ASSIGNMENT 01

Why stock markets demutualize?

The Stock Exchange (Corporatization, Demutualization and Integration) Act was passed on May
09, 2012 in Pakistan. This act was passed to provide solution to problems being faced by the
exchanges (like poor financial health and lack of listings etc.).
The legitimate structure of stock exchanges have now been changed over from a company
limited by guarantee to one limited by shares, this process is called Corporatization.
Demutualization is one approach to accomplish corporatization. Demutualization is the
demonstration of isolating the ownership privileges of exchange from its trading rights.
There are certain reasons of demutualization which are briefly explained below:
1. Generally all over the world, including Pakistan, stock markets have a shared structure
i.e. the members of exchange (brokers) had the proprietorship and trading rights. The
trading floor is only accessed by these members. On account of this, conflict of interest
arose among members as they controlled the exchange's workings making the operations
less transparent and compromising on the investors interest.

2. These mutualized exchanges focused on short term benefits and ignored the long term
interest of the market.

3. In addition, because of the shortage of resources, the stock markets did not possessed the
capacity to develop to the desires of investors, as trading was limited to only the three
exchanges with the major portion of the share heading off to Karachi Stock Exchange.

4. Member-owned old structure does not provide the flexibility as well as the capital
required to compete with reasonably competitive setting of the present world. If the cost
benefit analysis is done, the cost of setting up a mutual structure will exceed its benefits.
Because exchanges faces competition, external control in the exchange will become
extremely effective compared to the control by members.

5. Exchanges undergo demutualization to raise capital.

6. Because of the development in technology, speculators and financiers can switch markets
across the borders effortlessly. ECNs have revolutionized the way trading was performed
in the stock exchange. From buying the shares to selling them, now everything can be
done online. This has strengthen the competition among rival exchanges and has paved
way for demutualization and incorporation in various nations.

7. Stock exchanges seem to demutualize to undergo integration (mergers and acquisitions);

as they are important instruments in enhancing liquidity.
With the introduction of demutualization phenomenon, the shareholding structure of Stock
exchanges will undergo certain changes. 40% of the shares will be reserved for the previous
members of exchange. The remaining 60% will be distributed in a 40:20 ratio between strategic
investors and general public. This division will lessen the chances of ownership rights staying in
fewer hands.
BENEFITS
Today Pakistani stock markets are not limited by guarantee anymore, rather they are now limited
by shares. Because of this change, Pakistans capital market is available on an international scale
to different groups of investors. It can support strategic partnership and can guarantee innovation
and technological advancement as well.
This conversion will also help to rebuild the investors interest and participation in stock
exchanges as they will comply with globally acclaimed standards turning themselves into more
successful, directed and competent exchanges than ever.
Demutualization will also encourage a strong broker branch system which will play a part in the
liquidity of market and extending market outreach, transforming the association of dealers in to
strong financial entities.
Demutualization is a further step taken to rebuild the capital market and market foundations. It
will play a significant role in product development, market efficiency and will safeguard the
interest of the financial specialists. It will enhance the competitiveness of the stock exchanges by
strengthening the capital business segment. Hence such reforms will be implemented that will
make Pakistani Stock Exchanges conform to a high performance standard at a global competitive
level.
References:

1. Corporatization, Demutualization, Integration Act, 2012. Available from:

<http://archives.dailytimes.com.pk/business/08-May-2012/corporatisation-
demutualisation-integration-act-2012>. [29 September 2015]

2. Haider, Imtiaz 2012, Demutualization of Pakistani Stock Exchanges: The Break of New
Dawn, Business Recorder 20 December. Available from:
<http://www.brecorder.com/supplements/0:/1270439:demutualization-of-pakistani-stock-
exchanges-the-break-of-new-dawn/>. [29 September 2015]

3. Demutualization of Stock Exchange, 2012. Available from:

<http://www.brecorder.com/company-news/235/1223301/?format=pdf>.
[29 September 2015]

4. Ramos, Sofia Brito 2006, Why Do Stock Exchange Demutualize and Go Public, Swiss
France Institute Research Paper, no. 06-10. Available from:
<https://editorialexpress.com/cgin/conference/download.cgi?
db_name=pej2007&paper_id=80/>. [30 September 2015].