EXPLAINER: What to know about NSE demutualisation

The Nigerian Stock Exchange (NSE), on March 10, announced that it had received final approvals for its demutualisation plan from the Securities and Exchange Commission (SEC) and Corporate Affairs Commission (CAC), respectively.

With this, the nation’s bourse has joined the list of exchanges that have transited into a limited liability company, owned by shareholders who provide capital and shares in profits or losses.

Under the new arrangement, a new non-operating holding company, the Nigerian Exchange Group Plc (NGX Group), has been created with three operating subsidiaries, namely: Nigerian Exchange Limited (NGX), the operating exchange; NGX Regulation Limited (NGX REGCO), the independent securities regulator; and NGX Real Estate Limited (NGX RELCO), the real estate company.

WHAT IS DEMUTUALISATION?

Demutualisation is the process of converting a non-profit, mutually-owned organisation into a profit making, investor-owned company.

Since the first demutualisation by the Stockholm Stock Exchange in 1993, a number of stock exchanges around the world have also followed suit.

In Africa, the Johannesburg Securities Exchange (JSE) was the first to demutualise, having done so in July 2005.

While the NSE will continue to provide virtually the same services, it will have a different governance structure in which external shareholders will have the opportunity of representation on the board of directors.

WHAT VALUE DOES THIS BRING TO THE CAPITAL MARKET?

The Exchange can now more easily raise funds to finance strategic objectives and expansion. The opportunity for a potential initial public offer (IPO) or strategic investment is created, opening up opportunities for domestic and institutional investors, and creating liquidity for existing members.

Demutualisation enables the exchange to raise capital efficiently and effectively at market-determined pricing. Members can realise the economic value of their interest by exercising the right to sell.

Capital management is critical to an Exchange’s sustenance; demutualisation enables the exchange to optimise the level and mix of capital reserve.

Upon demutualisation, it will be a public company and its shares will be tradable on an available exchange in accordance with the SEC’s regulations.

The new entities will be subject to companies’ income tax and other relevant taxes payable by for-profit organisations, thereby providing additional source of tax revenue for government.

ANY DOWNSIDE RISK?

Since ownership and trading rights are now separated, the new company aiming to maximise profits and dividends for its shareholders may have less incentive to commit resources for self-regulation, or to take enforcement action against its customers who are a source of income. So, there is always the possibility that regulatory functions may be sacrificed on the altar of profit maximisation.

To forestall this from happening, the management must put in place a robust corporate governance structure to minimise the associated conflicts.