Demutualisation: NSE’s Journey to Elite League

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The ongoing demutualisation of the Nigerian Stock Exchange will energise the capital and help unlock Nigeria’s growth potential, writes Obinna Chima

The Nigerian Stock Exchange (NSE) last Tuesday, officially commenced the process to join 56 other Stock Exchanges in the world that are demutualised. This followed an endorsement gotten from a court ordered meeting (COM) and an Extra-ordinary General Meeting (EGM) held separately in Lagos.

At the COM, the members assented to: the registration of the Exchange as Nigerian Exchange Group; the transfer of its securities exchange license and other assets required to carry out the securities function to Nigerian Exchange Limited and the establishment of a separate subsidiary company to be charged with the regulatory functions of the Exchange post-demutualisation to be called NGX Regulation Limited.
The members equally approved the transfer of the assets of NSE Consult Limited, NSE Nominees Limited and Coral Properties Limited – existing subsidiaries of the NSE – to the Nigerian Exchange Group Plc.

They also approved that the Exchange will have a total share capital being N1,250,000,000 comprising 2,500,000,000 ordinary shares of 50 kobo each to be registered with the Corporate Affairs Commission (CAC). The members equally assent to the allotment of 1,964,115,918 ordinary shares to Dealing Members and Ordinary Members on the basis of a ratio of 78:22, respectively. A Claims Review Shares totaling 40,083,999 ordinary shares, representing two per cent of the Issued Shares of Nigerian Exchange Group, would be set aside for allotment to parties who are adjudged as being entitled to shares in the demutualised Exchange was also set aside.

However, the shares of the NSE would not be listed immediately after the demutualisation, but later. This would be after other documentation and registrations would have been perfected. With the process, the NSE would be unbundled and the Nigerian Exchange Group Plc would be a non-operating holding company. Under the holding company, there would be subsidiaries, which would include the operating Exchange.

Also, at the EGM members appointed a board of directors of the demutualised exchange with Mr. Abimbola Ogunbanjo, who is the current President of the NSE Council emerging as the chairman. Also, Mr. Oscar Onyema will remain as the chief executive officer and managing director. Others are: Dr. Umaru Kwairanga; Mrs. Fatimah Bintah Bello-Ismail; Mr. Oluwole Adeosun; Mr. Chidi Agbapu; Mr. Patrick Ajayi, all members and non-executive directors and Dr. Okechukwu Crescent Itanyi, Mrs. Nimi Akinkugbe, Prof. Enase Okonedo who were appointed independent directors; Mr. Ikpobe Apollos Oghooritsewarami and Mrs. Ojinika Nkechinyelu Olaghere who w ere appointed independent non-executive directors.

Demutualisation Explained
Demutualisation generally refers to the process of converting from a non-profit, mutually owned broker-dealer membership organisation to a shareholder-owned, for-profit corporation. Members of a mutual Exchange are both owners with voting rights and users with trading privileges.

In a fully demutualised Exchange, shareholders are investors in the business of the exchange. Trading rights of participants in the market run by the Exchange are created by separate contracts between the participant and the Exchange. The board of directors and corporate governance structure of the Exchange reflects the broader share ownership.

According to a World Bank report, demutualisation fundamentally changes the orientation and mandate of an Exchange from a cooperative to a business. This in turn necessitates a number of other changes, both internal and external, in order to transform the organisation into one whose benchmarks are based on financial performance.
Also, it triggers dramatic changes in Exchanges’ governance structures, managements, organisations and internal processes and procedures. These changes are imperative if a successful transition to commercial status is to be achieved.

The NSE was incorporated as a private company in September 1960 under the name of Lagos Stock Exchange which was changed to the NSE in December 1977. It was re-incorporated as a company limited by guarantee in December 1990 and has operated as such ever since.

In recognition of the potential of demutualisation in the development of the capital market, the NSE is set to join the growing list of demutualised Exchanges.

A bill for the process titled, ‘Demutualisation of the Nigerian Stock Exchange, Bill, 2017,’ was then sponsored by Mr. Ayo Tajudeen, who then chaired the House Committee on Capital Markets.

Members of the NSE had passed a resolution at an Extra-Ordinary General Meeting of the NSE held on March 30, 2017; specifically, authorising the Council to commence the process that will culminate in the Exchange being demutualised.

From the Beginning
Demutualisation has been on the agenda of the Nigerian Capital Market since 2001, although there was no traction in advancing the process until 2011.
In 2011, demutualisation was discussed again having been reflected in a paper presented by the NSE titled, ‘The Roles and Expectations of Regulators in the Demutualisation Process.’

Furthermore, a 21-member technical committee was inaugurated – also in 2011 – by the Securities and Exchange Commission (SEC) and charged with developing a legal framework for the demutualisation process.

The committee then had three months to complete its work and were required to review the structure and ownership of the NSE, examine the regulatory, ownership, management, operational, governance and financial issues in demutualisation of Exchanges, review various demutualisation models and experience including valuation models for demutualisation.

