Dhaka and Chittagong stock exchanges have successfully gone through major restructuring. Demutualisation of these exchanges was being talked about for quite some time. This is a global trend and Bangladesh could not have been out of it. The stock market collapse in 2010-11 brought the issue to the fore. Political commitment for this reform was firm. Unlike the experience of many other countries, both the stock exchanges of Bangladesh extended necessary cooperation for this major reform. Decisions were taken in consultation with the stakeholders and there was no serious resistance. Recently the exchanges elected boards of directors for the demutualised exchanges. This completed the first phase of demutualisation and the exchanges are now formally demutualised. There were concerns about proper selection of the directors. However, selection seems to have been reasonably satisfactory. At least, there is nothing to make any unfavourable comment against the boards before evaluating their performance for a reasonable period of time. While congratulating the newly-formed boards, it should be pointed out that their task is extremely demanding and all the directors need to understand that from the beginning.
Investors and the whole nation will be watching their performance. There is a general perception-especially among small investors-that there will be immediate improvements in market behaviour after the demutualisation and the exchanges will be safer business places. Impressions have been given by responsible persons that stock market problems will be over with demutualisation. This kind of over-simplification has raised expectations that are difficult to fulfill and this is likely to put undue pressure on the performance of the boards. Demutualisation is not likely to bring major improvements instantly. It has not been so anywhere in the world. It takes time to control market manipulation, ensure transparent trading, improve efficiency and surveillance, safeguard investors' interest and move towards improved corporate governance practices. Demutualisation is not a panacea for all kinds of problems. It will be unfair to expect too much from the new management immediately. However, the new boards must be able to convince the investors that they are capable of taking knowledge-based decisions independently without being influenced by any quarter. An impression needs to be created that the new management is working in the interest of general investors without being influenced by any vested quarter.
As required under the related law, the majority of members of the boards had to be independent directors. Most of the elected independent directors are not known to this writer. They seem to be capable persons in their own areas. However, possibly many of them are not so well-experienced in stock market management. If that is so, they need to learn about stock market operation urgently. The directors are not full-time employees. Their official exposure will be limited to board and committee meetings. Perhaps, some of them will need to do more than that to learn their job quickly in order to make effective contribution to the decision-making process. They are capable people and are expected to pick up quickly. It should not be difficult for any of them. Their decisions will have an effect on thousands of investors and no decision can be taken without evaluating the consequences. Therefore, board members must be knowledgeable. There is no substitute for knowledge and experience.
The immediate task of the new boards appears to be improving general image of the exchange management. There is a widespread perception that exchange management is influenced by a section of brokers and other market intermediaries. There is also an impression that market manipulators get protection from influential quarters. It has also been the perception that often the CEO (chief executive officer) cannot take any independent decision due to undue interference of the brokers and other influential stakeholders. There are rumours about management interference in pre-IPO (initial public offering) placement of shares. These allegations may not always be true. But perceptions are important. Demutualised exchange authorities must be able to create a fresh image of the exchange management from the beginning. This can be done by improving surveillance, giving exemplary punishment to market manipulators, controlling insider trading, resisting undue interference by powerful individuals and ensuring transparency. These are not very difficult tasks and can be done straightforwardly by an uncompromising, honest and capable leadership. Role of the CEO is pivotal in a demutualised exchange. In fact, he is the key person. It is important that an efficient, honest and experienced CEO is permitted to work effectively without undue interference from any quarter.
