The demutualisation challenges

Dipok Kumar Roy The Bangladesh Securities and Exchange Commission (BSEC) has drawn up a roadmap for carrying out proposed demutualisation process of both the stock exchanges by June 15, 2013 with a view to changing the constitutional framework and strengthening corporate governance in the bourses. Demutualisation is intended to make a stock exchange a profit-oriented public limited company that is able to generate funds on its own like others, rather than be limited by the guarantee given by the members. Demutualisation also transforms a currently-mutual exchange with one-vote- one-member into a bourse with one vote per share and the decision-making structure is also changed from 'consensus-based' to 'majority-based'. Demutualisation of stock exchanges always comes to the fore when we aspire to (i) improve governance, (ii) ensure investors' participation, (iii) inject competition, (iv) pave the way for globalisation and consolidation, and (v) unlock the stock exchange value. So, it gives a wider scope to strengthen corporate governance in a stock exchange resulting in effective control, operation and sustainable growth through active participation of investors. However, the success of corporate governance depends on accountability and transparency. If we have a look at corporate governance in every business sector in Bangladesh, there may arise a question-how far we have succeeded in implementing corporate governance in those sectors to strengthen operation, and ensure sustainable growth. The two stock exchanges in our country are no exception. The bourses would function in the same corporate culture and under the same framework of weak laws, regulations and dispensation of justice. Yet, demutualisation of the stock exchanges is, of course, a big step forward to developing the capital market, but not all steps thereof. We observe the statements from different quarters about demutualisation. They seem to say, as if, it would resolve all the problems pertaining to operation of the share market, its development and regulation. A demutualised stock exchange never functions outside the purview of the regulations of the regulatory watchdog the BSEC. Then there remains the question how the BSEC can succeed in implementation of corporate governance for listed companies. Hence, the BSEC needs to set the target of benefits under a strategy to face the challenges ahead and achieve the set target. The demutualisation process is a great challenge for the government as well as the stakeholders. They need to successfully put behind the era of mutual ownership. India took five years to implement it and Pakistan has been working on it for seven years. Some other emerging countries are working to move forward with demutualisation. After demutualisation, stock exchanges may register higher income than before and increase the profit remarkably to restore investors' confidence, if it can be operated efficiently meeting the challenges of (i) corporate governance, (ii) conflict of interest between the bourses' self-listing and the regulatory role, and (iii) financial viability. Good corporate governance: It is said that a demutualised stock exchange gets a corporate governance framework and is more strengthened, accountable and transparent than a mutually-structured stock exchange, as the Board of Directors is accountable to shareholders in the AGM (annual general meeting). How is the state of corporate governance in all other listed companies in Bangladesh? Are they well compliant with the provisions under the Companies Act and the BSEC guidelines? Certainly not. The corporate governance reporting has been simply a tick box in many cases. None of the companies concerned and the BSEC verify further the compliance status. While someone may comply with the provisions fully, many of them may not. Are the BSEC guidelines and the Companies Act 1994 adequate and appropriate to match the standard framework of corporate governance, identified as the best practice and accepted worldwide in light of the principles of the OECD (Organisation for Economic Cooperation and Development) and the Cadbury Report in the UK? Will it be free from any influence of political or other parties? Do the professionals, engaged in certifying corporate governance compliance as per the BSEC guidelines or giving their opinions on financial statements, maintain due care and impartiality? All the answers are 'NO'. Then how can we expect the for-profit demutualised stock exchange to be a super-governed and profit-oriented organisation? No organisation can register sustainable development and growth and accordingly may collapse unless that organisation complies with a good corporate governance system. The BSEC should have a strategy on implementation of good governance in demutualised stock exchanges. Based on the strategy, the BSEC should review and monitor the implementation as per related laws and guidelines in all respects. The professionals need to maintain due care and impartiality in certifying listed companies' compliance with corporate governance guidelines and give opinions on the financial statements as required by the BSEC guidelines. A research on 'Financial Disclosures Practices