Demutualisation of stock exchanges meaning

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Corporatisation and Demutualisation of Stock Exchanges in India – Priyanka Blog Thoughts

Demutualisation is a process that changes a mutual or co-operative association into a public company by converting the interests of the members into shareholdings. These holdings can then be traded like the shares of a company. The idea is to change the structure of exchanges that were originally formed as trusts.

Demutualisation allows such associations to conduct commercial business to make a profit just like a normal corporate entity. Demutualisation would also allow the exchange to put in place a board of directors, to look after day-to-day operations.

Why has demutualisation gained importance? With a sharp rise in the investing class, there is a lot of focus on trading exchanges.

Demutualization

Since demutualisation allows a professional body to run the exchange, it the demutualisation process is expected to have better acceptance among investors. How is it done? So far, exchanges were allowed both ownership and trading rights.

Members who were owners automatically had trading rights. Demutualisation seeks to separate the two. Owners will be given shares, just like in a company and demutualisation also stipulates paying for trading rights.

The process is similar to a company going public.

The BSE, which is currently undertaking this process, is awaiting clearance from the government on the route to take for demutualisation. This is to allow better regulation of the exchange. Once listed as a public company, the exchange will be governed by the normal corporate governance standards and ethics to ensure more transparency. It will dispel the perception among investors that since the exchange was being run by a trust, it was open to manipulation.

Is the process uniform? Demutualisation is done differently by different exchanges. In some cases, only trading rights are offered, while investors who want to own shares of the exchange are not offered trading rights. In others, there is more flexibility with both ownership and trading rights being offered. What are the pitfalls? In India, the problem with demutualisation lies with improving the functioning of the regional stock exchanges, which have not been flagging mainly because of no clear policy from the government.

The obvious question is who would one buy shares of exchanges which have poor profit track record and an uncertain future. Some of the regional exchanges only have real estate and some miscellaneous assets which can be realised by the investors only when the exchanges are liquidated. Can there be overseas investment under demutualisation?

The law is still not clear on this aspect. But senior government executives have recommended that the exchanges be encouraged to attract overseas securities, both equity and debt. They say that overseas investment can be attracted mainly from Asian countries and this would promote India as a regional financial hub.

This will also have the benefit of allowing regional exchanges to be liquidated. Comments 0 Add Comments. What does demutualisation mean?

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Demutualization - Wikipedia

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