Tweet

VII. B. Demutualization: PROMOTING STOCK MARKET DEVELOPMENT IN AFRICA

Written by: International Monetary Fund

Article Overview: Demutualization can be defined as a change in the legal status, structure and governance of an exchange from a non-profit, protected interest one to a profit oriented.

VII. B. Demutualization: PROMOTING STOCK MARKET DEVELOPMENT IN AFRICA

Demutualization can be defined as a change in the legal status, structure and governance of
an exchange from a non-profit, protected interest one to a profit oriented.11 The process of
demutualization involves a change in ownership structure and a change in legal and
organization form. With regards to the ownership structure, members’ seats are monetized
and values assigned per seat. Members then either keep or sell shares. Ownership restrictions
are placed (for example, 5-10 percent non-controlling stakes) on individuals and groups to
prevent potential takeovers by other exchanges. The legal and organizational change
normally entails the exchange becoming a typical profit making company with limited
liabilities and abiding by company laws.
Demutualization started gaining popularity in the 1990s, due to a number of factors. These
include competition among exchanges, need for increased capital, need for good corporate
governance in exchanges and the urge to open up ownership of exchanges to public investors
(Pirrong, 2000). Between 1999 and 2003, the number of demutualized and public exchanges
in the world increased from 10 to 25 (IOSCO, 2005).

Demutualization is expected to solve mutual structure problems by opening up trading rights,
admitting new trading partners, and broadening ownership such that the public can invest in
exchanges. The absence of these in mutual exchanges tends to breed poor governance
structures. In a mutualized exchange, traders and brokers enjoy monopoly power through
exclusive rights and access to trading systems, resulting in a protection of vested interests for
traders. In a demutualized exchange there is a vote per share and once incentives for equity
stakes to nonmembers exists there is separation of powers. Decision making is on ownership
structure not trades intermediation. Thus, demutualization induces better corporate
governance systems. In addition, undue governmental influence in mutual exchanges in
Africa is likely to be absent in demutualized exchanges since appointment of government
officials become unnecessary due to the fact that a demutualized exchange is a private
company.
Demutualization also increases access to services of the exchange and removes excessive
investment costs for fund holders. For instance, brokers usually package non-trade related
fees (research, computer systems and IPO access) into institutional traditional commissions
often known as “soft commissions” or “bundled commissions” and pass on to clients. With
demutualization, fund holders can directly access such information without the use of
brokers. Finally, it is also argued that demutualization instills efficiency and better structures
in exchanges and results in commercial gains for exchanges (Ryden, 1995).
A major problem with demutualization is that of conflict of interest and regulatory oversight.
Exchanges tend to shy away from taking enforcement actions against their own customers
who are a source of income. There is a potential commercialization of services; data and
trade information that traditionally is offered freely is now sold. Listing standards and
oversight can be compromised by the exchange concerned. To solve these problems selflisting
arrangements can be implemented.12
For mutual African stock exchanges, potential conflict of interest could pose huge problems,
since current regulatory structures are still undergoing restructuring to meet international
standards. In many African countries, the establishment of formal stock exchanges preceded
the creation of formal independent securities regulators. However, it could also be argued
that perhaps being a private venture, demutualized exchanges could speed up the formation
of strong regulatory systems in Africa.

The policy of demutualization should not be of immediate concern to most African
exchanges. The reason is that most African exchanges have barely existed for three decades,
and are grappling with teething issues of poor infrastructure and illiquidity. Demutualization
would, therefore, be more relevant in the medium to long term when the teething issues have
been properly managed. Indeed demutualization should be the step after Africans have
consolidated gains on improving liquidity problems and strengthening cooperation. For now
other African markets can study the JSE to learn from their current experiences as a
demutualized exchange. Admittedly the JSE case poses a challenge for advocacy for a
regional exchange for SADC. This is because a regional exchange in the SADC in the near
future is expected to be demutualized given the current stance of the JSE.

IMF Working Paper
African Department
Stock Market Development in Sub-Saharan Africa: Critical Issues and Challenges
Prepared by Charles Amo Yartey and Charles Komla Adjasi
August 2007

Related Articles
  VI. B. Banking Sector Development: WHAT DETERMINES STOCK MARKET DEVELOPMENT IN AFRICA?
  VII. A. Automation: PROMOTING STOCK MARKET DEVELOPMENT IN AFRICA
  VIII. SUMMARY AND CONCLUSION: Stock Market Development in Sub-Saharan Africa
  Introduction: Stock Market Development in Sub-Saharan Africa
  VI. A. Macroeconomic Stability: WHAT DETERMINES STOCK MARKET DEVELOPMENT IN AFRICA?

Article Tags: decision making, equity stakes, exchange traders, good corporate governance, governance structures, governance systems, governmental influence, iosco, limited liabilities, monopoly, monopoly power, organizational change, ownership restrictions, ownership structure, public exchanges, public investors, separation of powers, structure problems, takeovers, trading partners



Related Forum Posts
Re: Hello from South Africa - you are welcome to the forum of achievers.its great to have you here,i also reside in SOUTH AFRICA.


Share this article with your friends. Fund someone's dream.

Leave a comment below or share on the left and you'll help support entrepreneurs in Africa through our partnership with Kiva. Over $50,000 raised and counting - Please keep sharing! Learn more.

Tweet

Newsletter

Get advice & tips from famous business
owners, new articles by entrepreneur
experts, my latest website updates, &
special sneak peaks at what's to come!

Name:
Email:

Popular Articles

Sales Training – Top Salespeople Are Not Dunces

Starting a Business a Brave Move or a NoBrainer

Remind Me...

Suggestions

Email us your ideas on how to make our
website more valuable! Thank you Sharon
from Toronto Salsa Lessons / Classes for
your suggestions to make the newsletter
look like the website and profile younger
entrepreneurs like Jennifer Lopez.