The full demutualization of the exchange to a company called BSE Limited represented a historic milestone for Botswana and the capital market as a whole. Upon reflection, this has been a fairly shorter process, and one that was characterized by diplomacy and a concerted mission by the management of the exchange, the members of the exchange and Government of Botswana to modernize the domestic capital market. It is perhaps important to note that it happened at the time that the exchange was one-year shy of its 30 years of existence. This evolution elevated the position of the BSE in the African continent, as just a few of the 28 members of the African Securities Exchanges Association (ASEA) servicing 32 countries in Africa, have demutualized whilst just 4 have proceeded to self-list.
Arguably, the milestone was worth undertaking looking at the various facets of the organisation itself and the need to promote the competitiveness of the exchange in the face of global competition and its internationalization strategy.
The BSE was converted to a Government Parastatal through an Act of Parliament in 1994, having operated as an informal share market. In the earlier years, the BSE was mainly funded by Brokers through the purchase of Proprietary Rights from time to time. In subsequent years, Government started funding the exchange through a subvention primarily financing the capital projects of the exchange and its market development activities. This investment gradually translated into improved performance of the market which positively impacted the performance of the organisation. In 2012, the exchange moved from negative profitability position and has been generating profits each year since then.
Traditionally, stock exchanges are viewed as institutions for public good and clearly, the BSE, being a Government Parastatal (statutory body, member exchange) was seen as a national strategic asset that operates for the broader and more inclusive benefits of all Batswana. This perception was expressed in the various activities that the exchange has undertaken, which were largely undertaken to promote the reach of the exchange, the inclusion of all in the stock market and without due priority to lament on the cost or expect a return on investment.
A certain scholar, Rydzewska (2014), contests that as a public good an exchange exists to provide three basic functions to the public. These are; (a) allocation – stock exchanges are a platform on which limited capital is allocated to worthy investments; (b) valuation – stock exchanges assist in the price discovery of the listed securities and this is achieved by ensuring transparency and nurturing liquidity in the market; and (c) control – stock exchanges are also tasked with ascertaining that shareholders have meaningful control of their companies by protecting and upholding the rights of the minority shareholders.
These three functions ought to be equally pursued by the exchanges, because if there is inefficiency in one function there will be market imbalances. An analogy would be an instance where there is poor disclosure by issuers (because of lax regulation by the exchange) which leads to inaccurate market pricing, which in turn leads to inefficient allocation of resources on the market. Such has the risk of distorting rewards in the market and further threaten the stability of the market.
In relation to the foregoing, a transition from a Parastatal to a fully demutualized exchange operating as a Company or a Corporate poses one fundamental challenge in that the exchange has to reconcile being responsible for providing a public good with maximizing profit for its shareholders. The primary sources of income for exchanges are listings and annual sustaining fees as well as trading fees. If the exchange is to impose the burden of responsibilities and obligations on its issuers in favour of protecting the investors, it may crowd out the issuers and therefore lose out on the listings and annual sustaining fees, and thereby fail to maximize shareholder return. On the flip side, there is a possibility that the exchange might relax its regulation so as to attract and keep issuers for their fees, much to the detriment of the investors.
As such, it is important that demutualization efforts are preceded by bolstering and adequately capitalizing the supervision of the capital markets. Most markets have set up standalone public agencies, regulatory authorities and securities exchange commissions that regulate the capital markets. In the Botswana market, the Non-Bank Financial Institutions Regulatory Authority (NBFIRA), being the regulator of BSE Limited, with the NBFIRA Act is well equipped to accommodate this regulatory conundrum of ensuring adequate supervision of a stock exchange pursuing for-profit objectives whilst balancing the protection of investors and ensuring adequate compliance by listed entities.
As a way of improving the financial sufficiency of exchanges and cushion the heavy reliance on listing fees, annual sustaining fees and trading fees, some stock exchanges have sought to increase revenues by expanding their product offerings to include post-trade services as well as information and data services. This has helped to diversify exchange revenue from the main sources.
The move towards corporatisation of the BSE by way of demutualization has been well thought out in the manner in which the exchange has gradually been behaving like a corporate for this eventuality. The exchange has successfully balanced the public interests and profit motive for some time. The BSE has over the years been embarking on initiatives to diversify its revenue streams, whilst putting in place robust programmes to equally rationalise expenditure. In 2014, the BSE signed several data vending agreements with international data vendors. Besides promoting the visibility of the BSE and enhancing the reach of market statistics, these have generated revenue for the exchange. This area represents an immense potential for the BSE, which owns the Central Securities Depository Botswana (CSDB). The CSDB also functions as a data repository with respect to listed and unlisted instruments and can offer a broad range of cash generating services at its maximum capacity. Undoubtedly, pre and post-trade data services represent a growing income avenue for the exchange.
Notably, there has been modernization also in the manner in which the exchange has undertaken its market development initiatives. Until 2016, the BSE would undertake public roadshows across various places in Botswana primarily in various public arenas and these would be characterized by entertainment to pull the crowd. This was a necessary mode of execution given the low levels of awareness at the time, the myths and misconceptions about the stock market and the low retail investor’s participation in the stock market. As the financial literary improved over the years, along with retail participation from as low as 3 percent to 15 percent, the BSE remodelled this approach to be represented by highly targeted Open Days, still open to the general public for free and also introduced targeted annual listings and investment conference to cultivate the supply side of the market. As an institution moving towards corporatization, the remodelling of these highlighted activities was inevitable as, as a corporate, the focus will be on striking an optimal balance between attaining shareholder expectations without compromising the broader reach and inclusion of everyone in the stock market, more so that Government remains the majority shareholder in BSE Limited.
All these aspirations of becoming a competitive corporate and a world-class securities exchange are enshrined in the strategic plan which spans 2017 to 2021. Evidently, the design of the strategic plan had foresight to the corporatization of the exchange. The strategies are highly cost and revenue conscious, there is greater indication of product and services diversification, a shift towards optimising the technology infrastructure, commitment towards building a conducive regulatory environment, human capital uplifting and traction towards previously unchartered territories such as the derivatives market. The BSE Limited, however, will refine its 2017 to 2021 Strategic Plan to capture post-demutualization initiatives.
*The fourth article will cover “Self Listing – The BSE Limited Perspective”.