THE DEMUTUALIZATION OF THE NIGERIAN STOCK EXCHANGE

NOVEMBER 2017

Written by: Emmanuel Ohiri and Ayobamidele Akande

“Demutualization” is being floated by numerous stakeholders in Capital Markets all over the world. The concept, simply means the process when a mutual company i.e the Nigerian Stock Exchange (NSE), owned by its members, converts into a company owned by shareholders. In effect, the members exchange their rights of use for shares in the demutualized company. During the process of demutualization, ownership of the mutual company is separated from the exclusive right to use the services provided by the company. The Stockholm Stock Exchange adopted the concept in 1993. By year 2000 several stock and futures exchanges had demutualized, including the Amsterdam Stock Exchange, the London Stock Exchange, the Paris Bourse and the Capital Market of England.

The CEO of RMB Nigeria and Regional Head for West Africa, Mr. Michael Larbie, highlighted the benefits of the demutualization of the NSE: “We believe a demutualization will further strengthen the NSE’s position as a leading exchange in Africa. We intend to leverage our deep advisory and structuring expertise and in-depth understanding of the Global Market Structure and Broker Dealer sector to support the process.”. At the 56th Annual General Meeting, in September 2017, the NSE stated that it had achieved eighty percent (80%) demutualization in its process to reposition the capital market, as a key pivot of economic activities in the country and Africa in general.

In a bid to facilitate the development of the capital market in accordance with prevalent international practices and standards – to foster economic development, the Nigerian government through the National Assembly is considering a bill for the conversion and re-registration of the Nigerian Stock Exchange from a Company Limited by Guarantee to a Public Company Limited by Shares.

The introductory portion of the Bill (Section 1 (2)) provides; “Notwithstanding any provision of the Companies and Allied Matters Act or the Memorandum and Articles of Association of The Exchange, The Exchange is, with the prior authorization of the Securities and Exchange Commission, empowered to adopt any process, procedure, structure or plan as may be deemed fit by its Council for the purpose of converting to a public company limited by shares”.

INTRODUCTION

The Demutualization of the Nigerian Stock Exchange Bill,2017 (The “Bill”)

http://www.investopedia.com/terms/d/demutualization.asp (accessed October 25, 2017)The NSE website; NSE Announces Financial Advisers for Demutualisation, viewed online at http://www.nse.com.ng/mediacenter/pressreleases/Pages/NSE-Announces-Financial-Advisers-for-Demutualisation.aspx (accessed October 25, 2017)Proshare, viewed online at https://www.proshareng.com/news/Capital%20Market/NSE-holds-56th-AGM--says-it-has-achieved-80Percent-Demutualization/36500 (accessed October 25, 2017)http://www.nassnig.org/document/download/8684 accessed October 25, 2017)

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To complete the process, the NSE would be required to incorporate a public company limited by shares and alter its Memorandum and Articles of Association.

The introductory portion of the Bill (Section 1 (2)) provides; “Notwithstanding any provision of the Companies and Allied Matters Act or the Memorandum and Articles of Association of The Exchange, The Exchange is, with the prior authorization of the Securities and Exchange Commission, empowered to adopt any process, procedure, structure or plan as may be deemed fit by its Council for the purpose of converting to a public company limited by shares”.

The NSE will not have any obligation to pay tax arising in connection with and or as a result of its conversion and re-registration to a public company limited by shares. However, upon completion of the conversion and re-registration of the Exchange to a public company limited by shares, the NSE will only be liable to pay all extant applicable taxes on subsequent profits earned by the NSE after such conversion and re-registration.

Tax Implications

The major shifts in ownership and corporate governance structure have led to the demutualization of many Exchanges around the world - to keep up with global competition and economic advances. By converting member-owned, non-profit organizations into profit-driven investor-owned corporations, demutualization will give the NSE, access to capital that can be used both for investment in new technology and for participation in the ongoing consolidation of the industry. In addition to the influx of capital in the exchange market, demutualization serves to strengthen the corporate governance structure of the NSE. It also has the following benefits:

• A demutualized NSE, would enhance its drive for profit making and would not compromise its position of stock exchange as a public entity.

• Inclusion of outside Directors on Board to serve as a check and promote integrity in the decision making of the Board could reduce the entity’s risk.

• The Securities and Exchange Commission (SEC) Code of Corporate Governance for Public Companies, which would apply to the demutualized NSE, requires the positions of the chairman of the board and CEO be separate and held by different individuals. This is to prevent the over-concentration of powers in one individual which ‘may rob the Board of the required checks and balances in the discharge of its duties .

• Regulatory restrictions on the appointment of senior executives in the NSE may ensure that right persons are appointed and that they act in public interest, apart from being responsible to shareholders.

Returns of Demutualization

Section 2 (5) and (6) of the Bill.Section 3Clause 5.1(b) Code of Corporate Governance for Public Companies.Ibid.

Stark Legal | Barristers & SolicitorsTHE DEMUTUALIZATION OF THE NIGERIAN STOCK EXCHANGE

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To complete the process, the NSE would be required to incorporate a public company limited by shares and alter its Memorandum and Articles of Association.

Despite its advantages, demutualization is not without its distinct regulatory challenges. One of the most important regulatory challenges inherent in the demutualization of stock exchanges around the world is the management of conflicts of interest. Where the NSE is principally profit driven, it may: (1) abuse its position as both market participant and market regulator to its own advantage; and (2) sacrifice effective regulation in order to achieve the short-term goal of maximizing shareholder profits.

Whilst noting that demutualization of the NSE might pose various challenges for market supervision and regulations especially in Africa where markets are still not su�ciently liberalized, the benefits of the process are imperative to liberalize the stock market. We propose the following actions by the SEC to tackle the expected regulatory, business, and technological challenges:

• examine regulatory, ownership, management, operational, governance and financial issues in demutualization of the NSE

• establish appropriate platforms to examine potential conflict of interest and measures to deal with them in demutualization of the Exchange;

• Set up measures to improve the NSE’s corporate governance towards ensuring market operations are conducted with the highest levels of transparency, in line with global standards.

It is important that regulatory oversights are deployed to spot various conflict situations that may arise from the demutualization. Also, continued financial viability of the NSE is of paramount importance.

Conclusion

Downside of Demutualization

Md. Shariful Islam and Mohammad Rezaul Islam, Demutualization: Pros and Cons for Dhaka Stock Exchange, European Journal of Business and Management Vol 3, No.12, 2011 p. 28 viewed online at http://pakacademicsearch.com/pdf-files/ech/517/24-33%20Vol%203,%20No%2012%20(2011).pdf (accessed October 25, 2017)Ibid

Stark Legal | Barristers & SolicitorsTHE DEMUTUALIZATION OF THE NIGERIAN STOCK EXCHANGE

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