisation, the NSE thrives on the goodwill, reputation and integrity of its members. It has also operated over the decades as a self-regulatory organisation (SRO). The NSE altogether has some 350 individual and institutional members including some 255 active dealing members, state-owned investment firms and major high networth investors (HNIs).
While Nigeria’s doyen of accounting, Mr. Akintola William, is the only surviving initial signatory to the founding memorandum of the NSE, the membership list of the NSE has always included “the movers and shakers” of the Nigerian economy. Beside stockbroking firms and other capital market operators that are dealing members, members of the NSE included Alhaji Aliko Dangote, Alhaji Abdul Rasaq (SAN), Alhaji Aminu Dantata, Chief Ernest Shonekan, Chief Jerome Udoji, Chief Chris Ogunbanjo, Chief Bayo Kuku, Dr. Lateef Adegbite, Dr, Chris Abebe, Mr. Gamaliel Onosode, Mr. Isaiah Balat, Alhaji Isyaku Umar, Mr. Oba Otudeko, Otunba Adekunle Ojora, Mr. Pascal Dozie, Mr. Paul Ogwuma, Chief Phillip Asiodu, Rear Admiral Allison Madueke (rtd.), Senator Udo Udoma, Mr. Goodie Ibru, Mr. Tony Elumelu and Senator David Dafinone among others.
Several State Investment Companies are also institutional members of the NSE, giving the States inputs into the operations of the NSE. These included Adamawa Securities Limited, Kaduna Investment Company, Kano State Investment and Properties Limited, Katsina State Investment and Property Development Company Limited, Kwara State Investment Corporation, New Nigerian Development Company Limited, Niger State Development Company Limited, Sokoto Investment Company Limited and Yobe Investment Company Limited among others.
But the designation of members may soon change to shareholders, with all the trappings of a public limited liability company and with the Exchange itself listed on its own floor and probably other continental and global floors. The SEC’s rules and regulations on demutualisation settled a major contention-the probable template for demutualisation and placed the NSE firmly on the path of potential radical change in ownership and other related structures.
How to sell the market
The final body of rules and regulations on demutualisation appears to be a delicate balancing act. With ceiling on single individual and institutional shareholding, total equity interest of trade groups and core investor as well as provisions on procedures, documentations, corporate governance and finances among others, selling the shares of the market may not be as straightforward as buying from the market. For a start, stockbrokers and dealers, who constitute the largest members of the NSE, may have to sell down their shareholdings within a period of five year under the demutualisation of the Exchange. As against earlier ceiling of 40 per cent indicated in the draft rules and regulations, the final rules indicated that the aggregate equity interests of members of any specific stakeholder group such as stockbrokers and broker-dealer in the demutualised securities exchange should not exceed 20 per cent. Also, no individual or entity must directly or in directly own more than five per cent of the issued shares or voting rights in a demutualised securities exchange. The rules, made pursuant to section 313 of the Investments and Securities Act (ISA) 2007, describe “related entities and persons” as a person or entity that is related to the entity or person that owns the equity or the voting rights.
According to the rules, the stakeholder groups who are shareholders of the Securities Exchange shall with effect from the date of demutualisation reduce their cumulative shareholding in the demutualised Securities Exchange to no more than 20 percent within five years. The 20 per cent ceiling is however an improvement on the draft rules, which stipulated a ceiling of 10 per cent within five years.
The rules stipulate that the securities exchange should initiate a process for determining the accurate list of members of the Exchange prior to the commencement of demutualisation while the process of demutualisation should include an exchange of membership rights in the Securities Exchange for ownership of shares in the demutualised Securities Exchange.
The rules allow the Exchange to give equity interest to a strategic investor subject to establishment of the fact that the strategic investor has technical expertise through previous experience in managing other Exchanges. However, the aggregate number of shares to be offered to the strategic investors shall not be more than 30 per cent of issued and fully paid up capital of the securities exchange. Notwithstanding this, if the Exchange is in dire need of funds, it could issue a higher number of shares subject to approval of the Commission.
