nse demutualization study - stakeholders' workshop 1 (2) [compatibility mode]

8/2/2019 NSE Demutualization Study - Stakeholders' Workshop 1 (2) [Compatibility Mode]

1/33

Financial Advisory Services

NSE Demutualization studyNSE Demutualization study

Financial Markets & Services

John KiruthuPartner, Financial Advisory Services

KPMG East Africa, Nairobi15 June 2007

John KiruthuPartner, Financial Advisory Services

KPMG East Africa, Nairobi15 June 2007


2/33

Demutualization of the NSEDemutualization of the NSE

ect vesect ves

Assess the case for the demutualization of the NSE andAssess the case for the demutualization of the NSE and

review the implementation mechanismsreview the implementation mechanisms

Discuss the finding of the study with the stakeholdersDiscuss the finding of the study with the stakeholdersand obtain their commentsand obtain their comments

Discuss the role of the various stakeholders in theDiscuss the role of the various stakeholders in the

demutualization processdemutualization process

2


3/33

NSE demutualization studyNSE demutualization study

Organization of the days presentationsOrganization of the days presentations

Background and introduction to the NSE & capital markets inBackground and introduction to the NSE & capital markets in

KenyaKenya

vo ut on o t e s nce to atevo ut on o t e s nce to ate

Growth of the Capital markets since 2001Growth of the Capital markets since 2001 Challenges facing the NSE and capital marketsChallenges facing the NSE and capital markets

Empirical studies on demutualization models & challengesEmpirical studies on demutualization models & challenges

Results of the NSE demutualization studyResults of the NSE demutualization study

Key considerations and the NSE demutualization processKey considerations and the NSE demutualization process

3


4/33

Background and historicalBackground and historicalevo ut on o t e anevo ut on o t e an

markets

markets

4


5/33

Structure and mandate of capital market inStructure and mandate of capital market in

The structure of the ca ital markets includeThe structure of the ca ital markets include

The Capital Markets AuthorityThe Capital Markets Authority

The Nairobi Stock ExchangeThe Nairobi Stock Exchange

Stock BrokersStock BrokersDealersDealers

Institutional and retail investorsInstitutional and retail investors

Listed CompaniesListed CompaniesNon listed companiesNon listed companies

5


6/33

Mandate of the main playersMandate of the main players

Ca ital markets AuthoritCa ital markets Authorit

Established was in 1989 under the CMA ActEstablished was in 1989 under the CMA ActHas a mandate to regulate the capital market forHas a mandate to regulate the capital market for

NSENSE

Is the self re ulatin or anization for listed instrumentsIs the self re ulatin or anization for listed instruments

Draws membership from brokers, dealers etcDraws membership from brokers, dealers etc

Brokers, who are the principal members are allocatedBrokers, who are the principal members are allocated

sea s n e s oc exc ange o ea w e s esea s n e s oc exc ange o ea w e s einstruments on behalf of the investing publicinstruments on behalf of the investing public

Dealers deal on the instruments on their own accountDealers deal on the instruments on their own account

6


7/33

Evolution of the NSEEvolution of the NSE

The NSE has evolved from the informal coffee shopThe NSE has evolved from the informal coffee shopmeetin s and exchan e to become the 9meetin s and exchan e to become the 9thth lar estlar est

among Africas 17 exchangesamong Africas 17 exchangesMarket capitalization in 2006 reached an all time highMarket capitalization in 2006 reached an all time higho s. ono s. on

The exchange has adopted an immobilized shareThe exchange has adopted an immobilized share

In Sept 06, the NSE adopted an ATS system on LANIn Sept 06, the NSE adopted an ATS system on LANbasis and expects to move to WAN in the next 6basis and expects to move to WAN in the next 6

monthsmonths

7


8/33

This Is The Title Of The Slide (Arial 30pt Bold)This Is The Title Of The Slide (Arial 30pt Bold)

Level one is marked with a diamond bulletLevel one is marked with a diamond bullet

(Arial 24pt Bold)(Arial 24pt Bold)Level two is marked with a dash bullet (Arial 24pt)Level two is marked with a dash bullet (Arial 24pt)

