BY EMEKA EJERE
There is excitement among members of the Nigeria Stock Exchange (NSE), that the ongoing demutisalisation of the Exchange, which is about to be completed, will give them an opportunity to benefit from the value they create on the floor of the Exchange while also supporting the nation’s economic growth.
They are scheduled to meet later this month to consider and approve resolutions that will enable the holding group that will emerge from the demutualization of the Exchange and its subsidiaries to list its shares on the Exchange.
Listing its shares on the stock market for public trading will follow the completion of the ongoing conversion of the NSE from a non-profit, member-owned mutual company limited by guarantee to a public limited liability company with issued share capital and shareholders.
According to the plan, the emergent holding group, Nigerian Exchange Group Plc, will list its entire issued share capital of 2.0 billion ordinary shares of 50 kobo each by way of introduction on the Nigerian Exchange Limited, which will take over the trading function currently being done by the NSE.
Technological advancement in the financial world, over the last two decades, has significantly increased competition among stock exchanges globally and this competition has pressured many exchanges to adopt business models, which have greatly improved their efficiencies and effectiveness.
Demutualisation is the process by which a member-owned company is converted to a shareholder-owned company in which third party investors can participate. This conversion will allow the NSE carry on business activities with the aim of making profits just like regular corporate entities. It will also allow the company to put in place a board of directors to oversee its operations.
The first exchange to get demutualised was the Stockholm Stock Exchange in 1993. After that, many exchanges have demutualized. This includes the major stock exchanges like New York Stock Exchange, Chicago Mercantile Exchange, London Stock Exchange, Australian Stock Exchange, Deutsche Börse, Toronto Stock Exchange, and Singapore Stock Exchange among others.
Members of the NSE, which include dealing members and others, had approved for the exchange to embark on the demutualisation scheme at an Extraordinary General Meeting (EGM) in March 2017.
Specifically, members of the Exchange authorised its National Council and Management to proceed with the process leading up to the demutualisation, subject to applicable laws and regulations and obtaining the approvals of members and the relevant regulatory authorities. They also ratified the engagement of financial advisers, legal advisers, tax advisers and any other adviser that may be required for the demutualisation of the Exchange.
This was followed by the signing of the Demutualisation of The Nigerian Stock Exchange Bill sponsored by Mr. Ayo Tajudeen , then chairman of the House Committee on Capital Markets, into law by President Mohammadu Buhari, in July 2018.
In line with international best practices and standards, the Act authorises the NSE to convert to a shareholder-owned public company limited by shares. This is in a bid to diversify the operations of the NSE and increase its access to capital.
In December 2019, the Securities and Exchange Commission of Nigeria (SEC) in a No Objection letter gave its consent to the NSE’s planned conversion from a not-for-profit entity limited by guarantee into a profit-making, public limited liability company owned by shareholders.
Under the rules at the Exchange, immediate post-demutualisation shareholders of the emergent holding group may need to make initial shares available to create liquidity in the stock. Listing by introduction is a listing method for companies that desire to list their primary share capital on the exchange, without prior public issuance.
The Federal High Court (FHC) had in May 2020 sanctioned the scheme of arrangement for the conversion after shareholders at a Court-Ordered Meeting (COM) and EGM in March 2020 approved the scheme of arrangement and major changes in the organisational structures of the post-demutualisation NSE.
Under the approved scheme of arrangement, the NSE will transit into a holding company, Nigerian Exchange Group (NEG) Plc, which will be the parent company for the Nigerian Exchange Limited, the successor that will carry on the securities trading business of the Exchange, and other subsidiaries. Shareholders will own shares in NEG Plc and will own the main company and other subsidiaries.
According to the scheme of arrangement for the conversion, the post-demutualisation shareholders’ base will consist of 255 institutional shareholders and 177 individual shareholders. The arrangement was arrived at by converting the existing dealing members of the Exchange to institutional shareholders and ordinary members to individual shareholders.
Shareholdings will be on equal basis in the immediate conversion period with each institutional shareholder holding 6.01 million ordinary shares of 50 kobo each while each individual shareholder will hold 2.44 million ordinary shares of 50 kobo each.
Thus, each institutional shareholder will hold 0.3 per cent equity stake while each individual shareholder will hold 0.1 per cent equity stake, in line with the current membership-share conversion ratio of 78 per cent for dealing members and 22 per cent for ordinary members.
