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8/2/2019 NSE Demutualization Study - Stakeholders' Workshop 1 (2) [Compatibility Mode]
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Financial Advisory Services
NSE Demutualization studyNSE Demutualization study
Financial Markets & Services
John KiruthuPartner, Financial Advisory Services
KPMG East Africa, Nairobi15 June 2007
John KiruthuPartner, Financial Advisory Services
KPMG East Africa, Nairobi15 June 2007
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Demutualization of the NSEDemutualization of the NSE
ect vesect ves
Assess the case for the demutualization of the NSE andAssess the case for the demutualization of the NSE and
review the implementation mechanismsreview the implementation mechanisms
Discuss the finding of the study with the stakeholdersDiscuss the finding of the study with the stakeholdersand obtain their commentsand obtain their comments
Discuss the role of the various stakeholders in theDiscuss the role of the various stakeholders in the
demutualization processdemutualization process
2
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NSE demutualization studyNSE demutualization study
Organization of the days presentationsOrganization of the days presentations
Background and introduction to the NSE & capital markets inBackground and introduction to the NSE & capital markets in
KenyaKenya
vo ut on o t e s nce to atevo ut on o t e s nce to ate
Growth of the Capital markets since 2001Growth of the Capital markets since 2001 Challenges facing the NSE and capital marketsChallenges facing the NSE and capital markets
Empirical studies on demutualization models & challengesEmpirical studies on demutualization models & challenges
Results of the NSE demutualization studyResults of the NSE demutualization study
Key considerations and the NSE demutualization processKey considerations and the NSE demutualization process
3
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Background and historicalBackground and historicalevo ut on o t e anevo ut on o t e an
markets
markets
4
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Structure and mandate of capital market inStructure and mandate of capital market in
The structure of the ca ital markets includeThe structure of the ca ital markets include
The Capital Markets AuthorityThe Capital Markets Authority
The Nairobi Stock ExchangeThe Nairobi Stock Exchange
Stock BrokersStock BrokersDealersDealers
Institutional and retail investorsInstitutional and retail investors
Listed CompaniesListed CompaniesNon listed companiesNon listed companies
5
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Mandate of the main playersMandate of the main players
Ca ital markets AuthoritCa ital markets Authorit
Established was in 1989 under the CMA ActEstablished was in 1989 under the CMA ActHas a mandate to regulate the capital market forHas a mandate to regulate the capital market for
NSENSE
Is the self re ulatin or anization for listed instrumentsIs the self re ulatin or anization for listed instruments
Draws membership from brokers, dealers etcDraws membership from brokers, dealers etc
Brokers, who are the principal members are allocatedBrokers, who are the principal members are allocated
sea s n e s oc exc ange o ea w e s esea s n e s oc exc ange o ea w e s einstruments on behalf of the investing publicinstruments on behalf of the investing public
Dealers deal on the instruments on their own accountDealers deal on the instruments on their own account
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Evolution of the NSEEvolution of the NSE
The NSE has evolved from the informal coffee shopThe NSE has evolved from the informal coffee shopmeetin s and exchan e to become the 9meetin s and exchan e to become the 9thth lar estlar est
among Africas 17 exchangesamong Africas 17 exchangesMarket capitalization in 2006 reached an all time highMarket capitalization in 2006 reached an all time higho s. ono s. on
The exchange has adopted an immobilized shareThe exchange has adopted an immobilized share
In Sept 06, the NSE adopted an ATS system on LANIn Sept 06, the NSE adopted an ATS system on LANbasis and expects to move to WAN in the next 6basis and expects to move to WAN in the next 6
monthsmonths
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This Is The Title Of The Slide (Arial 30pt Bold)This Is The Title Of The Slide (Arial 30pt Bold)
Level one is marked with a diamond bulletLevel one is marked with a diamond bullet
(Arial 24pt Bold)(Arial 24pt Bold)Level two is marked with a dash bullet (Arial 24pt)Level two is marked with a dash bullet (Arial 24pt)
Level three is marked with a round bullet (Arial 20pt)Level three is marked with a round bullet (Arial 20pt)
Level four is marked with a dash bullet (Arial 18pt)Level four is marked with a dash bullet (Arial 18pt)
Level five is marked with a chevron bullet (Arial 18pt)Level five is marked with a chevron bullet (Arial 18pt)
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Performance of the NSE since 2001Performance of the NSE since 2001
