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Why SEC is determined to demutualise NSE

By Peter Egwuatu
As part of its effort to transform the Nigerian capital market in accordance with global practice, the Securities and Exchange Commission (SEC), said, it is determined to demutualise the Nigerian Stock Exchange (NSE).

Demutualisation is a process by which a member-owned Exchange is converted to a shareholder-owned Exchange. With demutualisation, the NSE should be exposed to robust corporate governance; enhanced efficiency and transparency associated with publicly quoted companies.

Demutualisation allows the Exchange to be listed on its own floor where investors would have the opportunity of investing in the self-regulatory organisation.

Demutualization is just part of the overall reform that SEC is putting in place to help reposition the capital market. SEC is setting up a regulatory committee to curb the downward movement in share prices. The Commission is leaving no stone unturned to ensure the success of the e-dividend policy. The Commission is also set to audit shareholders associations as part of the overall efforts to restore confidence in the capital market.

Speaking at a press briefing, last week to commemorate 50th year of capital market regulation in Nigeria, Director General of SEC, Ms Arunma Oteh said, “

A 21-member committee has been appointed by the Commission to review and recommend on how to demutulise the NSE. This 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.” She 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.

Oteh, further noted that a number of measures had been put in place by the Commission including the setting up of two Committees: one to review the structure of the market under Mr. Dotun Sulaiman, and the second to review the Code of Corporate Governance for public companies under Mr. A.B. Mahmoud SAN.

The recommendations of the two committees have since been largely implemented. In particular, a new Code of Corporate Governance for public companies has been issued by the Commission and it came into effect on April 1, 2011.

According to her, “Also in furtherance of the implementation of the Market Structure Committee report, a number of new rules have been issued and existing rules amended. All these are being compiled by SEC in a single document for ease of reference.

The Commission has also been taking steps to improve the governance structure of the NSE and to ensure that capital market operations are conducted in accordance with the highest global standards. An illustration of this was the highly transparent process, conducted by the Council of the Exchange, in line with the directives of the Commission, for the appointment of the new executive management team of the Exchange.”

It’s obvious now that the next challenge in improving governance of the Exchange is the ongoing effort by the SEC to ensure that the Exchange is demutualised by a process that is in consonance with the best global standards. This must be a process that ensures fairness and openness, as well as the protection of the national interest.

However, the Commission has started in a good direction of making the process transparent by the recently appointed committee members.

It should be noted that the major weakness of the NSE is its constitution (Mutual Exchange). At the moment, the three characteristics or 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 NSE 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 local and foreign investors feel that the NSE does not provide the flexibility to adequately meet these new challenges of the stock market. Hence demutualization is seen as the panacea for its problems. However, implementing a demutualization programme is not trivial. It represents a wholesale corporate cultural transformation – changing every dimension of an Exchange.

Exchanges in advanced economies are seen as platforms for creating fair and efficient stock market, with a duty to protect the public interest.

In advance markets, Exchanges face competition and are typically not saddled with an exclusive public policy role. Accordingly, demutualization programmme 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.

,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.


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