The NSE will transit into a non-operating holding company with an authorised share capital of 2.5 billion ordinary shares. About 2.0 billion ordinary shares of 50 kobo each are expected to be issued in the immediate period of the conversion.
The Exchange will transfer its securities exchange licence and other assets necessarily required to carry out the securities exchange function to Nigerian Exchange Limited pursuant to the scheme.
The other assets include: human resources, securities exchange function related contracts, the trading facilities comprising of the trading floors, work stations, telephones and other office equipment such as cabinets and others, quotation board, stock price electronic display device, stock printers, inquiry display equipment and other assets..
According to the scheme, the demutualised NEG will take off with authorised share capital of N1.25 billion comprising of 2.50 billion ordinary shares of 50 kobo each, which will be registered with the Corporate Affairs Commission. The NEG will subsequently set aside 2.0 billion ordinary shares of 50 kobo each as issued share capital, which will be registered with the SEC.
A total of 40.08 million ordinary shares, representing 2.0 per cent of the proposed issued shares of NEG will be set aside for allotment to parties that may lay claims to entitlement to shares in the demutualised Exchange. This was pursuant to the provisions of the Demutualisation Act 2018.
The apportionment of 2.0 per cent as the claims review shares is based on an analysis of the probable quantum of shares that would be required to settle each claim. However, each claimant will be expected to provide irrefutable evidence of membership or circumstance that confers such claim of ownership.
However, in the event the claims review shares are insufficient to satisfy successful claims, additional shares will be allotted from the demutualised Exchange’s authorised share capital.
A total of 1.96 billion ordinary shares, representing 98 per cent of the issued shares, the balance of the issued shares following the reservation of the claims review shares, will be apportioned between dealing and ordinary members on the basis of a ratio of 78:22.
With demutualisation, the Memorandum and Articles of Association of the re-registered Exchange will be amended to indicate the new name, NEG, the authorised share capital and all requisite provisions for a public company limited by shares.
Speaking on the potential benefits of the demutualization of the NSE, a member of the Exchange, Mr. Onyenwechukwu Ezeagu, described demutualisation as freeing members of the Exchange from bondage to enable them reap the fruit of their labour.
Mr. Ezeagu, who is also the chief executive officer of Solid Rock Securities & Investment Plc, in a telephone interview with Business Hallmark, said, “Demutualisation is like freeing the members of the Exchange from bondage. So, instead of staying there as just members, creating value and not benefitting from the value, we can now participate in the business and make more money for ourselves.
“Again, it will now run for profit making and the people who work there will be motivated.
Also speaking with Business Hallmark, the executive vice chairman, High Cap Securities, Mr. David Adonri, noted that demutualization will move the NSE from a charitable organization to a profit-making one.
Adonri said “It will now have owners instead of members. In other words, the present members of the NSE will become owners who will now share the profit made by the company unlike what obtains now.
“For the fact that it will bring more money at the disposal of the NSE, the Exchange will now be able to engage in a number of business activities with other exchanges, thereby becoming globally competitive. This will enhance its effectiveness and efficiency.”
Chief executive officer of NSE, Mr. Oscar Onyema, had while speaking during the 2019 market recap and outlook for 2020 held in Lagos early this year said, “Our effort at seeing the demutualisation to completion is fuelled by our commitment to developing a more agile exchange that is better able to support the economic growth of Nigeria. We are confident that post-demutualisation, the NSE will be better equipped to diversify our operations and evolve into a more competitive, robust and liberalised stock market.”
However, Professor of Capital Market, Uche Uwaleke, has his reservations since NSE will be both an operator and a regulator.
“On the flip side, although demutualisation has many benefits, it is not without some risks considering that ownership and trading rights are separated. In fact, it can be argued that the very motivation to earn profit intensifies conflict of interest.
“Stock exchanges usually act as self-regulators and their regulatory functions cover the areas of trading, market manipulation and members’ activities. A company aiming to maximise profits and dividends for its shareholders may have less incentive to commit resources for self-regulation or to take enforcement action against its customers who are a source of income.
“So, there is always the possibility that regulatory functions may be sacrificed on the altar of profit maximisation. In order to address these challenges, demutualised exchanges are encouraged to evolve strong governance structures to minimize the associated conflicts.”