Also, in 2014, SEC issued draft Rules on Demutualisation of Exchanges in Nigeria. The final rules on demutualisation were released by SEC on April 27, 2015 (the Demutualisation Rules or Rules). Despite these rules, the completion of demutualisation was stalled as the existing company laws and regulations did not have provisions that could be applied to achieve a demutualisation of the Exchange.

Therefore, even though demutualisation of the NSE had been an aspiration of the Exchange for several years, it was not until the EGM of March 2017, that they finally crossed the rubicon, where members of the NSE approved the dimutualisation scheme of the Exchange and began the journey of no return, one that has led to the success last week.
The enabling framework for the demutualisation of the Exchange is the Demutualisation of the Nigerian Stock Exchange Act, 2018 (No 14 of 2018), which was enacted on July 29, 2018 following the receipt of Presidential Assent.

The Act provides the regulatory and legal framework that will enable us to achieve a demutualised Exchange. Under the provisions of the Act, the conversion and re-registration of the Exchange to a public company limited by shares – from the current status of a company limited by guarantee – will be concluded.

In particular, Section 1 (2) of the Act empowers the Exchange to adopt any process, procedure, structure or plan as may be required by the National Council for the purpose of demutualisation, provided that the prior authorisation of the SEC has been obtained and all procedures and requirements of the Demutualisation Rules have been complied with.

Benefits of the Scheme
The Exchange will become the 57th exchange to demutualise amongst the 70 members of the World Federation of Exchanges as at June 27, 2019.
Some of the benefits and opportunities available to members and other stakeholders of the Exchange after the process, according to a document from the NSE, includes:

Liquidity and Capital Management: The Exchange can 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, the Exchange will be a public company and its shares will be tradable on an available exchange in accordance with the SEC’s regulations.
In addition, the Exchange would provide relevant support to its members in this regard, as and when required. Liquidity will however be subject to the efficiency of such trading exchange as well as market demand.

Improved Corporate Governance:
The demutualised Exchange and its subsidiaries will be subject to high standards of corporate governance expected of public companies to take decisions that are in the interest of all members as well as the Exchange. With regards to regulatory functions, the separation of ownership and trading rights will give The Exchange and its subsidiaries greater independence from its professional intermediaries.

As a public company, the Board of Directors of the Exchange are required to act in a manner that benefits the company and its shareholders including minority shareholders. The Board of Directors must also take decisions that have benefits to a broader scope of stakeholders such as employees, suppliers, shareholders, government etc.
Global Competitiveness:

Post demutualisation, the new Exchange will be forced to examine its role as a trading venue and take on necessary improvements to facilitate more competitive strategies. Technological improvements will allow for efficient and effective matching of buy and sell orders of clients at lower transaction costs, whilst offering transparency, trader anonymity and extended trading hours demonstrating the Exchange’s role as a ‘Niche’ player. Improved global trading facilities will maximise economies of scale and scope and increase our accessibility and market reach. Also, the NSE would be better positioned to seek strategic alliances and consolidation, introducing greater geographical collaborations and M&A possibilities.

Furthermore, a demutualised Exchange affords all Nigerians and the foreign investors the opportunity to become shareholders and creates opportunities for strategic partnerships and inorganic growth. In addition, demutualisation would enhance our access to skills, knowledge and technical efficiencies from strategic shareholders.

Tax Revenue: The post demutualisation 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 the Nigerian government.

Stakeholders’ Reactions
Ogunbanjo, said he felt elated that 19 years after initiating the process to demutualise and on the 60th anniversary of the Exchange, members were close to achieving the goal. According to him, the successful demutualisation of the exchange was one of his main objectives when he assumed the presidency of the exchange.

“I am particularly happy it has been achieved during the lifetime of one of its founding fathers, Pa Akintola Williams,” he said.
He commended efforts of management and staff of the Exchange, members, professional advisers, the federal government, the Securities and Exchange Commission (SEC) and other capital market stakeholders for making the demutualisation a success story.

Furthermore, Ogunbanjo, said demutualisation of the Exchange would benefit the economy in more ways than one. He revealed that post-demutualisation, the emerging entities would be subject to companies’ income tax and other relevant taxes payable by for-profit organisations, thereby providing additional source of tax revenue for the Nigerian government.

Ogunbanjo, anticipated that it would reinforce the continuous growth and development of a dynamic, fair, transparent and efficient capital market and thus significantly contribute to Nigeria’s economic development.
“The demutualisation of the Exchange will surely bring about changes in the market structure with more participants. It will also give rise to improved corporate governance, higher levels of efficiency and lower transactions costs which will inadvertently attract more listings to the market.

“Furthermore, we expect a general boost in confidence both from investors and issuers resulting from increased trade activities and better opportunities for international alliances and cross border listings. We believe the value proposition associated with demutualisation will encourage more listings.

“Our focus to increase retail participation and protect investors in our market will be unchanged. Retail investors will continue to have access to diversified asset classes for growing wealth and through the Investors’ Protection Fund we will continue to restitute proven cases of infractions but more importantly on artificial intelligence driven market monitoring system will be sustained. “Ultimately, when the Exchange is ready to float new shares for the investing public, retail investors would be a key consideration for the allocation of shares,” he added.