Level three is marked with a round bullet (Arial 20pt)Level three is marked with a round bullet (Arial 20pt)

Level four is marked with a dash bullet (Arial 18pt)Level four is marked with a dash bullet (Arial 18pt)

Level five is marked with a chevron bullet (Arial 18pt)Level five is marked with a chevron bullet (Arial 18pt)

8


9/33

Performance of the NSE since 2001Performance of the NSE since 2001

Year end December statistics

Share volume (mn) 109.2 135.8 327.7 600.7 874.2 1,453

Equities Turnover

(KShs. bn) 3.1 2.9 13.4 22.3 36.5 95

Index (points) 1355 1363 2738 2946 3973 5646

(KShs. bn) 86.1 112.3 317.5 314.2 426.5 792

T. Bonds Turnover

9

.Source: NSE fact book 2007


10/33

Challenges facing the NSE and the CapitalChallenges facing the NSE and the Capital

Low market confidenceLow market confidence

after uchumi, Francis Thuo and end of the bull run in Feb 07after uchumi, Francis Thuo and end of the bull run in Feb 07

Perception of low standards of corporate governancePerception of low standards of corporate governance

NSE or the brokers does not publish it corporate governance reportNSE or the brokers does not publish it corporate governance report

Eliminate politics relating to election of directors is normally dogged with politicsEliminate politics relating to election of directors is normally dogged with politics

Majority of the directors are brokers and management control through appoint ofMajority of the directors are brokers and management control through appoint of

senior managementsenior management

Lack of competitiveness in the local marketLack of competitiveness in the local market

Most company seek funds from the short term money market for the long termMost company seek funds from the short term money market for the long term

needsneeds

There is no depth in the NSE product offering (derivatives, option, securitisation forThere is no depth in the NSE product offering (derivatives, option, securitisation forexample)example)

10


11/33

Challenges facing the NSE and capitalChallenges facing the NSE and capital

Vulnerability to market shocksVulnerability to market shocks

Method of determining shares price may result in the Mrk cap of a counter beingMethod of determining shares price may result in the Mrk cap of a counter beingheavily affected by a small lot deal.heavily affected by a small lot deal.

ow eve o cap a mar e qu yow eve o cap a mar e qu y

Africa accounts for about 1.4% of the total capital market liquidity. NSE account forAfrica accounts for about 1.4% of the total capital market liquidity. NSE account for

about 7% of Africa liquidity and is ranked 5about 7% of Africa liquidity and is ranked 5th.th.

Slow pace of innovativeness and flexibility and limited access t capitalSlow pace of innovativeness and flexibility and limited access t capital

Deep market are constanly developing product such as securitization, derivative,Deep market are constanly developing product such as securitization, derivative,

..

been slow in developing products and have left compnies to depend on the shortbeen slow in developing products and have left compnies to depend on the short

term money marketsterm money markets

11


12/33

Challenges facing the NSE and capitalChallenges facing the NSE and capital

Management responsibility on the bottom lineManagement responsibility on the bottom line

As a mutual organization NSE management have no motivation for managing the bottom line asAs a mutual organization NSE management have no motivation for managing the bottom line as

a measure for shareholder valuea measure for shareholder value

Conflict of interestConflict of interest

Broker firms also act as dealers and fund managers. There is a very strong perception of conflictBroker firms also act as dealers and fund managers. There is a very strong perception of conflict

of interest which is not mitigated by effective market surveillanceof interest which is not mitigated by effective market surveillance

Creation of strong regional stock exchangeCreation of strong regional stock exchange

Initiative to create a regional stock exchange has been slow in implementation due to sovereignInitiative to create a regional stock exchange has been slow in implementation due to sovereign

interest and lack of common legal frameworkinterest and lack of common legal framework

Entr barriers that limit com etition and entr of new brokersEntr barriers that limit com etition and entr of new brokers

There are significant entry for additional local and foreign player who would like to enter theThere are significant entry for additional local and foreign player who would like to enter the

marketmarket

12


13/33

Empirical study ofEmpirical study ofemu ua za onemu ua za on

13


14/33

Empirical studies on demutualization BackEmpirical studies on demutualization Back

Demutualization is the se aration of membershi ,Demutualization is the se aration of membershi ,direction and management of an exchangedirection and management of an exchange

Proponents of demutualization see it as the panaceaProponents of demutualization see it as the panacea

Studies show that since the first demutualization inStudies show that since the first demutualization in

1993 most of the members of FIBV have demutualized1993 most of the members of FIBV have demutualized..

