By:
Mohd. Zamre Bin
Mohd. Zahir
Master in Laws (LL.M), UiTM
2012
The
author confirms that the works submitted is his own and that appropriate credit
has been given where reference has been made to the work of others.
Demutualisation is the process
by which a customer-ownedmutual organization (mutual) or co-operative
changes legal form to a joint stock company.[1]
It is sometimes called stocking or privatization. As part of the demutualization process, members
of a mutual usually receive a ‘windfall’ payout, in the form of shares in the
successor company, a cash payment, or a mixture of both. Mutualisation is the
opposite process, wherein a shareholder-owned company is converted into a
mutual organization, typically through takeover by an existing mutual
organization. Furthermore, re-mutualization depicts the process of aligning or
refreshing the interest and objectives of the members of the mutual society.
The mutual traditionally raises
capital from its customer members in order to provide services to them (for
example building societies, where members' savings enable the provision of
mortgages to members). It redistributes some profits to its members. By
contrast a joint stock company raises capital from its shareholders and other
financial sources in order to provide services to its customers, with profits
or assets distributed to equity or debt investors. In a mutual organization,
therefore, the legal roles of customer and owner are united in one form ("members"),
whereas in the joint stock company the roles are distinct. This allows a
broader capital base if the customers cannot or will not provide sufficient
financing to the organization. However, a joint stock company must also try to
maximize the return for its owners instead of only maximizing the return and
customer services to its customers. Shelagh Heffernan
(2003) contends that this can lead to a decline in customer service to the
extent that customers', management's and shareholders' interests diverge.[2]
In
general, the demutualization of the exchanges has been observed to offer a wide
range of advantages.[3]
It allows exchanges to abolish the members or traders’ monopoly over
intermediation and be responsive to the needs of its issuers and investors by
allowing them direct and cost effective access to exchange.[4]
For-profit motive of exchanges allows it to generate the desired levels of
investments, while offering appropriate returns to owners. Provided the
incentive structure of demutualized exchange is developed effectively,
demutualization lends itself to improved governance.[5]
This can be achieved through a shift in the ownership of the exchange from
member brokers and dealers to a wider group of investors with adequate
safeguards to prevent excessive concentration of ownership and power, appointment
of a professional board and management and appropriate investments in automated
trading to offer competitive services.[6]
[1]Oxford, “Demutualisation”, (Oxford English Dictionary 2004), online,
available at http://dictionary.oed.com/cgi/entry/00328152?query_type=word&queryword=demutualize&first=1&max_to_show=10&single=1&sort_type=alpha accessed on 10th December 2011.
[2]Shelagh
Heffernan, "The Effect of UK Building Society Conversion on
Pricing Behaviour (March 2003)" (PDF). (Faculty of Finance,
CASS Business School, City of London 2003) http://www.cass.city.ac.uk/facfin/papers/WP2003/Mutuals-WP.pdf accessed on 10th December 2011.
[3]Shamshad Akhtar,
“Demutualisation of Asian Stock Exchanges-Critical Issues and Challenges”
(2002), p. 29.
[4]Ibid.
[5]Ibid.
[6]Ibid.
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