Also speaking, Onyema explained that the meetings moved the demutualisation process significantly forward, adding that the positive outcomes affirmed the great interest from members to support the pivotal restructuring of the exchange to become globally competitive.
According to him, in furtherance of the plan, they would move to file the necessary resolutions from the COM and all other required documents at the Corporate Affairs Commission and SEC, obtain the Court Order sanctioning of the scheme, complete all necessary registrations and seek the final approval from the SEC to ultimately demutualise.

Onyema, explained that members of the Exchange had approved the demutualisation scheme of the Exchange in March 2017. This, he said was followed by the signing of the Demutualisation of The Nigerian Stock Exchange Bill into law in August 2018. In December 2019, the SEC had also in a No Objection letter gave its consent to the NSE to hold the COM and EGM that would facilitate its conversion from a not-for-profit entity limited by guarantee into a profit-making, public limited liability company owned by shareholders. Onyema, pointed out that a number of benefits will accrue to the stock market once the process is finalised.

He explained that it would bring about the diversification of the financial system. “As you know, with a more agile and efficient Exchange, we would have a better capital market that can be able to complement the banking sector, which presently dominates the funding of entities,” he said.

In addition, the NSE boss pointed out that African stock exchanges generally have liquidity challenge, saying that with a better exchange that is agile and more competitive, the liquidity challenge on the Nigerian stock market would be addressed. This, according to him, would make the market serve the Nigerian economy better. Oscar added: “The other economic benefit would actually be wealth creation for the general populace.

“Again, if you have a demutualised NSE that is listed itself, that means the general populace can actually buy the shares and benefit from the growth of the Exchange.
“So, because it is listed, it will be better governed and better managed, it will have more flexibility to raise capital. So, all these are expected to support the general populace who are shareholders.” According to him, with demutualisation, the branding of the company would improve, because it would be viewed as a modernised Exchange with independent directors.

Also speaking with THISDAY, the immediate past President of the NSE, Aigboje Aig-Imoukhuede, said the process was one that had been under consideration several years before he joined the Council of the NSE.
“I feel very humbled and I give thanks to God. It has been a very long journey and it is not a journey that I started. Demutualisation is something that has been mooted by the Exchange for several years before I even joined its national council.

“But for various reasons the process could not be completed. And for me, I embraced the challenge of demutualisation, more for the reason that without demutualisation the Nigerian Stock Exchange will not realise its full potential neither would Nigeria’s capital market. “This, to me is a necessary step towards the Nigerian capital market emerging as a global force to be reckoned with and that is what fueled my desire to see the fulfillment of the journey,” he explained.

Aig-Imoukhuede, added: “During our March 30, 2017, EGM, I had cracked a joke about Moses and Aaron and I said that Moses did not see the promised land. I prayed that God will permit us to enter the demutualised promised land alive and well. “So, I am just grateful that, I am here today as a member of the Council of the Exchange, witnessing our entry into the promise land. I think that this is not just something the Exchange and the capital market should celebrate, I think Nigeria’s decision makers have been exemplary, this has been one example that shows what happens when Nigeria comes together with a common objective. It is really wonderful and we should do more things like this.”

According to Aig-Imoukhuede, without demutualisation, the NSE would not realise its full potential neither would the capital market. He said the process would make the NSE more competitive.
“One of the things that make financial institutions competitive is the fact that they are accountable to shareholders. Another reason is corporate governance.

“So, obviously once you are a company limited by shares and a public company for that matter, you are subject to various standards of governance that are attached to companies of that nature.
“So, I can summarise this as, one, competitiveness, two, corporate governance, and finally, access.” This means that it will introduce new players into the capital market and who will bring significant value particularly international players,” the former Access Bank CEO explained.

He expressed optimism that the exercise would lead the Nigerian stock exchange to emerge as one of Nigeria’s best performing companies in the next 20 years.
“I feel that there is significant need for innovation in the Nigerian capital market and demutualisation is going to unlock that,” Aig-Imoukhuede said.

On her part, a former Director General of NSE, Prof. Ndi Okereke-Onyiuke, said she was satisfied with the outcome of the meetings, noting that demutualisation was good for the whole Nigerians. She said: “Though we started it but it did not happen, but we have been following through to ensure it happens. It is good, not only for stockbrokers and investors but for the whole Nigerians. It is good to have a demutualised exchange in Nigeria.

“I feel that people have come to understand what the stock exchange really means with this demutualisation, a lot of people will come into the exchange since we have already gone through the process of teaching Nigerians how to be shareholders in quoted companies.”
According to her, with demutualisation, the exchange can attract further highly experienced staff as well as foreign investors, foreign stockbroking firms and foreign direct investment.

“With this demutualisation, anybody in any part of the world can have access, the exchange will have a lot of money to execute high level plans that they have and people that will invest in the exchange will also make money.

It is the best thing that will happen to the Nigerian economy. It will definitely move the country forward because it is the engine room of the economy and now more people will be interested in investing in the stock exchange, they will bring in their money and it will be in Nigerian economy.

“It is just few people that will cash in and cash out but majority, 95 per cent of people that invest will keep their money here,” she said.