THE DEMUTUALIZATION OF THE BOTSWANA STOCK EXCHANGE

History of Botswana Stock Exchange Limited

THAPELO TSHEOLE
CHIEF EXECUTIVE OFFICER
BOTSWANA STOCK EXCHANGE

Orange

The modern day Botswana Stock Exchange Limited (BSEL) traces its origins to the Botswana Share Market (BSM) that was established in 1989. Back then there was only one stock broker (Stockbrokers Botswana) and it created the market by matching orders from the public on the shares of the then five listed companies. The buoyancy of Botswana’s economy led to more companies and more stock brokers coming to the market and ultimately creation of the BSE in 1994 through an Act of Parliament.
Following the establishment of the BSE as a stock exchange through an Act of Parliament of 1994, which resulted in the BSE opening for trading in 1995, the exchange was owned by its members (stock brokers) through ownership of Proprietary Rights as well as the Government of Botswana. Proprietary Rights were defined in the BSE Act “as a share in the assets of the Exchange acquired for the purposes of registering as a member of the exchange in order to trade on the exchange”. Historically, Government has provided majority of the financing targeted at developing the BSE infrastructure and undertaking market development initiatives, and jointly, Government and brokers have played a meaningful role of developing various facets of the BSE and the market as a whole. This includes establishing a favourable regulatory environment, driving marketing efforts and investor awareness, among others.
Commencement of the BSE’s Demutualization Process
On 1 December 2015, the BSE (Transition) Act, No. 2 of 2015 came into operation to commence the process of conversion of the BSE from a mutual entity to a public company limited by shares under the Companies Act, a process known as demutualization. The BSE Transition Act was primarily aimed at governing this process by outlining the details of conduct of the BSE whilst it is undergoing conversion, following conversion, and defining the powers of the relevant stakeholders overseeing the transition of the BSE during this period, being the Minister in the Ministry of Finance and Economic Development. It is worth noting that although BSE was regarded as a mutual entity, it was by and large a parastatal.
The Main Committee of the BSE, comprising of broker representatives and Government representatives, whose responsibility was to oversee the affairs of the BSE played a strategic role in the commencement of the demutualization. As the BSE would become a company, the BSE Act would become repealed effective the date of conversion, and in its place would be the Companies Act. The Companies Act required the promulgation of the Constitution of the BSEL as a governing document of the Exchange with respect to governance issues.
Demutualization of Other Stock Exchanges
Generally, the pace of exchange demutualization has been rapid in developed markets. Research indicates that in the fifteen years since the first demutualization in the world took place in 1993, only 21 exchanges in developed markets have demutualized. This number represents almost 40 percent of the membership of the World Federation of Exchanges (WFE). In contrast, the pace of demutualization in emerging markets has been relatively slower. A report published by the International Organisation of Securities Commissions (IOSCO) in 2014 showed that only 5 jurisdictions out of a total of 76 emerging market jurisdictions had completed demutualization.
The foregoing demonstrates the difficulty with which this process is accomplished given the diverse interests of the parties involved. In Africa, as at June 2018 only 6 stock exchanges amongst the 28 members of the African Securities Exchanges Association (ASEA) were demutualized. BSE became the 7th.
Valuation of the BSE
Some of the heated issues that delay demutualization include the allocation of shareholding in the new company by way of converting the Proprietary Rights (ownership of the brokers) and the capital injection by Government into shares on the company. By and large, the BSE has operated with just four members for a long time, each having a certain number of Proprietary Rights amounting to various amounts. Government has financially supported the Exchange for many years by way of a subvention, majority of which has gone towards the development of the BSE’s technology infrastructure and initiatives around market development. For purposes of demutualisation these investments by both stock brokers and the Government had to be converted into shares in the BSEL.
Following international best practise, the Main Committee of the BSE appointed an independent consultant in 2017 to determine the value of the BSE and attribute shareholding of the BSE between the brokers and Government, and among the brokers as individual shareholders.
Determining the Allocation of the BSE Limited’ Shareholding
The Transition Act, provides that “the shareholding of the Company shall be open to Government, securities brokers, employees of the Exchange and members of the public…”. This formed the basis for apportioning the share capital of the BSE. However, an independent valuation by an independent consultant was to provide the appropriate, independent and objective basis for such allocation and subsequent determination by the Minister of Finance and Economic Development.
The exercise of determining the share capital of the BSE, the value of the BSE and the attribution of shareholding in the BSE was completed in November 2017, by a consultant appointed through an open international tender which was impressively contested for. This was an impressively shorter period of time from the commencement of the Transition Act, which was just under 24 months.
As per the provisions of the Transition Act, the Minister had the power to determine the shareholding of the BSEL, and in this instance the independent valuation and share attribution report merely provided guidance, anchored on fundamentals, independence and objectivity, to this crucial decision. Perhaps, owing to the meticulousness of the report, the Minister approved the shareholding of the Exchange as presented in the report, paving a way for each of the four brokers to then take note of their individual shareholding on the basis of the number of Proprietary Rights held by each. This approval by the Minister signalled the commencement of the conversion of the stock exchange by way of registration of the company by Companies and Intellectual Property Authority (CIPA).
On 2 August 2018, CIPA completed the registration of the stock exchange as a public company limited by shares under and in accordance with the Companies Act. The date will go into the memoires of history as the date of full demutualization of the exchange to a company called Botswana Stock Exchange Limited (BSEL). In line with Section 12 of the Transition Act, the BSE Act has been repealed.
THE THIRD ARTICLE WILL COVER “FROM BSE THE PARASTAL TO BSE LIMITED THE COMPANY”.