by Listed Companies in Bangladesh' was carried out under the Accounting for Capital Market Development (ACMD), a research project administered under the Academic Innovation Fund (AIF) of the University Grants Commission (UGC) of Bangladesh and the World Bank at the University of Dhaka. The research was conducted on 94 listed companies audited by topmost chartered accounting firms in Bangladesh. The research findings, not yet published, reveal that a significant amount of non-compliance with mandatory disclosures persists in financial statements, but ridiculously the auditors certified those as unqualified (gave them clean reports). This is really not only contradictory but also unexpected from the professionals engaged to audit the financial statements. Whoever certifies the corporate governance compliance as per the BSEC guidelines should have the reasoning in favour of his action and the working methodology and he also should do it with due professional care and impartiality. Managing conflict of interest: There may be a conflict of interest when a demutualised bourse plays both the regulatory role and takes care of the listing of itself as a company. During its listing, it may look after its business interest as a corporate entity though other companies are deprived of the opportunity. As a profit-oriented company, the bourse then may try to maximise its earnings by influencing the process of listing, transaction volume, price and other fee-based activities. And it may unduly fetch monetary or other gain for the bourse instead of establishing it as a capital market free from any influence. If we fail to establish a share market free from any such influence, then what is the use of demutualisation? So, managing the conflict of interest is a great challenge if we really want to benefit from demutualisation. Good corporate governance in demutualised stock exchanges, review and monitoring and the appropriate watchdog role of the BSEC under the related laws, rules and regulations, i.e a comprehensive regulatory framework, and finally equitable dispensation of justice against any act of manipulation can ensure establishment of an efficient capital market free from any influence. Financial viability: Membership subscription fees, listing fees, trading charges, services fees including clearing and settlement, depository fees, etc. and charges for other services such as company news, quote and trade data are the principal sources of revenue for stock exchanges. In developed economies, the big markets and their business strategies generally lead to profitable operation of their stock exchanges, but in developing countries like Bangladesh, in most cases, the financial support is given from governments or donors to meet the operational costs and protect national interests. Listing of good securities and efficiency of a market are necessary to increase the base level of income for a stock exchange. Listing of good companies and securities is, of course, challenging. Micro-financiers, cooperative societies, specialising in suitable models of products like jute and jute goods-based handcrafts, clothes etc. and having marketing linkage and the capability of cluster financing, and venture capitalists can play a great role in upstaging emerging entrepreneurs. We should have an integrated policy to support entrepreneurs financially and technically in phases to make them successful and fit to collect capital from the capital market. More good companies and securities need to be listed to make the stock exchanges viable. But we find no sign and special efforts to get the companies and securities having very good potential listed with the bourses. Hence, demutualisation in emerging markets like Bangladesh is different from that in developed markets. A five-year plan can be drawn up providing for strict compliance and policy support to make the bourses objective-oriented after demutualisation. In order to get more good companies and securities listed, concerted efforts should be made as per industrial policy, tax policy, venture capital and fund management regulations. After demutualisation, the Toronto Stock Exchange (TSX) and the Australian Stock Exchange recorded a significant increase in income. On the contrary, the Philippine Stock Exchange posted negative return. In Australia, a reserve fund was created primarily to provide a capital cushion. As stated earlier, an integrated industrial policy highlighting the strategy on phase-by-phase financing and technical support from microcredit institutions, cooperative societies, venture capitalists and finally banks and financial institutions is required to bring more potential companies into the capital market. So, a demutualised stock exchange does not guarantee the profitability unless it is operated based on good corporate governance, regulated prudently in a free, fair and impartial environment and more good and potential companies and securities get listed and thus form a vibrant capital market. From the day one, we should be methodical about setting up a profit-oriented demutualised stock exchange. The writer is an associate member of ICAB and Head of Finance of Venture Investment Partners Bangladesh Ltd. (VIPB). roy_dipok@yahoo.com