Year end December statistics
Share volume (mn) 109.2 135.8 327.7 600.7 874.2 1,453
Equities Turnover
(KShs. bn) 3.1 2.9 13.4 22.3 36.5 95
Index (points) 1355 1363 2738 2946 3973 5646
(KShs. bn) 86.1 112.3 317.5 314.2 426.5 792
T. Bonds Turnover
9
.Source: NSE fact book 2007
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Challenges facing the NSE and the CapitalChallenges facing the NSE and the Capital
Low market confidenceLow market confidence
after uchumi, Francis Thuo and end of the bull run in Feb 07after uchumi, Francis Thuo and end of the bull run in Feb 07
Perception of low standards of corporate governancePerception of low standards of corporate governance
NSE or the brokers does not publish it corporate governance reportNSE or the brokers does not publish it corporate governance report
Eliminate politics relating to election of directors is normally dogged with politicsEliminate politics relating to election of directors is normally dogged with politics
Majority of the directors are brokers and management control through appoint ofMajority of the directors are brokers and management control through appoint of
senior managementsenior management
Lack of competitiveness in the local marketLack of competitiveness in the local market
Most company seek funds from the short term money market for the long termMost company seek funds from the short term money market for the long term
needsneeds
There is no depth in the NSE product offering (derivatives, option, securitisation forThere is no depth in the NSE product offering (derivatives, option, securitisation forexample)example)
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Challenges facing the NSE and capitalChallenges facing the NSE and capital
Vulnerability to market shocksVulnerability to market shocks
Method of determining shares price may result in the Mrk cap of a counter beingMethod of determining shares price may result in the Mrk cap of a counter beingheavily affected by a small lot deal.heavily affected by a small lot deal.
ow eve o cap a mar e qu yow eve o cap a mar e qu y
Africa accounts for about 1.4% of the total capital market liquidity. NSE account forAfrica accounts for about 1.4% of the total capital market liquidity. NSE account for
about 7% of Africa liquidity and is ranked 5about 7% of Africa liquidity and is ranked 5th.th.
Slow pace of innovativeness and flexibility and limited access t capitalSlow pace of innovativeness and flexibility and limited access t capital
Deep market are constanly developing product such as securitization, derivative,Deep market are constanly developing product such as securitization, derivative,
..
been slow in developing products and have left compnies to depend on the shortbeen slow in developing products and have left compnies to depend on the short
term money marketsterm money markets
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Challenges facing the NSE and capitalChallenges facing the NSE and capital
Management responsibility on the bottom lineManagement responsibility on the bottom line
As a mutual organization NSE management have no motivation for managing the bottom line asAs a mutual organization NSE management have no motivation for managing the bottom line as
a measure for shareholder valuea measure for shareholder value
Conflict of interestConflict of interest
Broker firms also act as dealers and fund managers. There is a very strong perception of conflictBroker firms also act as dealers and fund managers. There is a very strong perception of conflict
of interest which is not mitigated by effective market surveillanceof interest which is not mitigated by effective market surveillance
Creation of strong regional stock exchangeCreation of strong regional stock exchange
Initiative to create a regional stock exchange has been slow in implementation due to sovereignInitiative to create a regional stock exchange has been slow in implementation due to sovereign
interest and lack of common legal frameworkinterest and lack of common legal framework
Entr barriers that limit com etition and entr of new brokersEntr barriers that limit com etition and entr of new brokers
There are significant entry for additional local and foreign player who would like to enter theThere are significant entry for additional local and foreign player who would like to enter the
marketmarket
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Empirical study ofEmpirical study ofemu ua za onemu ua za on
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Empirical studies on demutualization BackEmpirical studies on demutualization Back
Demutualization is the se aration of membershi ,Demutualization is the se aration of membershi ,direction and management of an exchangedirection and management of an exchange
Proponents of demutualization see it as the panaceaProponents of demutualization see it as the panacea
Studies show that since the first demutualization inStudies show that since the first demutualization in
1993 most of the members of FIBV have demutualized1993 most of the members of FIBV have demutualized..
