Demutualization:The process by which a mutual company becomes apublicly-traded company. A mutual company is a company owned by its members orusers for the benefit of those members or users. In demutualization, themembers give up their rights and receive shares in the company in return, whichthe (now former) members may then sell. Demutualization happens most often whena stock exchange owned by its members goes public.Moreover, Demutualization is the process by which acustomer-owned mutual organization (mutual) or cooperative changes legalstructure to form a joint stock company.

Historically stock exchanges startedas a mutually governed, self-regulated structures where profit was not a verystrong motive. The stock exchanges were authorized to promulgate by-laws togovern their functioning. Shareholding structure before merger:PSX waspreviously operating as a non-profit organization with mutualized structurewherein its Members had trading as well as ownership rights. This structureinherently created conflict of interest and perceived to jeopardize theinvestors’ interest. Therefore, the Stock Exchanges (Corporatization,Demutualization & Integration) Act, 2012 (“Demutualization Act”)was promulgated by the Government.

Management structure before merger:There were physical locations with trading floors.The stock exchanges had a mutually dependent, co-operative structure. Howeverwith technological innovation came electronic trading system.

The concept offloor trading no longer held ground, hence the physical presence of the traderwas no longer important, which in turn meant that the cost of inductingadditional member fell drastically, reducing the overall trading cost. Themembership fee did not have much of significance. This in turn reduced theimportance of mutual dependence andcooperation. The outcome of this was demutualization.

·         Board ofDirectors ·         InternalAudit and Company Secretary·         4Managing Directors ? Head of Training Institute and Human Resource·         Traininghouse, library, human resource and marketing department ·         ChiefOperating Officerv Marketing surveillance v Exposure and risk management/Clearing house v Head of legal and member affairs v Administrations/building maintenance and companyaffairs.  ·         ChiefFinancial Officer·         Accountsand Finance ·         Chief ITOfficerShareholding structure after merger:As per theplan imagined under the Act, the whole paid-up capital of the Exchanges asworked out after the revaluation of benefits and liabilities has been similarlyallocated to initial shareholders who were beforehand the individuals from theExchanges. These underlying investors can hold upto 40% offers as apportionedto them while the 60% stake has been obligatorily held by the Exchange.According to the arrangements of the Act and Regulations encircled there-under,upto 40% of these saved offers might be dispensed to a strategic investor andfinancial institutions while the staying 20% offers should be assigned to theoverall population through. The returns to be gotten from such divestment areto be dispensed among 121 investors similarly. As gave under theDemutualization Act, now Members have stopped to be Members of PSX and theyhave been issued Trading Right Entitlement Certificates (“TRECs”) andPSX’s offers, accordingly isolating exchanging rights from possession rights.Though TRECs speak to exchanging rights, PSX shares speak to proprietorship.Presently, TREC holders require not be an investor of PSX nor a PSX investor isrequired to be TREC holder of PSX.

Management aftermerger:Upon corporatization anddemutualization, the Board of Directors of the Exchange was supplanted by theFirst Directors containing eleven individuals out of which four were designatedby the Exchange speaking to TRE authentication holders enthusiasm for aninterval period till decision of Directors inside thirty days from the date ofre-enlistment of the Exchange while six free executives were selected by SECP.The MD is an ex-officio individual from each Board of the Exchange. The Boardof First Directors chose to lead race of Directors in regard of four seats.

Inthe Extraordinary General Meetings (EGMs) investors of the Exchanges chose fourDirectors for a time of three years. The chosen people of SECP on the Board ofthe Exchange should proceed till the time the agents of investors includingoverall population after divestment of 60% shareholding are so chosen orco-selected. As per the plan of demutualization, the agents of TRE testamentholders on the Board of the Exchange can’t surpass four whenever and theChairman of the Board should dependably be a man who is neither a TREdeclaration holder nor their associated individual as far as the arrangementscontained in the Act.Board of Directors – 13 Members ·        Board Committees v Nomination Committee v Regulatory Affairs Committee v Audit Committee v Human Resource and Remuneration Committee ·        Company Secretary ·        Acting Chief Regulatory Officer ·        Auditors·        Legal Advisors ·        Bankers·        Associate CompanieMotiveThere are two main forces that drove (KSE, LSE andISE) to demutualize: (1) Increased global competition and(2) Advances in technology.

Benefit:Let’s take the scenario in which the KSE, the LSE,and the ISE merge into a single exchange that is a for-profit company listed onitself. In this scenario, issuers of listed securities had seven majoradvantages from integration and demutualization1.     The monetary cost of listing has reduced.

Of the total 670 listedcompanies, four out of five are listed at more than one exchange and one out ofthree is listed at all three exchanges. These listed companies have to paylisting fees to each exchange separately. Once there is only one exchange, onlyone fee would have to be paid.2.     The managerial cost of time and effort spent in compliance with listingregulations has reduced.

Companies that are listed at more than one exchangehave to comply with the regulations of each exchange.3.     Trading volumes has increased because all the trading would happen atone exchange rather than three exchanges. Since exchanges earn most of theirrevenues from trading volumes.4.     It would be under constant pressure to be a role model for others.

Thiswould make it more realistic in devising and implementing regulations forlisted companies, such as the Code of Corporate Governance.5.     Due to its greater economic and strategic significance, the exchange hasbeen able to lobby with the Government for the common issues facing listedcompanies. For instance, the exchange may effectively seek concessions for thelisted companies, such as lower tax rates on corporate income and dividends.6.

     There has been a strong commercial incentive for the exchange to seeksuch concessions because the more the listed companies, the greater would bethe listing revenue and trading fees for the exchange.7.     Listing on a high profile and closely watched exchange has carried anelement of prestige and helped the listed companies in their overall marketingefforts. By following better governance practices, such as a high level ofon-going disclosure, listed companies has been able to get better terms fromlenders and other business partners than similar unlisted companies.


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