THAPELO TSHEOLE
CHIEF EXECUTIVE OFFICER
BOTSWANA STOCK EXCHANGE LIMITED
History of Self-Listing
More often than not, demutualization is just an interim step for many exchanges in their evolution. Post-demutualization, the exchange can evolve further by listing on its own platform, and this is referred to as self-listing. Globally, a number of exchanges progressed to self-list after they demutualized as a way of further enhancing their governance and competitiveness given that a listing expands the shareholder base and enables access to deeper pools of capital.
Early examples of exchanges that underwent a self-listing are the Stockholm Stock Exchange AB in Sweden, Australian Stock Exchange, Hong Kong Stock Exchange and Singapore Stock Exchange. As time progressed Deutsche Bourse, London Stock Exchange, Euronext and NASDAQ followed suit.
The same phenomenon has been experienced in Africa. For example, the Johannesburg Stock Exchange was the first stock exchange in Africa to self-list in 2006 following its demutualization in 2005. The Nairobi Securities Exchange self-listed in 2014 in the same year that it demutualized. The most recent self-listing in Africa was by the Dar Es Salaam Stock Exchange in 2016, a year after its demutualization in 2015. Notwithstanding, few of the demutualized exchanges in Africa, such as Zimbabwe Stock Exchange, Stock Exchange of Mauritius, and Bourse de Casablanca remain unlisted. BSE Limited as a newly demutualized stock exchange is also unlisted. A handful, especially those that were established in recent times, such as Rwanda Stock Exchange, Trop-X (Seychelles) and Lesotho Stock Exchange were registered from the onset as companies limited by shares and have never had to experience the transition from a mutual to a demutualized stock exchange.
Perhaps, with this background, it’s worth exploring a key perspective with respect to self-listing especially that it is the only next and ultimate step in the evolution of BSE Limited. This perspective is to do with maintaining a balance between serving the regulatory functions and pursuing the corporate objectives without jeopardy to stakeholders.
Benefits of Self-Listing
Transformation of stock exchanges is undertaken primarily to revitalise their business models. Evidently, the listing of stock exchanges has transformed their business models significantly. Although demutualization is undertaken to alter the ownership of stock exchanges, in some cases significant ownership stakes were often retained by previous member firms, particularly in exchanges that were predominantly member owned from the onset. Therefore, the fundamental governance structure of exchanges was not significantly impacted in such cases. Self-listing and the subsequent dispersion and dilution of ownership of exchanges have immensely impacted the governance of stock exchanges.
A self-listing is a privatization of the exchange. Experience and empirical evidence shows that privatization brings about a broader mix of shareholders ranging from institutional investors, retail investors, listed companies, technology companies, the public at large, and in some cases foreign investors. Often, as is common practise in most government-driven privatization efforts, foreign institutions might become owners of newly privatized entities to a certain extent.
In the context of BSE Limited, demutualization has ushered the exchange into an era of corporatization. This is particularly necessary as the exchange itself is mandated to regulate corporatized institutions, being listed companies. Corporatization brings about significant expectations from the shareholders of BSE Limited. One such is the expectation that the exchange, once listed, should maximise profits and value for its shareholders.
The listing of a stock exchange strongly accentuates the business orientation of the exchange. As with any listed company, the exchange can be expected to be more value oriented, more efficient, more innovative and growth oriented and, as a result, highly motivated by short-term profit maximisation. This is because where the open ownership attracts outside investors, they will expect a return on their investment that is commensurate with the return they could earn on their investment alternatives. However, this probably will not be the case if the owners are insiders (members, issuers) with other interests in the exchange than outsiders.
BSE Limited as a Self-Regulatory Organization (SRO)
A self-listing of the exchange presents a number of conundrums and one such is to do with maintaining an optimal balance between serving its regulatory functions and pursuing its corporate objective without jeopardy to its stakeholders.
A common and widely observed practise is to delegate a demutualized stock exchange a Self-Regulatory Organization (SRO) status. An SRO is “an organization whose object is to regulate the operations of its members or of the users of its services and include the organizations that may be recognised as such”.
Under its SRO status, the exchange maintains its primary regulatory functions of developing listing requirements, enforcing compliance by listed companies with the listing requirements, facilitating listings and trading and conducting market surveillance. These may be financially demanding functions in the context of an increasingly competitive environment. However, not doing these functions can be detrimental to the reputation of the exchange and the definition of the securities market as a whole, whereas doing them may be unfavourable to the value maximisation objective of the exchange. So why does an exchange strive to maintain an optimal balance?
A number of approaches have been explored and practiced to deal with this. For example, when the Stockholm Stock Exchange (SSE) demutualized it set up an independent Disciplinary Committee to handle compliance of the SSE with its own listing requirements. Prior to this, the function had been handled by the Board of the SSE. The stock exchange law was later amended to require that all authorised exchanges organise such committees. When the Johannesburg Stock Exchange (JSE) demutualized and self-listed the JSE equities listing requirements were amended to include the establishment of the SRO Oversight Committee which was the Board Sub-Committee responsible for overseeing the issuer regulation and market regulation functions of JSE Limited. Subsequently, compliance of JSE Limited with its listings requirements was seconded to the financial market regulator, the Financial Services Board (FSB). These two examples represent some of the strategies used to work around promoting the independence and objectiveness of the exchange with respect to its regulatory function and the compliance of the exchange to its own listing requirements in order to ensure that the exchange discharges its functions in a manner that is transparent and equitable to all.
Regulating the SRO
The Non-Bank Financial Institutions Regulatory Authority (NBFIRA) regulates BSE Limited and the NBFIRA Act provides that an institution such as BSE Limited can be declared a SRO. However, if declared, the status will not absolve the exchange of its supervision by NBFIRA and NBFIRA will continue with its role of approving any rules, including the amendment of listings requirements. Section 36 of the NBFIRA Act outlines this relationship and due process by SRO in detail.
Recent developments are that NBFIRA is undertaking this assessment regarding BSE Limited being declared a SRO and will submit a recommendation to the Minister of Finance who will make this declaration. The declaration of SRO status will evolve and possibly expand when BSE Limited progresses to the next phase of its development which is a self-listing at a future point in time.
International best practice suggests that once BSE Limited is self-listed, it will continue to regulate companies and securities listed, the listings and trading platform, and NBFIRA will regulate BSE Limited with the same set of listing requirements that BSE Limited uses to regulate companies listed on its platform.