TABLE OF CONTENTS

1. What is Demutualization?..........................................2

2. Pros and Cons.............................................................3

3. Why Demutualization? ..............................................7

4. Problems of Stock Exchange……………………….8

5. Working Model........................................................10

6. Pre and Post Demutualization..................................12

7. Should Pakistan Demutualize? ................................14

8. Recommendations....................................................15

9. References ...............................................................16

WHAT IS DEMUTUALIZATION?

• Demutualization is literally the process of changing an organization from its mutual ownership structure to a share ownership structure or that converts a not-for-profit Company, often limited by guarantee into a for-profit company limited By shares.

• As defined in STOCK EXCHANGES(CORPORATIZATION, DEMUTUALIZATION AND INTEGRATION) BILL, 2009:

o “CORPORATIZATION” means the conversion of a stock exchange

from a company limited by guarantee to a public company limited by shares.

o “DEMUTUALIZATION” means the segregation of the majority

ownership of a stock exchange from the right to trade on such Stock Exchange.

o “INTEGRATION” means the merger of two or more stock exchanges

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PROS AND CONS

PROS:

1. BETTER CORPORATE GOVERNANCE:

It is a set of processes, customs, practices, policies and laws which is directly affecting the way an organization is working. It would restructure governance at the stock exchanges on a sustainable basis as the ownership rights will be delinked from trading rights. Management would be in the hands of professional people selected by the directors.

2. ACCESS TO HUMAN CAPITAL:

Good Governance and access to economic capital assist exchanges to attract better qualified human Resource.

3. ACCESS TO ECONOMIC CAPITAL:

Stock Exchanges can raise capital from many sources as normal for profit organization. Most important would be new shareholders, institutions and Individuals. It increases the Capital and income of an exchange.

4. GROWTH/DEVELOPMENT:

There will be a constant pressure on the exchanges to grow and develop their businesses which will increase profitability. It should work as an incentive to enhance liquidity in the market and to introduce new products and services.

5. ATTRACT MORE LISTINGS:

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Better and efficient system of a demutualized exchange would increase the confidence of other companies and this would result in greater listings.

6. INTERNATIONAL ALLIANCES:

Demutualized exchange can go for international alliances and such alliances provide openings for investments and cross border listings.

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CONS:1. DEVELOPMENT OF A REGULATORY FRAMEWORK:

How can ownership structure be transferred to Non-members from Members?

2. CONFLICT OF INTEREST:

De-Linkage of ownership and Management can create Conflicts. Managers may pursue personal goals ahead of corporate goals or the probability that managers may hunt their goals at the expense of shareholders

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WHY DEMUTUALIZATION?

A. Globalization:

The world has now become a Global Village and it has changed everything in business or household. Due to globalization, mergers and acquisitions are taking place; Businesses are expanding and organizations are working worldwide.

B. Information Technology (IT):

Stock exchanges are affected by the developments like ATD (Alternate Trading systems), CDC (Central depository Committee) etc. Such factors are also affecting the physical location of stock exchanges.

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Problems of Stock Exchanges‐• 1. Insufficient Growth in Market Capitalization:

– Market Size below International Benchmark– Too Few Listings– Low Quality of Many Listed Companies– Limited Free Float and Supply‐Demand Imbalance

• 2. Narrow Base of Investors:

– Minimal Share Ownership– Stagnation in Number of Shareholders– Small Number of Unit Holders in Mutual Funds– Lack of the Market Awareness

• 3. Lack of Balance in Governance Structures:

-Weak Professional Management– Ineffective Regulation of Members– Ineffective Regulation of Listed Companies– Unequal Access to Corporate Announcements– Mixed Performance of Non‐Member Direct

• 4. Fragmentation of Market:

- Division of Liquidity and Distortion of Price Discovery– Cost Inefficiency for All Stakeholders– Complexity in Operations– Lack of Inter‐exchange Competition

• 5. Insufficient Economic & Human Capital:

– Limited Revenues– Inequitable Burden Sharing– Low Level of Capital Expenditure– No Financial Guarantee• Insufficient Human Capital– Few Professionals– Inability to develop New Products and Services

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WORKING MODEL:

SGX (SINGAPORE EXCHANGE)

The Exchanges (Demutualization and Merger) Act was passed on August 4, 1999 to effect the demutualization and merger.

