The basic objective of demutualisation of stock exchanges should be to do away with the involvement of brokers in the management of the exchanges and to convert the exchanges into business entities so that they are professionally managed. This basic objective can be achieved in the Bangladesh context without getting into all the legal complications of first converting the exchanges into limited liability tax-paying entities and then separating their ownership from the trading right of brokers.
Demutualisation refers to the legal structure of a stock exchange whereby the ownership, management and the trading rights at the exchange are segregated from one another. A demutualised stock exchange operates in a more customer-oriented manner and is capable to react more easily and swiftly to meet business challenges. Demutualisation also allows an exchange to go public and raise capital for productive investment by listing its shares.
Dematerialisation is the process by which physical certificates of an investor are converted to an equivalent number of securities in electronic form and credited to the investor's account with his Depository Participant. Basically, the demutualisation of a stock exchange refers to the process by which a member-owned exchange is reorganised as a shareholder-owned exchange, thereby switching from private to public ownership.
The four-member investigation committee on the recent stock market crash made some recommendations to improve transparency in the operation of the nation's two stock exchanges: Dhaka Stock Exchange (DSE) and Chittagong Stock Exchange (CSE). One of the recommendations is the demutualisation of the two stock exchanges. The probe body report revealed alleged manipulation of the stock market operation through issuing of illegal placement and preference shares, loan settlement through shares, asset re-evaluation, share split, and a series of other dubious transactions.
Demutualisation in the context of a stock exchange, means separating the ownership of the exchange from its trading system. The DSE and CSE are somewhere between a mutual society and a for-profit private company in that both are shareholding companies that do not distribute profits to their shareholders. In the mutual ownership model, a broker seeking to trade on the exchange has to be approved as an owner or member of the exchange. Demutualisation separates these roles so that one no longer need be a shareholder to be granted trading privileges.
The stock exchanges that have demutualised have done so because they found that the governance structure, which once served them well, had become a hindrance to positioning themselves competitively in a global trading environment. Where exchanges have demutualised, the appointment of government appointed officials has by and large been viewed as controversial given that the demutualised exchange is a private sector company operating in a competitive environment.
A demutualised stock exchange does not face the same conflict of interest that a member-owned stock exchange faces. Also, as more exchanges demutualise, the heightened competition drives exchanges to improve technologies and fee structures. Another benefit is that by going public, an exchange has access to more capital and the ability to expand into new markets.
The other benefits of demutualization of the stock exchanges in the context of Bangladesh include: broadening exchange ownership; allowing members the ability to realise the value of their assets; spreading ownership risk; making the exchange less susceptible to members' vested interests; providing greater access to capital; providing greater speed and flexibility in decision-making; diversifying into other markets and services; adopting transparent governance; having greater flexibility in negotiations with other entities; bringing market discipline to bear upon management; and facilitate merger of the two exchanges.
Although demutualisation has many benefits, it is not without risks. Such risks may include the lack of loyalty of the stock brokers; transforming the exchange into a profit-oriented, competitive organisation accountable to its shareholders; and becoming a takeover target, although this can be managed through ownership limits. Demutualisation also brings new conflicts, as an exchange pursuing business opportunities may find itself in conflict with one or more of its listed companies.
It needs to be mentioned here that demutualisation does not guarantee good corporate governance. However, as it separates owners from managers, an independent management system provides a more transparent organisational structure. One way to ensure good corporate governance can be to set up a separate entity to conduct the regulatory functions.
The article is based on a research paper titled "A comparative study In Bangladesh Capital market", authored by the writer. He is from the Department of Finance, American International University of Bangladesh. He can be reached at email:toufique2010@gmail.com
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