By 2002, 21 stock exchanges had demutualisedBy 2002, 21 stock exchanges had demutualised

Demutualized stock exchan es account for a verDemutualized stock exchan es account for a versignificant portion of the worlds mkt capsignificant portion of the worlds mkt cap 52% in 200152% in 2001

Demutualization is now a trend in the worldDemutualization is now a trend in the world

14


15/33

Empirical studies on demutualization Empirical studies on demutualization

Major drivers of demutualization are:Major drivers of demutualization are:

Globalization of the capital marketsGlobalization of the capital marketsCompetition especially from technology based systems such asCompetition especially from technology based systems such as

Creating a organization that is read for mergers & strategicCreating a organization that is read for mergers & strategic

alliancesalliances

Afford adoption of new technologyAfford adoption of new technology

Spread ownership risksSpread ownership risks

Adoption of the new corporate governance frameworksAdoption of the new corporate governance frameworks

Manage perception of conflict of interest more effectivelyManage perception of conflict of interest more effectively

15


16/33

Empirical studies on demutualization Models

ado ted in other demutualized markets

Empirical studies on demutualization Models

ado ted in other demutualized marketsWe reviewed the LSE, ASX, NZSE, HKex, SGX. Common featuresWe reviewed the LSE, ASX, NZSE, HKex, SGX. Common features

include:include:

Demutualization is a long journeyDemutualization is a long journey

Demutualized exchange were motivated by globalization,Demutualized exchange were motivated by globalization,efficiency, innovation and flexibility with the exception of JSEefficiency, innovation and flexibility with the exception of JSE

All demutualized exchanges have maximum shareholding limitsAll demutualized exchanges have maximum shareholding limits

Most had to grapple with the management of conflict of interestMost had to grapple with the management of conflict of interest

All had set medium term goal of self listing in the exchangeAll had set medium term goal of self listing in the exchange

Malaysian model is the most suitable for our emerging marketMalaysian model is the most suitable for our emerging market

It was driven by the establishment of a stand alone law andIt was driven by the establishment of a stand alone law andamendment to the previously existing laws.amendment to the previously existing laws.

Established a Capital Market Devt FundEstablished a Capital Market Devt FundAllocated value on 30:30:30:10 ratio to Government, CMDF,Allocated value on 30:30:30:10 ratio to Government, CMDF,Brokers and remisiers (other market intermediaries)Brokers and remisiers (other market intermediaries)

16


17/33

Empirical studies on demutualization Empirical studies on demutualization

IOSCO Technical Committee in 2001 identified theIOSCO Technical Committee in 2001 identified thefollowing as the major challengesfollowing as the major challenges

Conflict of interest;Conflict of interest;

The role of the exchange as a public interest enterprise,The role of the exchange as a public interest enterprise,

andandFinancial managementFinancial management

BTA, a capital markets consulting company in a researchBTA, a capital markets consulting company in a research

facing demutualized exchanges are corporate structure,facing demutualized exchanges are corporate structure,regulatory, legal issues and management vestedregulatory, legal issues and management vested

17


18/33

Analysis of the study results andAnalysis of the study results andconc us onconc us on

18


19/33

Issues of the Structure of NSEIssues of the Structure of NSE

Study focused on a tar et of individual & institutional investors,Study focused on a tar et of individual & institutional investors,

brokers, policy makers and other emerging marketsbrokers, policy makers and other emerging markets89.9% of the respondent believe that the current structure of the89.9% of the respondent believe that the current structure of the

s respons e or e corpora e governance an ow mar es respons e or e corpora e governance an ow mar e

confidenceconfidence

77.6% believe that demutualization is the wa forward to address77.6% believe that demutualization is the wa forward to address

the challenges facing the NSE.the challenges facing the NSE.

