Demutualization of stock exchanges: the legal pros
Globally, stock exchanges are transforming their corporate governance structures through demutualization due to the globally competitive environment that is characteristic of the 21st century.
The very first stock exchange to demutualise was the Stockholm Stock Exchange in 1993. Thereafter, like a domino effect, the trend towards demutualization spread rapidly with exchanges in Canada (Toronto Stock Exchange), Europe (London Stock Exchange 2001), Asia (Hong Kong Stock Exchange), India and even Africa, (Johannesburg Stock Exchange 2005) demutualizing.
The demutualization of a stock exchange has been simply defined as the process by which a member-owned exchange is reorganized as a shareholder-owned exchange, thereby essentially transforming its structure from private to public ownership. The ownership and management structure of a mutualised exchange is private in that it is run by its members for the benefit of its members and it is from this that major criticisms on that model are levelled by the opponents thereof who suggest that mutual organizations are fraught with conflicts of interest which may have adverse effects on other non-member groups for example, investors.
The Zimbabwe stock exchange is still operating as a mutual organization though demutualization is on the cards. However, due to pressure associated with changes in global trends, the Zimbabwean law-makers have ushered in the Securities Act [Chapter 24:25], which, through the Commission it creates, somewhat dilutes that power of the Stock exchange commonly associated with mutual organizations. This article seeks to go through the advantages, legal and otherwise, that will arise from our Zimbabwe stock exchanging conforming to the changing times and moving from a mutual to a demutualized stock exchange.
The move in recent years from such mutual to demutualized exchanges has been applauded by many for the following reasons;
The transformation of the ownership structure, as well as legal and organizational form means less conflict of interest thereby leading to an improvement on corporate governance of the Exchange.
Because of the improved corporate governance structure, transaction costs are reduced and there is an increased attraction of investors’ funds as well as new firms so that they can raise their capital requirements.
By going public, an exchange has access to more capital and the ability to expand into new markets thus essentially; there is a larger scope for moving towards the globalization of local exchanges.
Unlike a mutual stock exchange which focuses on providing services for the primary benefit of its members at the expense of profit, a demutualized exchange structured as a company has the objective of maximizing the value of the equity shares by focusing on generating profits from servicing the demands of their customers (brokers and investors) in a competitive manner.
The resulting competitiveness drives exchanges to improve technologies and fee structures. In the case of Zimbabwe which currently has one stock exchange in place, it could mean the development of more stock exchanges and the development of an electronic trading system whereby one can partake in the stock market from their cellphone, home or office (which would be a much welcome move in this technological era!)
When an exchange is demutualized, it becomes more commercially flexible, responsive to market needs, is unimpeded by member committees and their diverse interests and is thereby attractive to a broader base of investors.
Seeing as there are many advantages of a demutualized stock exchange, the demutualization of the Zimbabwe Stock Exchange is much awaited as it clearly is the future.