DEMUTUALIZATION STATUS: Is now public, listed on its own exchange. SGX was formed in 1999 by the merger of the stock exchange of Singapore (SES) and the Singapore international monetary exchange limited (SIMEX) (financial futures exchange).

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Prior to the merger, SES was an incorporated company administered by the Monetary Authority of Singapore (MAS); both SS and SIMEX were “mutual’s”—they were legally owned by their members; access to SES was restricted to its 33 members; SIMEX was owned by its 35 clearing members

DEMUTUALIZATION PROCESS:

Pursuant to legislation adopted to effect the merger, SGX was created to own the exchanges and their related clearinghouses, and the former owners and shareholders were given shares and seats in the exchanges.

In 2000, SGX became a public company, with 1,000,000,000 ordinary shares outstanding.

REASONS FOR DEMUTUALIZATION:

- Globalization and technology

- Merger minimizes operating costs and increases value positioning vis-à-vis other foreign exchanges

- Proliferation of electronic communications networks (ecns) which are positioning themselves as virtual exchanges and providing a single electronic access to multiple markets.

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PRE AND POST DEMUTUALIZATIONIn Singapore, in the five years after demutualization, market capitalization and number of listed companies have grown by 62% and 134% respectively. The Average daily turnover has grown by 134% to the advantage of its brokers

POST DEMUTUALIZATION: Signed MOU with Tokyo Stock Exchange for general cooperation, designed to contribute to the development and efficiency of the two markets, as well as to investor protection

in 2000, SGX announced joint venture with American Stock Exchange (Amex) to offer a series of exchange traded funds to investors across Asia

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1999

(Year Of Demutulaiztaion)

2003 Growth

Market Cap $ 198 Billion $ 321 Billion 62%

No.Of Listed Cos 397 521 31%

Market Volume( No.of Contracts)

25.9 Million 34.9 Million 35%

Avg Daily Turnover 155.8 Million Shares 364.8 Million Shares 134%

Joint Venture

On 25 September 2006, the Joint Asian Derivatives Exchange (JADE), a joint venture between SGX and Chicago Board of Trade (CBOT) became operational.[16] However, this joint venture was canceled in November 2007, with CME Groups selling of its 50% stake in the joint venture to SGX. The contracts previously traded on JADE were transferred to SGX's QUEST trading platform.[17]

In August 2009, SGX formed a joint venture with Chi-X Global, called Chi-East.[18] At the beginning of October 2010, this joint venture received approval from the Monetary Authority of Singapore to operate a dark pool trading platform.[19]

Acquisition

In March 2007, SGX bought a 5% stake in Bombay Stock Exchange for 42.7 million dollars.[20]

On 15 June 2007, Tokyo Stock Exchange, Inc. announced that it had acquired a 4.99% stake in SGX.[21] Since then the value of the shares has declined and the Tokyo Stock Exchange, Inc. has made a decision to sell the shares it holds in SGX to its parent company, the Tokyo Stock Exchange Group, Inc. [22]

On 31 January 2008, SGX acquired a 20% stake in Philippine Dealing System Holdings Corp, which has become an associated company of SGX.[23]

At the beginning of 2008, SGX reached an agreement to buy at least 95% of Singapore Commodity Exchange.[24] On 30 June 2008, SGX completed the acquisition of Singapore Commodity Exchange Ltd (SICOM), which now is a 100% subsidiary.[25]

Signed MOU with Tokyo Stock Exchange for general cooperation, designed to contribute to the development and efficiency of the two markets, as well as to investor protection

in 2000, SGX announced joint venture with American Stock Exchange (Amex) to offer a series of exchange traded funds to investors across Asia created alliance with the National Stock Exchange of India (NSE) and the India Index Services & Products Limited (IISL) for cooperation in areas relating to derivatives trading, market-information sharing, staff training and technical assistance.

SHOULD PAKISTAN DEMUTUALIZE?12 | P a g e

THE DEMUTUALIZATION PROCESS IN PAKISTAN HAS BEEN STARTED BY THE FEDERAL GOVT. AS PART OF THE CAPITAL MARKET REFORMS PACKAGE INTRODUCED BY ASIAN DEVELOPMENT BANK (ADB)..

KSE HAS THE POSITIVE REPO WHICH CAN HELP TO IMPROVE THE POSITION OF THE EXCHANGE WHEN IT WILL DEMUTUALIZE. WHEREAS ISE AND LSE HAVE TO ADAPT HARDER TO COPE WITH THE COMPETITION.