The demutualized NSE should have the medium term goal of selfThe demutualized NSE should have the medium term goal of self

st ng.st ng.PLC status is seen to be more accountable and transparent andPLC status is seen to be more accountable and transparent and

able to res ond to its stakeholders needsable to res ond to its stakeholders needs

19


20/33

Research methodology and data analysisResearch methodology and data analysis

investors, fund managers, stock brokers, listedinvestors, fund managers, stock brokers, listedcompanies, policy makers and other emerging marketcompanies, policy makers and other emerging market

regulators and stock exchanges.regulators and stock exchanges.

Out of the 80, 67 respondended, an impressiveOut of the 80, 67 respondended, an impressiveresponse rate of 83%response rate of 83%

The data analysis are presented in frequency charts,The data analysis are presented in frequency charts,

bar chart and histogramsbar chart and histograms

20


21/33

The current corporate structure of the NSE isresponsible for the perceived low market confidenceThe current corporate structure of the NSE isresponsible for the perceived low market confidence

Overall 89.6% of theOverall 89.6% of the

or agreed that theor agreed that themembership, majoritymembership, majority

9%1%

Stron l a ree and management control ofand management control ofthe NSE by one group ofthe NSE by one group of

stakeholders i.e. thestakeholders i.e. the27%

Agree

Neutral

stockbrokers, has createdstockbrokers, has createdgovernance weaknesses,governance weaknesses,which can negatively impactwhich can negatively impact

63% Disagree

on the flexibility andon the flexibility andinnovativeness of the capitalinnovativeness of the capitalmarket.market.

21

9% were neutral, while only9% were neutral, while only

1.5% disagreed.1.5% disagreed.


22/33

Demutualization of the NSE would solve theDemutualization of the NSE would solve the

86.6% of the respondents86.6% of the respondentsPercentage Cumulative

NSENSE13.4% were neutral, disagreed or13.4% were neutral, disagreed or

Frequency (%) (%)Strongly agree 39 58.2 58.2

Those who strongly disagreedThose who strongly disagreed

would like CMA and NSE marketwould like CMA and NSE market

Agree 19 28.4 86.6

to address market playersto address market playersweaknesses in governance andweaknesses in governance and

. .

Disagree 3 4.5 95.5

..

They argue that so long marketThey argue that so long marketsurveillance is weak issues ofsurveillance is weak issues of

rong ydisagree

3 4.5 100.0

22

..They cite NYSE as a market thatThey cite NYSE as a market that

is well regulated and operatingis well regulated and operatingwell.well.

Total 67 100.0


23/33

The demutualized NSE's structured shouldThe demutualized NSE's structured should

Majority of the respondentsMajority of the respondentsre resentin 77.6% were inre resentin 77.6% were in

Disagree

favour of the demutualizedfavour of the demutualizedNSE being registered as aNSE being registered as apublic company limited bypublic company limited by

Agree

Neutral shares and later self listed inshares and later self listed inthe Nairobi Stock Exchange.the Nairobi Stock Exchange.

14.9% were neutral to the14.9% were neutral to the

Strongly agree

proposition; while 1.5%proposition; while 1.5%disagreed, 6.0% stronglydisagreed, 6.0% stronglydisagreeddisagreed

. . . . . .

Percentage (%) Those neutral or disagreeingThose neutral or disagreeingof view that the market is tooof view that the market is toosmall and a commercializedsmall and a commercialized

23

NSE may not be viableNSE may not be viable


24/33

Allocation of interest in the demutualised NSEAllocation of interest in the demutualised NSE

Majority of the respondentsMajority of the respondents

Above

would like the shareholding towould like the shareholding to

be widely distributed with nobe widely distributed with noone category of shareholderone category of shareholder

- -

Government 57 10 0

or n v ua s are o ersor n v ua s are o ersowning more than 25%.owning more than 25%.

