The Demutualization Of The Nigerian Stock Exchange

Background Facts

The Nigerian Stock Exchange (“NSE”), a company limited by guarantee (“Ltd/Gte”), recently announced the approval by its members of its decision to convert to a public company limited by shares (“PLC”).[1] To facilitate the conversion, the Demutualization of the Nigerian Stock Exchange Bill, 2017 (“the Demutualization Bill”) was signed into law on 29th August 2018 and since that time, the NSE has commenced the conversion process by passing a special resolution authorizing the conversion, engaging relevant professional advisers and obtaining the approval of the Securities and Exchange Commission (“SEC”).

What Is Demutualization?

Before commencing on this paper, it is important to understand the concept of demutualization. Demutualization is a process by which a private, member-owned company, such as a cooperative or a mutual life insurance company, legally changes its structure, to become a public-traded company owned by shareholders[2], such as in this situation.  The NSE is currently registered as a Ltd/Gte which does not have a share capital and cannot carry out business for the purpose of making profits for distribution to its members. Furthermore, it can only carry out activities to promote commerce, art, science, religion, sports, culture, education, research, charity or other similar objects. Demutualization is therefore necessary so that the NSE can access the benefits of a PLC.

The Nigerian Stock Exchange Bill

The Companies and Allied Matters Act, 1990 (CAP C20, LFN 2004) does not make provisions for conversion from a Ltd/Gte to a PLC. This, therefore, led to the passage of the Demutualization Bill. The Bill authorizes NSE to convert to a PLC, with the prior authorization of SEC.[3]

Implications of The Demutualization Bill

The Bill is aimed at facilitating an expeditious conversion and re-registration of the NSE from a Ltd/Gte to a PLC.[4]  The NSE will then have to subsequently comply with applicable provisions of the CAMA and the Investments and Securities Act 2007 concerning public companies.[5]

It should be noted that after demutualization, all income, assets, properties, and liabilities of the NSE shall continue to be the income, assets, properties, and liabilities of the NSE as a PLC.[6] Also, the Bill exempts the NSE from any tax liability that may arise in connection with and/or as a result of its conversion to a PLC.[7] However, after the conversion, the NSE will be liable to pay tax on subsequent profits earned.[8]

Impact of Demutualization

After the conversion, the NSE would have a share capital and can be listed on the stock exchange. It can then raise money from the public by offering its shares or debentures to the public and inviting them to subscribe, which would increase its access to capital.  The NSE will also be able to diversify its business activities for the purpose of making and distributing profits like a PLC.

Furthermore, the demutualized NSE would now be governed by the Code of Corporate Governance for Public Companies, 2011 (“2011 Code”), issued by SEC. Consequently, the Board of Directors must carry out the business of the NSE in line with the principles of the 2011 Code.[9]  Furthermore, in appointing the Board of Directors and other officers of the NSE, the principles of the 2011 Code would have to be complied with,  to ensure that only competent and qualified persons are appointed. This would promote independence, checks and balances and corporate governance standards in the NSE.

The demutualized NSE would, in addition, be governed by the Nigerian Code of Corporate Governance 2018, (“2018 Code”), issued by the Financial Reporting Council of Nigeria (“FRCN”).  The 2018 Code aims to establish corporate governance best practices in Nigerian companies by providing that companies should follow its recommended practices in the composition, structure, and appointment of their Board of Directors, Chairman, Managing Director/Chief Executive Officer, Executive and Non-Executive Directors, Company Secretary and other committees.  It also provides for other recommended practices to be followed by companies in their operations. More so, companies are required to adopt the ‘Apply and Explain’ approach in reporting compliance with the principles of the 2018 code, i.e. the companies would demonstrate how the specific activities they have undertaken best achieve the outcomes intended by the corporate governance principles specified in the 2018 Code.[10] This approach would further strengthen the corporate governance standards within NSE.

Also, demutualization would propel technological improvements in the NSE since it would engender the flexibility of operations and increased access to capital needed for technological innovations in the NSE. This would, in turn, improve the efficiency and competitiveness of the NSE.  It would also increase the value of the NSE, as empirical studies have shown that demutualized exchanges have a stronger post-listing value & operational performance than mutual exchanges.[11]

The Implication of the Demutualization Bill on Other Companies Limited by Guarantee

It should be noted that the Demutualization Bill is specifically for the conversion of the NSE to a PLC. Therefore, for the conversion of other companies limited by guarantee, recourse would have to be made to the Companies and Allied Matters Act, 1990 (CAP C20, LFN 2004) Repeal and Re-enactment Bill, 2018 (“the CAMA Bill”) which includes the procedure for conversion of a company limited by guarantee to a company limited by shares. However, the provisions in the CAMA Bill are not effective until the CAMA Bill is passed and in force.

Conclusion

The demutualization of the NSE is a laudable and progressive reform. It is hoped that the steps to finalize the demutualization will be concluded soon. This would promote the country’s capital market operations and value and also enhance its competitiveness globally.

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