THERE IS A POSSIBILITY OF AN INTERNATIONAL ALLIANCE SINCE STOCK EXCHANGES IN PAKISTAN HAS PERFORMED WELL IN THE LAST 10 YEARS OR SO.. MERGER IS ANOTHER OPTION AS IT WILL INCREASE AND IMPROVE THE CREDIBILITY AND ENHANCE THE DOMAIN OF OPERATIONS...

INTEGRATION WITH CDC AND NCC

INTEGRATION OF CDC AND NCC WOULD FURTHER INCREASE THE REVENUES AND COST EFFICIENCIES IN AN INTEGRATED EXCHANGE

THE CDC IS A WELL GOVERNED AND SUCCESSFUL COMPANY THAT HAS ADDED SUBSTANTIAL VALUE TO OUR CAPITAL MARKET. CDC IS NOW A PROFIT MAKING ORGANIZATION, WHICH HAS TREMENDOUS POTENTIAL. KSE, LSE, AND ISE OWN 52.3% OF SHARES OF CDC, THEREFORE, ONCE THE STOCK EXCHANGES INTEGRATE, CDC SHALL BECOME A SUBSIDIARY OF INTEGRATED STOCK EXCHANGE

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RECOMMENDATIONS

-BETTER FOR ISE AND LSE TO MERGE AND FORM INTEGRATED EXCHANGES THAT WILL ENHANCE THEIR DOMAIN OF OPERATIONS

-MERGER WITH CDC WOULD HELP REDUCE IT AND COMMUNICATION COST.

-AGENCY PROBLEMS CAN BE TACKLED BY BETTER UNDERSTANDING BETWEEN THE 2 GROUPS.

-BETTER SALARY AND BENEFITS TO MANAGEMENT CAN INCREASE THEIR JOB SATISFACTION LEVEL

- A REGULATORY FRAMEWORK CAN HELP REDUCE CONFLICT OF INTEREST, UNETHICAL PRACTICES AND ENSURE TRANSPARENCY INS STOCK EXCHANGES

SINGLE BUSINESS STRATEGY AND COORDINATED DEVELOPMENTS

CURRENTLY, NCC AND CDC ARE PURSUING BUSINESS STRATEGIES, WHICH ARE NOT ALWAYS CONSISTENT WITH THOSE BEING PURSUED BY THE EXCHANGES. A FULLY INTEGRATED EXCHANGE WOULD BE ABLE TO PURSE A UNIFIED BUSINESS STRATEGY.

WHEN TRADING, CLEARING, SETTLEMENT, AND CUSTODY ARE ALL PROVIDED UNDER A SINGLE UMBRELLA, IT WOULD GREATLY FACILITATE DEVELOPMENT OF THE MARKET.

COMPLETE VERTICAL AND HORIZONTAL INTEGRATION HAS STRONG INTERNATIONAL PRECEDENTS SUCH AS IN HONG KONG AND SINGAPORE WHERE THE EXCHANGES, DEPOSITORY, AND CLEARING HOUSES ARE OWNED BY A SINGLE HOLDING COMPANY.

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REFERENCES

“DEMUTUALIZATION OF STOCK EXCHANGES IN PAKISTAN”—ACADEMIC JOURNALS.ORG/AJBMWWW.SGX.COM/WPS/PORTAL/EN.WIKIPEDIA.ORG/WIKI/SINGAPORE EXCHANGE

LAHORE STOCK EXCHANGE AND DEMUTUALIZATION OF STOCK EXCHANGES IN PAKISTAN BY: MIAN SHAKEEL ASLAM

HTTP://WWW.BIZRESEARCHPAPERS.COM/CHESINI.PDF

HTTP://WWW.ACADEMICJOURNALS.ORG/AJBM/ABSTRACTS/ABSTRACTS/ABSTRACTS2011/18JAN/AHMED

HTTP://WWW.MFA2011.COM/PAPERS/CAUSES_AND_EFFECTS_OF_DEMUTUALIZATION_OF_FINANCIAL_EXCHANGES.PDF

HTTP://WWW.EUROJOURNALS.COM/IRJFE_40_13.PDF

HTTP://WWW.MFA2011.COM/PAPERS/CAUSES_AND_EFFECTS_OF_DEMUTUALIZATION_OF_FINANCIAL_EXCHANGES.PD

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