By 2002, 21 stock exchanges had demutualisedBy 2002, 21 stock exchanges had demutualised
Demutualized stock exchan es account for a verDemutualized stock exchan es account for a versignificant portion of the worlds mkt capsignificant portion of the worlds mkt cap 52% in 200152% in 2001
Demutualization is now a trend in the worldDemutualization is now a trend in the world
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Empirical studies on demutualization Empirical studies on demutualization
Major drivers of demutualization are:Major drivers of demutualization are:
Globalization of the capital marketsGlobalization of the capital marketsCompetition especially from technology based systems such asCompetition especially from technology based systems such as
Creating a organization that is read for mergers & strategicCreating a organization that is read for mergers & strategic
alliancesalliances
Afford adoption of new technologyAfford adoption of new technology
Spread ownership risksSpread ownership risks
Adoption of the new corporate governance frameworksAdoption of the new corporate governance frameworks
Manage perception of conflict of interest more effectivelyManage perception of conflict of interest more effectively
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Empirical studies on demutualization Models
ado ted in other demutualized markets
Empirical studies on demutualization Models
ado ted in other demutualized marketsWe reviewed the LSE, ASX, NZSE, HKex, SGX. Common featuresWe reviewed the LSE, ASX, NZSE, HKex, SGX. Common features
include:include:
Demutualization is a long journeyDemutualization is a long journey
Demutualized exchange were motivated by globalization,Demutualized exchange were motivated by globalization,efficiency, innovation and flexibility with the exception of JSEefficiency, innovation and flexibility with the exception of JSE
All demutualized exchanges have maximum shareholding limitsAll demutualized exchanges have maximum shareholding limits
Most had to grapple with the management of conflict of interestMost had to grapple with the management of conflict of interest
All had set medium term goal of self listing in the exchangeAll had set medium term goal of self listing in the exchange
Malaysian model is the most suitable for our emerging marketMalaysian model is the most suitable for our emerging market
It was driven by the establishment of a stand alone law andIt was driven by the establishment of a stand alone law andamendment to the previously existing laws.amendment to the previously existing laws.
Established a Capital Market Devt FundEstablished a Capital Market Devt FundAllocated value on 30:30:30:10 ratio to Government, CMDF,Allocated value on 30:30:30:10 ratio to Government, CMDF,Brokers and remisiers (other market intermediaries)Brokers and remisiers (other market intermediaries)
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Empirical studies on demutualization Empirical studies on demutualization
IOSCO Technical Committee in 2001 identified theIOSCO Technical Committee in 2001 identified thefollowing as the major challengesfollowing as the major challenges
Conflict of interest;Conflict of interest;
The role of the exchange as a public interest enterprise,The role of the exchange as a public interest enterprise,
andandFinancial managementFinancial management
BTA, a capital markets consulting company in a researchBTA, a capital markets consulting company in a research
facing demutualized exchanges are corporate structure,facing demutualized exchanges are corporate structure,regulatory, legal issues and management vestedregulatory, legal issues and management vested
17
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Analysis of the study results andAnalysis of the study results andconc us onconc us on
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Issues of the Structure of NSEIssues of the Structure of NSE
Study focused on a tar et of individual & institutional investors,Study focused on a tar et of individual & institutional investors,
brokers, policy makers and other emerging marketsbrokers, policy makers and other emerging markets89.9% of the respondent believe that the current structure of the89.9% of the respondent believe that the current structure of the
s respons e or e corpora e governance an ow mar es respons e or e corpora e governance an ow mar e
confidenceconfidence
77.6% believe that demutualization is the wa forward to address77.6% believe that demutualization is the wa forward to address
the challenges facing the NSE.the challenges facing the NSE.
The demutualized NSE should have the medium term goal of selfThe demutualized NSE should have the medium term goal of self
st ng.st ng.PLC status is seen to be more accountable and transparent andPLC status is seen to be more accountable and transparent and
able to res ond to its stakeholders needsable to res ond to its stakeholders needs
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Research methodology and data analysisResearch methodology and data analysis
investors, fund managers, stock brokers, listedinvestors, fund managers, stock brokers, listedcompanies, policy makers and other emerging marketcompanies, policy makers and other emerging market
regulators and stock exchanges.regulators and stock exchanges.
Out of the 80, 67 respondended, an impressiveOut of the 80, 67 respondended, an impressiveresponse rate of 83%response rate of 83%
The data analysis are presented in frequency charts,The data analysis are presented in frequency charts,
bar chart and histogramsbar chart and histograms
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The current corporate structure of the NSE isresponsible for the perceived low market confidenceThe current corporate structure of the NSE isresponsible for the perceived low market confidence
Overall 89.6% of theOverall 89.6% of the
or agreed that theor agreed that themembership, majoritymembership, majority
9%1%
Stron l a ree and management control ofand management control ofthe NSE by one group ofthe NSE by one group of
stakeholders i.e. thestakeholders i.e. the27%
Agree
Neutral
stockbrokers, has createdstockbrokers, has createdgovernance weaknesses,governance weaknesses,which can negatively impactwhich can negatively impact
63% Disagree
on the flexibility andon the flexibility andinnovativeness of the capitalinnovativeness of the capitalmarket.market.
