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:
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.
Audit and Company Secretary
Managing Directors ? Head of Training Institute and Human Resource
house, library, human resource and marketing department
Exposure and risk management/Clearing house
Head of legal and member affairs
Administrations/building maintenance and company
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.
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
Regulatory Affairs Committee
Human Resource and Remuneration Committee
Acting Chief Regulatory Officer
There are two main forces that drove (KSE, LSE and
ISE) to demutualize:
(1) Increased global competition and
(2) Advances in technology.
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
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.
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.
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.
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.
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.
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.
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 from
lenders and other business partners than similar unlisted companies.