The Process of Demutualization

Demutualization

The process by which a mutual company becomes a publicly-traded company. A mutual company is a company owned by its members or users for the benefit of those members or users. In demutualization, the members give up their rights and receive shares in the company in return, which the (now former) members may then sell. Demutualization happens most often when a stock exchange owned by its members goes public.

Moreover, Demutualization is the process by which a customer-owned mutual organization (mutual) or cooperative changes legal structure to form a joint stock company. Historically stock exchanges started as a mutually governed, self-regulated structures where profit was not a very strong motive. The stock exchanges were authorized to promulgate by-laws to govern their functioning.

Shareholding structure before merger

PSX was previously operating as a non-profit organization with mutualized structure wherein its Members had trading as well as ownership rights. This structure inherently created conflict of interest and perceived to jeopardize the investors’ interest. Therefore, the Stock Exchanges (Corporatization, Demutualization & Integration) Act, 2012 ( “Demutualization Act”) was promulgated by the Government.

Management structure before merger

There were physical locations with trading floors. The stock exchanges had a mutually dependent, co-operative structure. However with technological innovation came electronic trading system. The concept of floor trading no longer held ground, hence the physical presence of the trader was no longer important, which in turn meant that the cost of inducting additional member fell drastically, reducing the overall trading cost. The membership fee did not have much of significance. This in turn reduced the importance of mutual dependence and cooperation. The outcome of this was demutualization.

• Board of Directors
• Internal Audit and Company Secretary
• Managing Directors Head of Training Institute and Human Resource
• Training house, library, human resource and marketing department
• Chief Operating Officer
• Marketing surveillance
• Exposure and risk management/Clearing house
• Head of legal and member affairs
• Administrations/building maintenance and company affairs.
• Chief Financial Officer
• Accounts and Finance
• Chief IT Officer

Shareholding structure after merger

As per the plan imagined under the Act, the whole paid-up capital of the Exchanges as worked out after the revaluation of benefits and liabilities has been similarly allocated to initial shareholders who were beforehand the individuals from the Exchanges. These underlying investors can hold upto 40% offers as apportioned to them while the 60% stake has been obligatorily held by the Exchange. According to the arrangements of the Act and Regulations encircled there-under, upto 40% of these saved offers might be dispensed to a strategic investor and financial institutions while the staying 20% offers should be assigned to the overall population through. The returns to be gotten from such divestment are to be dispensed among 121 investors similarly.

As gave under the Demutualization Act, now Members have stopped to be Members of PSX and they have been issued Trading Right Entitlement Certificates ( “TRECs”) and PSX’s offers, accordingly isolating exchanging rights from possession rights. Though TRECs speak to exchanging rights, PSX shares speak to proprietorship. Presently, TREC holders require not be an investor of PSX nor a PSX investor is required to be TREC holder of PSX.

Management after merger

Upon corporatization and demutualization, the Board of Directors of the Exchange was supplanted by the First Directors containing eleven individuals out of which four were designated by the Exchange speaking to TRE authentication holders enthusiasm for an interval period till decision of Directors inside thirty days from the date of re-enlistment of the Exchange while six free executives were selected by SECP. The MD is an ex-officio individual from each Board of the Exchange. The Board of First Directors chose to lead race of Directors in regard of four seats.

In the Extraordinary General Meetings (EGMs) investors of the Exchanges chose four Directors for a time of three years. The chosen people of SECP on the Board of the Exchange should proceed till the time the agents of investors including overall population after divestment of 60% shareholding are so chosen or co-selected. As per the plan of demutualization, the agents of TRE testament holders on the Board of the Exchange can’t surpass four whenever and the Chairman of the Board should dependably be a man who is neither a TRE declaration holder nor their associated individual as far as the arrangements contained in the Act.Board of Directors – 13 Members

• Board Committees
• Nomination Committee
• Regulatory Affairs Committee
• Audit Committee
• Human Resource and Remuneration Committee
• Company Secretary
• Acting Chief Regulatory Officer
• Auditors
• Legal Advisors
• Bankers
• Associate Companie

There are two main forces that drove (KSE, LSE and ISE) to demutualize:

1. Increased global competition and
2. Advances in technology.

Benefit

Let’s take the scenario in which the KSE, the LSE, and the ISE merge into a single exchange that is a for-profit company listed on itself. In this scenario, issuers of listed securities had seven major advantages from integration and demutualization

1. The monetary cost of listing has reduced. Of the total 670 listed companies, four out of five are listed at more than one exchange and one out of three is listed at all three exchanges. These listed companies have to pay listing fees to each exchange separately. Once there is only one exchange, only one fee would have to be paid.
2. The managerial cost of time and effort spent in compliance with listing regulations has reduced. Companies that are listed at more than one exchange have to comply with the regulations of each exchange.
3. Trading volumes has increased because all the trading would happen at one exchange rather than three exchanges. Since exchanges earn most of their revenues from trading volumes.
4. It would be under constant pressure to be a role model for others. This would make it more realistic in devising and implementing regulations for listed companies, such as the Code of Corporate Governance.
5. Due to its greater economic and strategic significance, the exchange has been able to lobby with the Government for the common issues facing listed companies. For instance, the exchange may effectively seek concessions for the listed companies, such as lower tax rates on corporate income and dividends.
6. There has been a strong commercial incentive for the exchange to seek such concessions because the more the listed companies, the greater would be the listing revenue and trading fees for the exchange.
7. Listing on a high profile and closely watched exchange has carried an element of prestige and helped the listed companies in their overall marketing efforts. By following better governance practices, such as a high level of on-going disclosure, listed companies has been able to get better terms fromlenders and other business partners than similar unlisted companies.