This is in line with otherThis is in line with other

Investing public 24 33 10

Stockbrokers anddemutualized markets wheredemutualized markets whereeach have a cap on maximumeach have a cap on maximumshareholdingshareholding

investment advisors

NSE management and

Most respondents argue thatMost respondents argue thatdue to the monopolisticdue to the monopolisticnature of the NSE, control bynature of the NSE, control by

employees

Listed com anies 63 0 4

24

an n v ua or ca egory wan n v ua or ca egory wbe counterproductivebe counterproductive


25/33

Allocation of the current value of NSE asAllocation of the current value of NSE as

The current value of NSE shouldThe current value of NSE shouldPercentage Cumulative

stakeholders on a 25:25:25:5stakeholders on a 25:25:25:5basis more or less adopting thebasis more or less adopting the

Frequency (%) (%)

Strongly agree 10 14.9 14.9

other intermediaries, Govt, CMDFother intermediaries, Govt, CMDFand NSE ESOP or pensionand NSE ESOP or pension

scheme (rewardin for theirscheme (rewardin for their

Agree 31 46.3 61.2

Neutral 9 13.4 74.6contribution of the current valuecontribution of the current valuethrough bonus after valuation ofthrough bonus after valuation ofthe NSE. an additional 20% will bethe NSE. an additional 20% will be

Disagree 9 13.4 88.0

Strongly

given to CMDF for sale togiven to CMDF for sale toinvesting public at a future date.investing public at a future date.

61.2% were in favour or neutral61.2% were in favour or neutral

disagree 8 12.0 100.0

25

which 25.4% disagreed.which 25.4% disagreed.


26/33

Corporate governance structure of the demutualizedNSE should be in line with CMA guidelines and bestCorporate governance structure of the demutualizedNSE should be in line with CMA guidelines and best

A 97% majority of theA 97% majority of therespondents agree that therespondents agree that theNeutral

Stron l a reeappo n men , s ze,appo n men , s ze,

composition, appointmentcomposition, appointmentand operation of the Board ofand operation of the Board of

Agree

Neutral

should follow the CMAshould follow the CMAguidelines and internationalguidelines and international

Agree

39%

,,respondent were neutral.respondent were neutral.

Most respondents commentedMost respondents commented

rong y agree

58%

the CMA corporatethe CMA corporategovernance guidelines. Thisgovernance guidelines. Thisshould be extended toshould be extended to

26

brokers and all other marketbrokers and all other market

intermediaries to bring theintermediaries to bring therequired market disciplinerequired market discipline


27/33

Regulation and control of the demutualisedRegulation and control of the demutualised

In the world over, there is an ongoing debate as to whetherIn the world over, there is an ongoing debate as to whetherdemutualized exchanges should also act as the capital markets selfdemutualized exchanges should also act as the capital markets self

regulating organization (SRO) as part of its core activities. 77.6%regulating organization (SRO) as part of its core activities. 77.6%were in favour or neutral.were in favour or neutral.

Disputes between the demutualized company and the parties itDisputes between the demutualized company and the parties itregulates, that are not resolved by mutual agreement, should beregulates, that are not resolved by mutual agreement, should be

referred to the Regulator for resolution to avoid conflicts of interest.referred to the Regulator for resolution to avoid conflicts of interest.88.1% of the respondents were in favour.88.1% of the respondents were in favour.

demutualized company should itself be regulated by the Securitiesdemutualized company should itself be regulated by the SecuritiesMarket's Regulator through an amendment of the securities lawsMarket's Regulator through an amendment of the securities laws

and issuance of guidelines, in order to ensure that the company'sand issuance of guidelines, in order to ensure that the company'scommercial activities do not override public interest. In particularcommercial activities do not override public interest. In particularregulation fees should be varied after sanction by the regulator.regulation fees should be varied after sanction by the regulator.

