ISLAMABAD (December 11 2007): The caretaker Cabinet is likely to approve the much-awaited 'Stock Exchanges Corporatisation, Demutualisation and Integration Ordinance 2007' on Wednesday for promulgating it in the shape of an Ordinance before December 31, 2007, fearing that any further delay would deprive the country of huge investment, sources in Finance Ministry told Business Recorder.

The government had inserted a new section in the 'Securities and Exchanges Ordinance, 1969' to expedite the process of corporatisation and Demutualisation, whereas in the Finance Act, 2006, all stock exchanges were to be corporatised and demutualised by December 31, 2006, or "by such later date as may be specified by the Commission".

However, the Commission extended the date for Demutualisation to December 31, 2007. Sources said that SECP and stock exchanges were in contact with various potential strategic investors who expressed reservations over delay in the process of corporatisation and Demutualisation of stock exchanges, and added that any further delay would derail the process and there was likelihood that the potential strategic investors might shift towards other regional demutualised stock exchanges.

Finance Ministry sources said that since National Assembly stands dissolved and Demutualisation was to take effect by December 31, enactment of Demutualisation by the Parliament as per laid down procedure may take time. They asked for its promulgation through Ordinance, sources added.

The process involves not only corporatisation, which is conversion of a stock exchange, limited by guarantee, into the one 'limited by shares', but also it segregates ownership and trading rights. Hence, Demutualisation brings balance among interest of different stakeholders in the corporate and governance structure of a stock exchange.

The Finance Ministry, in its proposal elaborated that Demutualisation was a well established global trend. In developed countries, Demutualisation is motivated primarily by the need to compete with other exchanges, both conventional exchanges and alternative trading systems.

In order to compete, stock exchanges require efficient decision making structures and large amounts of funds for investment in technological infrastructure. The mutual structure of the exchanges has been an obstacle in both the decision making and access to capital, thus causing a wave of Demutualisation the world over, sources quoted the Ministry as saying. "The desire to address the governance problems of exchanges has been the driving factor behind Demutualisation," sources added.

They said that to bring an improvement in the governance structure and to make the stock exchanges more competitive, Finance Division had initiated the process of Demutualisation of stock exchanges. It may be mentioned that regional and international stock exchanges are constantly looking for strategic partners in South Asian region.

The launch of Dubai International Financial Stock Exchange (DIFX) and Demutualisation of Bombay Stock Exchange (BSE) increased the level of competition for domestic exchanges. According to Finance Ministry, Demutualisation of exchanges was desirable for the following reasons:

1) It helps in improving governance structure as the process separates management from ownership, ownership from trading rights and sets out clear roles and responsibilities of owners, management, and users (such as brokers, agents, and issuers etc). Due to improved governance, confidence of investor and issuers increases.

2) Through increased capitalisation and greater market access, a demutualised stock exchange can enhance its resource base.

3) Once the stock exchange is converted into 'for profit' organisation, it becomes more cost-efficient.

Sources said that SECP had undertaken a participative and consultative process while developing the said draft Ordinance, and several detailed sessions/meetings were held with the stakeholders, including brokers, management and Board of Directors of the stock exchanges, prior to finalising it. They said that the proposed legislation, for Demutualisation, would provide for the following:

1) Conversion of company 'limited by guarantee' to a company 'limited by shares';

2) The mechanism and process of corporatisation and Demutualisation of a stock exchange;

3) Regulating sale and purchase of shares held by various categories of shareholders;

4) Regulating trading right holders;

5) The integration of the stock exchanges with the approval of the Commission;

6) Regulating ownership and voting rights;

7) The governance structure of the demutualised stock exchange to ensure the segregation of its regulatory function from its commercial function;

8) Self-listing of the demutualised stock exchange and the non-applicability of section 187(j) of the Companies Ordinance, 1984; and

9) Empowering the SECP to supervise a demutualised stock exchange as a listed company on its own exchange.

Sources further said that the Cabinet would approve the draft of 'Stock Exchanges (Corporatisation, Demutualisation and Integration) Ordinance, 2007' in terms of rule 16(l) (b) read with rules 27 and 30 of the Rules of Business, 1973.

Copyright Business Recorder, 2007