As part of preconditions for demutualisation, a securities exchange shall prior to demutualization submit the names and profiles of members of its committee on demutualization, a valuation report, the draft Memorandum and Articles of Association of the Securities Exchange, the proposed rules of the demutualised Securities Exchange, the proposed allotment and the basis of the proposed allotment of shares to the initial shareholders of the Securities Exchange, a list of the directors proposed as the Board of the Securities Exchange, an implementation plan stating the process to be adopted for effecting the demutualisation of the Exchange, including but not limited to the treatment of the rights and liabilities of the existing members of the Exchange and the proposed plan for the independent management of the commercial and regulatory functions of the demutualised Securities Exchange and timelines for implementation of necessary structures to ensure the functional treatment of commercial and regulatory functions for a “No Objection” clearance by SEC. Any changes to the information provided under the preconditions must also be filed with the Commission for a “No Objection” clearance.
The demutualised Exchange is also expected to implement its plan for the independent management of its commercial and regulatory functions within one year of approval by SEC.
On corporate governance, demutualised Exchange shall have a board of sufficient size relative to the scale and complexity of its operations and the board must be composed in such a way as to ensure diversity of experience without compromising independence, compatibility, integrity and availability of members to attend meetings. At least one third of the board shall be independent directors as provided for under the SEC Corporate Governance Code or any other applicable Corporate Governance Code while all appointments of directors and executive management shall require the prior written approval of the SEC. Besides, the demutualized Exchange shall be required to comply, in all other respects with the SEC Code of Corporate Governance for public companies and any other applicable corporate governance code.
Drumming supports for demutualisation
Nigerian retail shareholders have expressed supports for the demutualisation of Nigeria’s only regular securities exchange. Minority retail shareholders, who usually operate under various groups and see themselves as major stakeholders at the stock market, said the demutualisation of the Exchange would open up the marketplace for popular ownership and enable minority shareholders who have been part of the growth of the market to benefit from ownership of the market.
Chairman, Ibadan Zone Shareholders Association (IBZA), Chief Sola Abodunrin, said demutualisation portends good omen for the Nigerian stock market as the NSE can now truly become a national institution in terms of ownership. The zonal shareholders’ associations were established by SEC to widen domestic participation in the Nigerian capital market.
National coordinator, Independent Shareholders Association of Nigeria (ISAN), Sir Sunny Nwosu, said the demutualisation of the Exchange will open up opportunity to minority retail shareholders to be part of the market they had contributed to. According to him, the demutualisation should be inclusive and should encourage participation by the generality of the people including shareholders that have been major stakeholders in the market.
He said shareholders were in support of the provision which limits the maximum allowable equity stake for any individual or entity in the demutualised exchange to five per cent. “I think it is good for the shareholders, they should allow everybody to participate in the ownership, we are the growers of the market and we should be able to participate in the fortunes we have created. They should however ensure that nobody, no matter how big you are, should own more than five per cent in the Exchange,” Nwosu said.
President, Constance Shareholders Association of Nigeria, Shehu Mikhail, described demutualisation as one of the best things to happen to the Exchange noting that it will create opportunities for the general investing public and also for the NSE itself.
Beyond domestic concerns, demutualisation is being driven by global trend, increasing globalisation of the marketplace and the capital-intensive nature of competitive stock exchange. Proponents argue that mutual-ownership does not provide the flexibility to adequately meet these new challenges. Demutualised entities have wider access to capital and can have wider horizons compared with mutual-owned exchanges. A demutualised NSE, for instance, will be able to float initial public offering (IPO) and supplementary equity and debt issues to raise funds from the investing public. While the NSE boasts of superior trading technology relative to other African exchanges, it will need to increase investments in cutting-edge technology and operating systems to realise its dream as the African hub for financial trading. This is further highlighted by the ongoing programme to integrate all stock exchanges and stock markets in the West African region under the West Africa Capital Market Integration (WACMI) programme.
Under the WACMI programme, securities exchanges in Nigeria – NSE; Ghana-Ghana Stock Exchange (GSE), Sierra Leone-Sierra Leone Stock Exchange and the bloc of eight francophone countries under the Bourse Regionale des Valuers Mobilieres (BRVM)- including Benin, Burkina Faso, Cote d’Ivoire, Guinea, Mali, Niger, Senegal and Togo, will be gradually integrated in phases.
With the removal of jurisdictional restrictions, the defining factor for financial convergence may be technology- with the most seamless, foolproof and smoothest remotely running the regional market. The competitive verve, more than any other factors, has seen conversion of many exchanges from mutual member-owned entities to limited liability companies. London Stock Exchange (LSE), which has significant relationship with the NSE including several dual listings, was demutualised in 2000. The Australian Stock Exchange was demutualised in October 1998. India started the process of demutualising all the broker-run exchanges with the demutualisation of the Bombay Stock Exchange in August 2005. Many other exchanges such as the Singapore Stock Exchange, Japan’s Nikkei and New York’s NASDAQ have also converted into shareholding structure.
