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Demutualization of Stock Exchanges
Demutualization is the process of converting a member-owned organization into a shareholder-owned company. In the context of stock exchanges, demutualization refers to the conversion of a member-owned exchange into a shareholder-owned exchange.
Prior to demutualization, stock exchanges were typically owned and managed by their members, who were mostly brokers and dealers. However, with the growth of electronic trading and increased competition, there was a need to modernize and professionalize the management of exchanges. Demutualization was seen as a way to achieve this.
Demutualization involves the following steps:
Conversion of membership rights into shares: Members of the exchange are given shares in the newly created shareholder-owned company in proportion to their membership rights.
Listing of shares: The shares of the new company are listed on the stock exchange, allowing public trading.
Separation of ownership and management: The ownership and management of the exchange are separated, with the management being run by a board of directors and professional managers.
Implementation of corporate governance standards: The new company is required to adhere to corporate governance standards, including transparency, accountability, and shareholder rights.
Demutualization has several benefits, such as:
Improved governance and management: Demutualization allows for professional management and governance of the exchange, which can help improve efficiency and competitiveness.
Access to capital: By listing on the stock exchange, the new company can raise capital to fund its growth and development.
Greater transparency: Demutualization can improve transparency by requiring the new company to adhere to corporate governance standards and provide greater disclosure to shareholders.
Increased investor participation: Demutualization can increase investor participation by allowing for public trading of the exchange’s shares.
In India, the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) underwent demutualization in 2012 and 2005, respectively.
Demutualization refers to the legal structure of an exchange whereby the ownership, the management and the trading rights at the exchange are segregated from one another.
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