The process of automating the Ghana Stock Exchange (GSE), which is currently at a very advanced stage, is a welcome news for many industry participants. It will not only bring the Ghanaian market to be at par with some of the more advanced markets on the continent, but also enhance market liquidity, which is essential for the further development of the capital market in Ghana. It is against this background that the indication by the exchange that it is seeking the services of a consultant to draw up a business plan as part of the process of converting it into a limited liability company is a very important development. This is certainly an indication of moves to position the stock market to play a central role in the mobilisation of domestic capital for the development of the Ghanaian economy. That the exchange is seeking to become a profit-oriented entity is a departure from the traditional structure of exchanges as non-profit making organisations. Background Companies around the world are incorporated in several forms. Some are incorporated as limited liability companies with a profit objective and others as companies limited by guarantee that by their nature they do not have a profit objective. Stock exchanges are one of those companies that are incorporated without a profit objective. They are usually member-owned institutions, with the shareholders being users of their services. An entity becomes a member of a stock exchange by contributing funds to purchase a seat or contributing to the achievement of its objectives. The members of the exchange usually work together to achieve common goals and protect their collective interests. The distinguishing feature of the traditional stock exchange structure is its mutual governance model. The close identity between the ownership of the exchange and the direct use of its trading services. In effect, the owners of the mutual enterprise are also its customers. Owner/customers may share in the net gains/losses of the enterprise in proportion to their ownership interest. Decisions are made on a one-member-one-vote basis and are often made by committees of representatives of member firms. Stock exchanges have over the years performed the vital role of helping companies raise equity capital and providing a secondary market for the trading of listed securities. This dual role has provided an access to capital for companies and liquidity for investors. The GSE is incorporated as a company limited by guarantee with two groups of members. The licensed dealing members and the associate members. The licensed dealing members are those companies that act as dealers in securities on the exchange. The associate members are individuals or corporate entities that share in the mission of the exchange and have committed to contribute to the attainment of those objectives. Evolution of stock exchanges Mutually owned exchanges have served their purposes, and markets are increasingly recognising that a trading infrastructure, as well as modern corporate and governance structure, is essential to reducing transaction costs, attracting the funds of investors, and attracting new firms to raise their capital requirements. In the light of this, exchanges around the world are converting from non-profit entities to corporate entities with a profit-making objective. This is to enable the exchanges to be able to raise funds on their own to undertake those investment projects that will make them able to continuously play their role as intermediaries between owners and users of funds. This process of converting from a mutual member-owned company to a public company with a more diverse ownership is called demutualisation. Demutualisation is the process of converting a mutual member-based association or company where decisions are taken on a one-vote-per-member basis to an organisation where decisions are taken one vote per share. Demutualisation is literally the process of changing an organisation from its mutual ownership structure to a share ownership structure. The process entails first converting memberships into shares, which step may or may not be followed by a public issue of those shares. In this manner, a quasi-governmental institution transforms itself into a profit-oriented, publicly owned/traded company. This way, there is a clear distinction between ownership and the use of the services of the exchange. It has been argued that demutualisation makes sense only if it induces a change in the exchanges’ objectives. That is, if the objective changes from managing the interests of a closed member-based organisation with the central focus of providing services for the benefit, primarily of the members and keeping costs and investments limited to financing agreed by members into a company set up with the objective of maximising the wealth/value of shareholders by focusing on generating profits from servicing the demands of their customers (brokers and investors) in a competitive manner. Motivation to demutualise There are a number of motivations for exchanges to want to demutualise. One of the main reasons is to raise additional capital to expand and innovate. The increased sophistication of the capital markets requires stock exchanges to invest in technological infrastructure that will speed up the processing of orders and reducing transaction costs for investors. A mutually owned stock exchange is hardly ever able to raise capital from anyone other than its members. As such, demutualising to expand the ownership base is one way to attract funds for investment purposes. Demutualisation also fosters greater investor participation in capital markets. It is important in today’s competitive environment that exchanges become responsive to the needs of their many stakeholders - shareholders, listed companies, participating organisations, institutional and the retail investors. As such, it has been argued that separating exchange membership from trading rights may be a politically and an economically feasible way to effect such a change and resolve conflicts of interest between exchange members and between exchanges and their many stakeholders. Research conducted by the Toronto Stock Exchange indicates that demutualised exchanges affords both institutional and retail investors the opportunity to become shareholders, and as such, will have greater flexibility to accommodate the needs of institutional investors as customers and potentially as owners. Source: Daily Graphic/Prince Akpesey