Besides, many believe that demutualisation will remove inherent weakness in the constitution of member-owned exchange. 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.
Many stakeholders appear keen on the demutualisation. The Federal Government, which played a major role in the founding of the private members-owned NSE in 1960, said it had held talks with the NSE and SEC prior to the release of the rules and regulations. Minister of State for Finance, Ambassador Bashir Yuguda, confirmed the discussion between the government and other stakeholders on the demutualisation. According to him, government is engaging stakeholders such as SEC and the NSE because of the importance it attaches to the capital market and the import of such demutualisation on the market. He noted that the engagements and discussions with the stakeholders were geared towards ensuring that government comes up with the right policy for the demutualisation.
President, Nigerian Stock Exchange (NSE), Mr. Aigboje Aig-Imoukhuede, also said the discussions on the demutualisation of the Exchange are ongoing noting that the exercise is of critical importance to the NSE and the entire capital market. According to him, giving the position of the NSE, the demutualisation of the Exchange will require input from both the government side and the private sector.
Beyond the silver linings
However, demutualisation also has its own challenges, which may colour the success or otherwise of the entire exercise. One of the most difficult aspects of demutualisation is the adoption of the correct corporate structure. Corporate structure is the first rung of the demutualisation ladder and will adversely affect all other stages unless the optimal solution is implemented. There may be potential vexatious issues that may arise given the status of NSE as an SRO including the issue of conflict resolution mechanism in case the exchange finds itself in a commercial conflict with another company listed on its board and enforcement of disciplinary action especially where such enforcement would hurt the exchange’s bottom line. Also, a shareholding structure spread across large number of shareholders without a major controlling shareholder may unduly delay decision making as vested interests jostle to carry the votes while a controlling core investor with larger-than-majority shareholding could return the NSE into a worse private ownership. For the Nigerian market, the demutualisation may not fare better than the entire market, where more than two-thirds of transactions are controlled by foreign portfolio investors and less than five per cent of the entire population participate in the market.
Already, there is a seething rage among the stockbrokers and dealers who feel that the rules and regulations are unfair. Stockbrokers and dealers, the largest constituency of the market, had earlier kicked against the ceiling placed on trade group’s final shareholding in the post-demutualised period. With the new rules reducing trade group’s stake to 20 per cent, many operators said broker-dealers will be shortchanged in the demutualisation process.
“I have reservation with the demutualisation provisions. The market is owned by the dealing members who are the major stakeholders. The limit of stockbrokers to 20 per cent is unfair while the 30 per cent for core investor may create avenue for a single individual or institution with financial strength to exert major influence in the NSE. The provisions should be fair to all and core investor limit should not be more than 15 or 20 per cent,” said Tunde Oyekunle, a broker at the NSE and managing director, Finawell Capital Limited. President, Association of Stockbroking Houses of Nigeria (ASHON), Mr. Emeka Madubuike, said the group’s sub-committee on the demutualisation, which scheduled meeting this weekend, will come up with a common position on the final rules and regulations.
Many have cited example of the Indian government’s scheme for demutualisation of stock exchanges, which was used in the demutualisation of the Bombay Stock Exchange, now BSE Limited. With some 790 brokers, the maximum trade group’ holding was 49 per cent with a provision that a minimum of 51 per cent of the equity capital would be held at all times by public other than broker-shareholders. The BSE scheme shared similarity with the SEC’s rules with regard to the provision that no individual or institution should be allowed to have more than five per cent voting rights. Also, the Nairobi Securities Exchange, which in third quarter 2014 floated its IPO and listed its shares on its own floor, allocated more than three-quarter of its shares to former member-broker-dealers.
The demutualisation’s IPO and eventual listing may be the lift several cash-strapped and illiquid Nigerian stockbroking firms have been angling for. The Nairobi Securities Exchange’s IPO was the most successful in the history of the bourse. Such a repeat by the NSE’s IPO will lay a background for strong post-listing trading.
But the demutualisation is still a long walk for all the stakeholders. It may be a puzzle to the local folks that the stock exchange, where shares of quoted companies are sold, is also up for sale. But to the stakeholders, this demutualisation is about the redefinition of the marketplace.
