The conversion of African stock exchanges from member-owned mutual entities to shareholder-owned companies, will lead to considerable improvements in the governance and capacity of African stock exchanges to provide the linchpin for the development of African stock markets.
The conversion is technically known as demutualisation.
Out of the 27 African stock exchanges under the auspices of African Securities Exchanges Association (ASEA), seven, including Johannesburg, Nairobi, Mauritius, Seychelles, Rwandan, Casablanca stock exchanges and BRVM are demutualised. The Nigerian Stock Exchange (NSE) has also started the process of demutualisation.
First Vice President, Nigerian Stock Exchange (NSE), Abimbola Ogunbanjo, said demutualisation would provide African stock exchanges with much-needed access to capital, flexibility and global best practices that could boost the development of the African stock markets.
He said while the process for demutualisation may be cumbersome and there could be some disadvantages, the conversion has many rewards that far out way short-term challenges.
He said the improvement in flexibility of governance structures that come with demutualisation and the adoption of for-profit model, empower management to make strategic decisions more efficiently, giving utmost priority to the interests of customers and the exchange itself.
“Demutualised 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,” Ogunbanjo said.
He pointed out that the primary factor that has driven the demutualisation of exchanges is the increased pressure on capital market traditional sources of income, noting that 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.
Ogunbanjo, who delivered a keynote address on demutualisation at the Building African Financial Markets (BAFM) seminar in Casablanca, Morocco, said as a demutualised entity disciplined by profit-seeking, African exchanges will be in better stead to capitalise on new income opportunities, free from any limitations arising from conflicting member interests.
Academic research on the effect of demutualisation on the financial performance of 20 demutualised exchanges between 1996 and 2008, suggests that the return on equity increases by an average of five per cent to 20 per cent, with the average net profit margin increasing by 14 per cent to 30 per cent.
Demutualisation has also contributed positively to stock market performance. On the back of strong macro-economic performance, improved regulation and other factors, the Johannesburg Stock Exchange (JSE) All Share Index has grown by 280 per cent since its demutualisation in 2005 to reach 53,817.31 points as at the end of April 2017. Following demutuali-sation, a number of stock exchanges had re-positioned their markets, building alliances or consolidating within and across borders in order to enhance their attractiveness. For example, in 2006, the Australian Stock Exchange merged with the Sydney Futures Exchange to form the Australian Securities Exchange (ASX). In 2007, the New York Stock Exchange (NYSE) merged with Euronext to form NYSE Euronext, creating the world’s largest stock exchange with revenues of $4.5 billion.
“While African exchanges might have limitations in raising the funds required to effectively compete in a dynamic business landscape as member-owned stock exchanges, as demutualised exchanges, they can tap into the capital markets as a publicly owned stock exchange. Capital raised by African exchanges in an Initial Public Offer (IPO) or a private placement, like any other business can be used to upgrade systems and attract high-calibre human resources, thereby enhancing its ability to compete domestically and internationally,” Ogunbanjo said.
He noted that given the peculiarities of emerging markets, demutualisation could serve as a means of collaborating with strategic shareholders with specialised know-how aimed at importing international skills, knowledge and technical efficiencies into African stock markets.
According to him, demutuali-sation appears to be the logical next step for African exchanges especially if they are to remain relevant in their roles of powering Africa’s economic growth and development, although they must proceed cautiously on the path of conversion as certain key preconditions are necessary to drive a financially viable operation post demutualisation.
“Perhaps the most important outcome of demutualisation of African exchanges over the long term would be addressing the liquidity challenges faced by African capital markets,” Ogunbanjo said, adding that illiquidity and higher costs of capital, characteristic of underdeveloped markets, are known to deter foreign investors, and steer capital raising efforts of large domestic companies’ to foreign markets.
He noted that by listing on a stock exchange, demutualisation provides an opportunity to unlock the value of African stock exchanges, providing an exit mechanism for former members and a unique opportunity for the public to partake in the profits of the exchange, thereby creating wealth for the general populace.
He said that the NSE has already submitted a draft demutualization Bill to the National Assembly, which will allow it to transit as a demutualized entity while it has also completed five key reports in support of the conversion including inception report, legal due diligence, tax due diligence, member register review and assessment of business and operational plan reports.