Now, we have demutualised exchanges technically and legally. But have the exchanges been demutualised in the true sense of the term? It appears that only composition of the board has changed by the provision that the majority of the directors including the chairman must be independent directors. There were a large number of independent directors in the boards even before demutualisation. In spite of that, there was a general impression that decisions were taken by broker directors. Therefore, composition of the boards alone cannot serve the purpose of meaningful demutualisation. One of the fundamental purposes of a demutualised exchange is to separate shareholders (owners) from the brokers. As per Section 2(10) of the Demutualisation Act, such separation is mandatory. But in our demutualised exchanges, all shareholders are trading right entitlement certificate (TREC) holders and they are the only brokers. In other words, trading right has been made a monopoly of the former members of the exchanges only. The scenario is likely to remain so for at least next four to five years or even more, since there is no obligation to include non-shareholder TREC holders. What kind of demutualised exchange is it going to be where owners and the TREC holders are the same persons? The situation can change only when the 60 per cent blocked shares are transferred to general investors, institutional investors and strategic investors. It is also necessary to extend TREC to persons other than shareholders. But this may not happen in several years. So, the exchanges are likely to remain captive to their former members for many years to come. In that kind of situation, significant improvements may not take place.
If the authorities want the demutualisation process to work in its true spirit, it is essential to transfer the blocked shares as quickly as possible. As per the existing law, the BSEC (Bangladesh Securities and Exchange Commission) may direct the exchanges, at any time within three years, to complete transfer of the blocked shares within next one year. So, the exchanges may get a period as long as four years to transfer the blocked shares. If that is not enough, a provision is there enabling the BSEC to extend this time limit indefinitely. Such a provision has made the process of transfer of blocked shares within a timeframe uncertain and put the entire issue of demutualisation in jeopardy. However, the redeeming feature is that the BSEC may direct such transfer to take place at a date earlier than three years. The commission and the boards of exchanges should work together to expedite the process. A definite timeframe should be worked out to complete transfer of the entire blocked shares within two to three years. If that is to be done, necessary preparation should start immediately. Similarly, effective steps should be taken to grant TREC to persons other than shareholders so that separation of owners from the brokers is noticeable. Demutualisation will remain ineffective, or even a mere eyewash until these steps are taken.
The question of collaboration with strategic investors is an extremely important issue. This is one of the essential purposes of demutualisation. Selection of strategic partners is a crucial and difficult process. A strategic partner should have specialised technical know-how, skill, knowledge, experience and exposure to the global market. Efforts should be made to build strong partnership with the strategic investors for operational improvement of the exchange, product development and enhanced business opportunities. Collaboration with strategic partners is important for the purpose of importing international skill and capabilities to the domestic market. This can accelerate development of technology-related infrastructure and promote cross-border trade. However, it may need extensive negotiation and persuasion to bring the right kind of strategic partners to a frontier market like that in Bangladesh. Therefore, search for strategic investors should start immediately. This is a major challenge in the demutualisation process and the newly-formed boards will do well, if they keep this in mind and keep the issue high on their agenda. The related law stipulates that if any exchange fails to make any contract with a strategic investor within the stipulated time, such shares may be transferred to others with the approval of the commission. Exchanges should try to do their best to ensure that they do not have to do that. One of the important purposes of demutualisation will be defeated, if there is no strategic investor.
Within the same timeframe, the exchanges are required to transfer 35 per cent of the shares to institutional investors and general public. A mechanism for such transfer needs to be worked out and these shares should be transferred in the shortest possible time. It may be possible to do this within a year or so, if the exchange authorities are serious about it. Completion of this process will be a long step forward towards proper demutualisation of the exchanges. This will bring a large number of shareholders without trading right and help dilute the influence of TREC holders.
There will be a number of other challenges for the exchange authorities in course of time, which they must address with courage and determination. Different committees formed in the exchanges under independent directors have enormous responsibilities and these forums are the most important places for initial policy formulation. Exchanges have been demutualised for controlling all kinds of manipulation and corruption so that transparency is ensured and proper corporate governance is established. Exchanges will have to work hard so that a positive change is visible towards that in public perception in the shortest possible time.
Finally, under Section 19 of the demutualisation act, it is mandatory for the exchanges to work for protection of investors' interest. In case of any conflict of interest, investors should get the priority. This legal obligation should always be kept in mind in discharging the function of the exchanges.
The writer is a retired Secretary to the government and former Chairman of the Bangladesh Securities and Exchange Commission (BSEC).
faruqasiddiqi@yahoo.com
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