Demutualisation, Alternative Stock Market And Investors’ Confidence

The effort to attract firms in major sectors of the economy to list on the stock exchange over the years has not yielded the desired result. The stock market downturn and the absence of an alternative platform may be a major impediment. In this write-up, STANLEY ORONSAYE looks at the prolonged effort to demutualise the Nigerian Stock Exchange and the prospect of a new trading platform to boost the capital market

The simple fact that public quoted companies are expected to be better run along the line of transparency is one of the attractions for taking that road. Unlike private firms, a quoted company is expected to comply with some reporting and disclosure standards that could amount to working in the full glare of the public. Even though there may be instances where affairs of public firms are manipulated and befuddled, as in the case of Enron and Cadbury Nigeria in the past, it will be only a matter of time for such misdemeanors to be exposed.

This underlying conviction is why many stock exchanges around the world have their shares listed so that they can also be held accountable to the same standards which they subject other companies listed on their official trading window. This procedure, which is known as demutualisation, transforms a securities exchange from a member-owned entity to an organisation whose shares are held by diverse investors, and listed on its own board or another stock exchange. Bourses like the New York Stock Exchange, the London Stock Exchange, the Johannesburg Stock Exchange, and other such sophisticated exchanges around the world are public listed companies.

This presupposes that robust corporate governance framework is put in place and to enhance efficiency and transparency.

Demutualisation of the Nigerian Stock Exchange (NSE), which was first mooted nearly 10 years ago is still in the works, but not without some causalities. The former director-general of the NSE, Ndi Okereke-Onyiuke even attributed her sack in August 2010 to intrigues over the demutualisation, alleging that some powerful individuals want to corner a huge percentage of the 50-year old stock exchange when it is eventually sold.

The process so far
Chief executive officer of the NSE, Oscar Onyema stated recently that the plan to demutualise the exchange was still on. According to him, the committee set up by the Securities and Exchange Commission (SEC) was working on the final draft of the document for submission. Onyema, who is also a member of the committee, said the report will focus on different aspects of the SEC guidelines under which the NSE can embark on its demutualisation. “The Committee is working on the different aspects of the guidelines to make sure that they can present a credible Report to SEC; which I think will come out soon,” Onyema said.

The 21 member committee which was inaugurated on September 22, 2011 by SEC chairman, Senator Udoma Udoma, is chaired by Asuerinme Ighodalo, a Legal Practitioner and given three months to advice on the demutualisation of the Exchange.Members include Enase Okonedo, Dean of Lagos Business School, Abdul Muhtar, Managing Director, Aso Savings and Loans Plc. Yemisi Ayeni, Chairperson, Demutualisation Committee, NSE Council and MD, Shell Nigeria CPFA Ltd.

Others are Tola Mobolurin, Vice Chairman and CEO, Crusader Investments, Ahmed Makele, Associate Director, Legal Risk Compliance, DTZ Holdings Plc. Rotimi Oyekanmi, CEO, Renaissance Capital; Haruna Jalo-Waziri, MD, UBA Asset Management Company Limited, Dimeji Saludeen, Partner, KPMG, Deji Alli, CEO, Asset Resource Management, Chuka Eseka, CEO, Vetiva Capital, Femi Akingbe, CEO, Ventures & Trust and Nsikan Ekure, Former MD of First Trustees Limited.
Others are Ike Chioke, MD, Afrinvest Nigeria Limited, Kemi Adewole, Vice President, Citibank Nigeria, Chike Obianwu, Templars Law Firm, Femi Akinsanya, CEO, Felicity Schemes Limited, Akeem Oyewale, CEO, Stanbic IBTC Stockbrokers, Yinka Edu, Secretary, Capital Markets Solicitors Association, Moses Isiaku, Director, Registration and Recognised Investment Exchanges Department and Edosa Aigbekaen, Director, Secretary to the Commission, both of Nigeria’s SEC.

The terms of reference for the committee include reviewing various demutualisation models and experiences including valuation model for demutualisation, recommend best demutualisation model for the Nigerian Market and recommend practical timeline for the completion of the demutualisation of the Nigeria’s Exchange. The Committee will also recommend steps which are necessary and appropriate for the demutualisation of the NSE, examine potential conflict of interest and measures to deal with them, in the demutualisation of the Exchange and to examine any other issue necessary for the demutualisation.