27

. o e respon en s were n avour. o e respon en s were n avour


28/33

Conclusions from the studyConclusions from the study

Majority of the respondents are in favour ofMajority of the respondents are in favour of

demutualization to address structure weaknessesdemutualization to address structure weaknesses

There were major concerns over the capabilities of theThere were major concerns over the capabilities of theNSE in identifying and managing conflict of interestNSE in identifying and managing conflict of interest

There is need to adopt best practice corporateThere is need to adopt best practice corporate

governance standards by all the market playersgovernance standards by all the market playersThere is need to separate membership fromThere is need to separate membership from

shareholdingshareholding brokers do not need to be shareholdersbrokers do not need to be shareholders

o e a oca e seao e a oca e seaThe demutalized NSE should be a company listed inThe demutalized NSE should be a company listed in

28


29/33

considerations and process forconsiderations and process foremu ua z ng eemu ua z ng e

29


30/33

Key considerations in demutualizing the NSE-

identif in & mana in conflict of interest

Key considerations in demutualizing the NSE-

identif in & mana in conflict of interest

Background to ConflictsBackground to ConflictsSelf Listing of the NSE CompanySelf Listing of the NSE Company

Regulation of Other ListingsRegulation of Other Listings

Supervision of intermediariesSupervision of intermediariesSet standards for disciplinary and dispute resolutionSet standards for disciplinary and dispute resolution

Profit Motive versus Supervisory FunctionProfit Motive versus Supervisory Function

Set standard for the commercial & supervisorySet standard for the commercial & supervisoryoperationsoperations

30


31/33

The process for demutualizing the NSEThe process for demutualizing the NSE

Obtaining members approvalObtaining members approval through special resolution to change thethrough special resolution to change thecompanies liability clausecompanies liability clause

Mechanism for conversionMechanism for conversion

Changes to the regulatory frameworkChanges to the regulatory framework

Stand alone law on demutualization preferable. However, it may not be easy to passStand alone law on demutualization preferable. However, it may not be easy to passthrough parliamentthrough parliament

,,self listing, allocation of value of NSE, corporate Governance and supervision.self listing, allocation of value of NSE, corporate Governance and supervision.

Demutualization processDemutualization process

Vest the assets & liabilities of the current NSE to the demutualised NSEVest the assets & liabilities of the current NSE to the demutualised NSE

Determine the share structureDetermine the share structure

Change memorandum and ArticlesChange memorandum and Articles

Allocate value of the demutualised NSEAllocate value of the demutualised NSE

Establish and implement corporate governance structureEstablish and implement corporate governance structure

Develop financial management policies including dividends policyDevelop financial management policies including dividends policy

Establish employee policies and benefits schemesEstablish employee policies and benefits schemes

31

Amend the trading and other rules to reflect the new corporate structure of NSEAmend the trading and other rules to reflect the new corporate structure of NSE


32/33

The process for demutualizing the NSEThe process for demutualizing the NSE

Memorandum of Understandin between NSE and theMemorandum of Understandin between NSE and theCMACMA

The MoU cover the relationship between theThe MoU cover the relationship between the

and surveillance of NSE once it lists.and surveillance of NSE once it lists.

Demutualization resultsDemutualization resultsthose allocated shares before the IPO should be free tothose allocated shares before the IPO should be free totrade the shares over the countertrade the shares over the counter

NSE should have the ob ective of self listin in theNSE should have the ob ective of self listin in the

medium termmedium termCMDF should offer 20% of the shares of NSE to theCMDF should offer 20% of the shares of NSE to the

32


33/33

resen er s con ac e a sresen er s con ac e a s

John KiruthiJohn Kiruthi

ar ner, nanc a v soryar ner, nanc a v sory

ServicesServices

+254 (20) 2806000+254 (20) 2806000

. . .. . .

www.kpmg.comwww.kpmg.comCopyrights and Disclaimers may vary between applications. Please consult the GB&RC MicroWeb forspecific policies. http://www.gbmc.kworld.kpmg.com/BRC/resource/default.asp?getnode=339

Please delete this message prior to printing or presenting

33

The information contained herein is of a general nature and is not intended to address thecircumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that suchinformation is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriateprofessional advice after a thorough examination of the particular situation.

KPMG KPMG I S A P

I

nse demutualization study - stakeholders' workshop 1 (2) [compatibility mode]

Documents