Demutualization Of Stock Exchanges

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Demutualization of Stock Exchanges

Financial Markets and Institutions

IqbalKhawer AliZubair Aslam

What is Demutualization?

the process of converting exchanges from nonprofit, member-owned organizations to for-profit, investor-owned corporations.

Corporatization and IPO of the stock exchange.

Reasons for Demutualization: Globalization Information Technology

Benefits of Demutualization

Rationalized Governance

Investor Participation

Globalization

Resources of Capital Investment

Challenges for Demutualized Exchanges

Conflict of Interest b/w ownership and management

Ownership Structure Transfer of ownership from members to non-

members

Regulatory Framework

Demutualization Process

Ownership Structure Dilution of membership by valuation of

member seats.

Legal and Company Structure Similar to a profit-making corporation

Demutualization History

First demutualized SE : Stockholm Stock Exchange (SSE), 1993, Sweden

Followed by Helsinki Stock Exchange, 1995 Copenhagen Exchange, 1996 Amsterdam Exchange, 1997 Australian Exchange, 1998 Toronto, Hong Kong, London SE, 2000

60% of WFE members demutualized by 2005 Current Demutualization : Nairobi SE, Kenya

Case: Hong Kong Stock Exchange (HKEx)

Pre Merger/Demutualization Period (1999) The Stock Exchange of Hong Kong Limited (SEHK) Hong Kong Futures Exchange Limited (HKFE) Hong Kong Securities Clearing Company Limited (HKSCC) HKFE Clearing Corporation Limited (HKFECC) SEHK Options Clearing House Limited (SEOCH)

Case: Hong Kong Stock Exchange (HKEx)

Post Merger/Demutualization Period (2000)

Case: Hong Kong Stock Exchange (HKEx)

Post Merger/Demutualization Period Highest Market Price

HK$ 18.95 > 4 times before demutualization

P/E Ratio (based on 1999 earnings) 35.8 times before demutualization

Rate of Equity Listing Increased 60 new companies listed 852 listed companies (2002) > 693 (1999) 64 China Incorporated, 10 Foreign

Demutualization in Pakistan

Initiated by Federal Govt.

SECP’s Expert Committee on Demutualization and Integration/Transformation of Stock Exchanges

Demutualization without Integration

Three individual demutualized SE’s KSE, LSE, ISE

The process will be completed by the end of current year.

Conclusion / Recommendation

KSE as individual demutualized SE.

LSE and ISE as integrated SE

Merger with CDC

Better Understanding to resolve Agency Problems

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