A Brief Note On Demutualization

Submitted By ashikeelahi
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Demutualization is the current trend among stock exchanges all over the world. It is the process of converting an organization from a mutual entity to a shareholder owned corporate body. Traditionally, stock exchanges operated as club-like mutual organizations where traders/ brokers were the owners of the exchange as well as recipients of its services. Many stock exchanges operated on a not- for-profit basis; excess income was not distributed among the members as profit. The members were the owners of the exchange and also its customers. This is a distinguishing feature of traditional exchanges. On the other hand, in a profit making corporate body, the owners, decision makes and customers are three separate groups. By demutualization, an exchange’s mutual ownership structure is changed to a share ownership structure, therefore segregating ownership, management and functionality. The first stock exchange to demutualize was the Stockholm stock exchange in 1993. Today, all major stock exchanges around the world such as exchanges in India, Malaysia, Hong Kong, Singapore, Japan, Germany, Australia, the USA, the UK etc are operating as demutualized exchanges. This significant change in the business model of stock exchanges in the developed countries has sometimes been attributed to growing market competition and integration, globalization induced by cross- border listing, portfolio flows and migration of trading orders to overseas markets and concern for investors’ interests. Growing competitive pressure has sometimes resulted in restructuring, mergers and alliances for greater market reach, maximization of profit through economics of scale and accessibility. The Chicago Mercantile Exchange, Singapore stock exchange and others have formed global alliances with participants from all time zones, thereby creating around the clock trading facilities. However, the motivation for demutualization between developed and emerging markets seem to be quite different – the later being regulatory driven. In our country, demutualization of both the exchanges is at the centre of the current reform initiatives taken by the government surrounding the capital market. In line with the government’s agenda, both the stock exchanges have made significant progress in this respect.
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