Demutualization of stock exchanges meaning
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The demutualization of stock exchanges is a recent new phenomenon in the economic world with a history of approximately 20 years, meaning that till the early s, most of world stock exchanges were non-profit, mutual organizations with monopoly power, owned by their members.
In , the Stockholm Stock Exchange became the first exchange to demutualize. Demutualization is the process through which a member-owned company becomes shareholder- owned; frequently this is a step toward the initial public offering IPO of a company. Insurance companies often have the word "mutual" in their name, when they are mutually owned by their policy holders as a group.
Generally, policy holders are offered either shares or money in exchange for their ownership rights.
Because shares can be traded or sold - in contrast to ownership rights, which can -not - demutualization increases the possibility of profit for those involved, and tends also to benefit the economy. Worldwide, stock exchanges have offered another striking example of the trend towards demutualization, as the London Stock Exchange LSE , New York Stock Exchange NYSE , Toronto Stock Exchange TSE and most other exchanges across the globe have either recently converted, are currently in the process, or are considering demutualization.
Demutualised exchange different from a mutual exchange in following way: In a mutual exchange, the three functions of ownership, management and trading are concentrated into a single Group.
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Here, the broker members of the exchange are both the owners and the traders on the exchange and they further manage the exchange as well. This at times can lead to conflicts of interest in decision making. A demutualised exchange, on the other hand, has all these three functions clearly segregated, i. As stated earlier, demutualization is the process of converting a non-profit, mutually owned organization to a for-profit, investor-owned corporation.
The members of mutually owned exchanges. Trading rights and ownership can be separated;shareholders provide capital to the exchange and receive profits, but they need not conduct trading on the exchange. And as discussed later, although demutualized exchanges will continue to provide. After demutualization, brokers would not have percent ownership because the general public and strategic investors would also now be able to obtain major shareholding of the stock exchanges, which would be turned into companies.
The status of the stock exchanges would thus be changed from limited by guarantee to the public limited company that will be listed on the stock e xchanges.
Compo sition of the board of directors will also be changed, bringing a balance among the interests of different stakeholders in the corporate and governance structure of a stock exchange. Conflict of interest will also end in demutualized exchanges as the management, board and shareholders will become independent.
Disadvantages of Demutualizati on: A large com pany can eas ily spend tens or even hundreds of millions of dollars on the professional services needed to go through the process. One costly task is figuring o ut how to allocate the company's surplus among the individual policyhol ders. Ongoing administration is also ex pensive, because the company is likely to have many small shareholders.
It can take 18 to 24 months from start to finish. During this time, management's attention is distracted from other operational duties. It may lead to litigation or at least t o perceptions of unfairness.
Policyholders who receive cash or policy enhancements may object to a valuation that is based on a below-book-value IPO price. Litigation can be costly and time consuming, and it can also damage a company's reputation. It may h urt the performance of existing polic ies, through lo wer dividends, interest rates, and other factors.
Although every demutualization plan tries to address this risk, there is no assurance that the solutions will work. Shareholders want their stock to perform well, and policyholders want their policies to perform well, and that inherent conflict can't be avoided.
Based on unconfirmed anecdotes, it appears that the risk o f dividend cuts is much greater for small policies. It may hurt a company's financial strength, because managers may take greater risks to improve profitability.
Some companies may find that the cultural leap from mutual to stock was too sudden, like jumping into a pool before you have learned how to swim. The mistakes they make as they try to build a competitive organization may be costly. Early missteps may also depress t he company's stock and create long-term credibility problems with the investment community.
It usually forces management to issue stock to policyholde rs even if c onditions are. About About Scribd Press Our blog Join our team! Contact Us Join today Invite Friends Gifts. Legal Terms Privacy Copyright. Sign up to vote on this title.
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Demutualization - Definition of Demutualization - QFINANCE
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