Some of the concerns by the various stakeholders centre around how many shares should be allotted to trade groups, stock trading houses and council members. There is also the question of who are/were the real owners of the Stock Exchange and how their interest will be accommodated in the new scheme.

While many market operators wait on the outcome of their recommendation and its eventual implementation, there is no controversy as to the desirability of a demutualised stock exchange to enhance transparency and improve investor confidence.

According to Victor Ogiemwonyi, managing director of Partnership Investment Plc and council member of the NSE, there should be caution on the timing of the sale of the exchange in order to preserve its value. He was quoted recently as saying that the shares will be underpriced far below its actual value if the planned demutualization programme is concluded at the current declining state in the capital market.

Investor confidence
Ogiemwonyi said the value of the NSE, today, is not as much as it would have been if it was demutualised in 2008 due to the low investor’s confidence that has prevailed since 2009. He explained that in demutualisation, a stock exchange is valued based on the total value of investments or listed securities in the exchange, especially as the income of and profitability of the exchange is a function of the value of listed securities.

The effort to demutualise the exchange again brings to the fore the need to have a virile capital market to enhance the capital raising effort of firms. As barometer of the economy, there have been calls for some firms in strategic sectors of the economy such as telecommunications, oil and gas, and power to list on the stock exchange.

The major impediment has always been stringent listing requirements. In fact, pundits believe that the absence of these major sectors is responsible for the poor manner in which the stock market currently mirrors the economy.

While stressing on its role of market development during the 50th anniversary of the NSE in June 2011, director general of the Securities and Exchange Commission, Arunma Oteh, said the commission would continue to play its role of market deepening and development. She said the regulator was desirous of encouraging firms in the other sectors of the economy to list in order for more Nigerians to benefit from their success stories.

“Our role also involves market development. We are talking to the telecom companies, we are talking with the oil and gas companies and others to first of all understand what are the issues that they will like to be addressed. We have got very useful feedback on what should be done to get them to list and they have got useful feedback from us on the process to get listed,” Ms Oteh said.

However, despite the various reviews of the listing requirements carried out over the years, the NSE has not been able to attract these major industries. This is due, either to the reluctance of the firms to subject to public scrutiny, or the lack of trust of the current operations of the stock market, especially now that reforms are still ongoing.

Alternative Trading Platform
In any case, the argument for multiple stock exchanges has been on for several years based on the need to create competition and give investors and fund raisers alternative outlets. This necessitated the establishment of the Abuja Securities and Commodities Exchange (ASCE).

Originally incorporated as a Stock Exchange on June 17, 1998 by government, it commenced electronic trading in securities in May 2001 and was converted to a commodity Exchange on August 8, 2001. Since then, the ASCE has been focused mainly on commodities trading even though it was initially aimed to serve as an alternative to the stock exchange.

It is in this breathe that the intention of securities dealers to set up an alternative platform may just be the needed impetus to get these firms to list their shares. Starting on a fresh slate, the new arrangement is not bugged down by the baggage of the Nigerian capital market. Under the aegis of the National Association of Securities Dealers (NASD), the new trading platform is expected to complement the NSE and so develop a more robust capital market. This will enable investors to make more competitive investment decision.

According to Mr. Ogiemwonyi, one of the promoters, the initiative was to provide an easier platform for listing and fund raising exercise of companies. Fashioned after the Stock Exchange of Mauritius, the platform will be a multi-product exchange for trading of banks’ commercial papers, bonds and equities. The new platform which has already received approval in principle from SEC, is expected to revive investor confidence in the Nigerian capital market and boost the capital raising process of eligible firms. He said apart from providing competitive listing requirements, the NASD platform will help restore investor enthusiasm.

While the market awaits the takeoff of the new trading platform which already has the endorsement of the regulators, the concern at this point should be how to enhance market development and enable Nigerian investors stake their funds in a transparent and properly regulated environment. In this case, competition will enhance the viability of each market such that all the players; investors; shareholders; listing firms and the regulators will be the main beneficiaries.
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