Demutualization is coined from the word “Mutual”. A mutual organization is an association set up by members to satisfy their narrow interest or to serve public interest under a charter.
They are generally not-for-profit entities in which members are also their customers. Stock exchanges began as private clubs that eventually adopted formal structures by granting seat to members, which entitled them to trade on the floor of the exchange, and right to vote on the exchange’s affairs. Members were prohibited from trading with non members, a kind of monopoly that is no longer tenable in today’s competitive economies.
Under the traditional mutual model, exchanges earn revenue through membership dues, trading fees charged to members on every transaction, initial and annual listing fees charged to listed companies, sale of data and other information to members and the public. Homogeneity of members lent itself to the mutual association model when market operators were bound by same commission rate and other execution conditions.
The mutual society model was the traditional way of organizing stock exchanges until 1990s when the forces of liberalization and globalization ushered in drastic changes to the global financial landscape. One of such changes was the departure from mutually organized stock exchanges to demutualized exchanges.
Demutualization is the term used to describe the transition of a stock exchange from a mutual association of exchange members, operating on a not-for-profit basis to a limited liability company, operating for profit and accountable to shareholders. Demutualization in its many forms has become a widespread phenomenon globally since 1993, when the Stockholm Stock Exchange blazed the trail as the first exchange to demutualize. Several other renowned stock exchanges like Amsterdam, London, Deutsche, Paris, Hong Kong, Toronto, Chicago, NASDAQ, etc followed suit in quick successions. After several years of resisting the domino effect, the highly revered New York Stock Exchange that was established in 1792 succumbed to the inevitable and demutualized in 2006. Africa has also had its fair share of demutualization. Johannesburg, Nairobi, Mauritius, Seychelles, Rwandan, Casablanca and BRVM, Stock Exchanges in Africa are demutualized.
With passage of the Demutualization Act by the National Assembly, and approvals by SEC and CAC, The Nigerian Stock Exchange (NSE) has become the latest exchange to be demutualized. The NSE was was established by an Act of Parliament in 1960 as a mutual, not-for-profit organization, limited by guarantee of its members. For sixty years of existence, it has functioned as a charitable organization, consisting of members but not owners. Its surplus income was not distributable but retained. The situation has now changed because of its new corporate status. It can now make profit, distribute same to shareholders and also pay corporate income tax.
The journey to demutualization started around 2009, during the tenure of Oba Otudeko as President and Professor Ndi Okereke-Onyiuke as Director General of The NSE. The decision was made in 2009 or thereabout by the Council of The NSE at a special retreat in South Africa. Soon after that retreat, the Council of The NSE descended into a brutal power struggle which many believed was attributable to the jostling between contending principalities for ownership of the proposed demutualized Exchange. Twelve years after the idea was muted, the demutualization has crystallized without any of the contending adversaries hijacking ownership of the exchange. Actualization of the NSE demutualization without any rancour is a remarkable event and a watershed in its anal of history.