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9% were neutral, while only9% were neutral, while only
1.5% disagreed.1.5% disagreed.
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Demutualization of the NSE would solve theDemutualization of the NSE would solve the
86.6% of the respondents86.6% of the respondentsPercentage Cumulative
NSENSE13.4% were neutral, disagreed or13.4% were neutral, disagreed or
Frequency (%) (%)Strongly agree 39 58.2 58.2
Those who strongly disagreedThose who strongly disagreed
would like CMA and NSE marketwould like CMA and NSE market
Agree 19 28.4 86.6
to address market playersto address market playersweaknesses in governance andweaknesses in governance and
. .
Disagree 3 4.5 95.5
..
They argue that so long marketThey argue that so long marketsurveillance is weak issues ofsurveillance is weak issues of
rong ydisagree
3 4.5 100.0
22
..They cite NYSE as a market thatThey cite NYSE as a market that
is well regulated and operatingis well regulated and operatingwell.well.
Total 67 100.0
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The demutualized NSE's structured shouldThe demutualized NSE's structured should
Majority of the respondentsMajority of the respondentsre resentin 77.6% were inre resentin 77.6% were in
Disagree
favour of the demutualizedfavour of the demutualizedNSE being registered as aNSE being registered as apublic company limited bypublic company limited by
Agree
Neutral shares and later self listed inshares and later self listed inthe Nairobi Stock Exchange.the Nairobi Stock Exchange.
14.9% were neutral to the14.9% were neutral to the
Strongly agree
proposition; while 1.5%proposition; while 1.5%disagreed, 6.0% stronglydisagreed, 6.0% stronglydisagreeddisagreed
. . . . . .
Percentage (%) Those neutral or disagreeingThose neutral or disagreeingof view that the market is tooof view that the market is toosmall and a commercializedsmall and a commercialized
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NSE may not be viableNSE may not be viable
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Allocation of interest in the demutualised NSEAllocation of interest in the demutualised NSE
Majority of the respondentsMajority of the respondents
Above
would like the shareholding towould like the shareholding to
be widely distributed with nobe widely distributed with noone category of shareholderone category of shareholder
- -
Government 57 10 0
or n v ua s are o ersor n v ua s are o ersowning more than 25%.owning more than 25%.
This is in line with otherThis is in line with other
Investing public 24 33 10
Stockbrokers anddemutualized markets wheredemutualized markets whereeach have a cap on maximumeach have a cap on maximumshareholdingshareholding
investment advisors
NSE management and
Most respondents argue thatMost respondents argue thatdue to the monopolisticdue to the monopolisticnature of the NSE, control bynature of the NSE, control by
employees
Listed com anies 63 0 4
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an n v ua or ca egory wan n v ua or ca egory wbe counterproductivebe counterproductive
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Allocation of the current value of NSE asAllocation of the current value of NSE as
The current value of NSE shouldThe current value of NSE shouldPercentage Cumulative
stakeholders on a 25:25:25:5stakeholders on a 25:25:25:5basis more or less adopting thebasis more or less adopting the
Frequency (%) (%)
Strongly agree 10 14.9 14.9
other intermediaries, Govt, CMDFother intermediaries, Govt, CMDFand NSE ESOP or pensionand NSE ESOP or pension
scheme (rewardin for theirscheme (rewardin for their
Agree 31 46.3 61.2
Neutral 9 13.4 74.6contribution of the current valuecontribution of the current valuethrough bonus after valuation ofthrough bonus after valuation ofthe NSE. an additional 20% will bethe NSE. an additional 20% will be
Disagree 9 13.4 88.0
Strongly
given to CMDF for sale togiven to CMDF for sale toinvesting public at a future date.investing public at a future date.
61.2% were in favour or neutral61.2% were in favour or neutral
disagree 8 12.0 100.0
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which 25.4% disagreed.which 25.4% disagreed.
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Corporate governance structure of the demutualizedNSE should be in line with CMA guidelines and bestCorporate governance structure of the demutualizedNSE should be in line with CMA guidelines and best
A 97% majority of theA 97% majority of therespondents agree that therespondents agree that theNeutral
Stron l a reeappo n men , s ze,appo n men , s ze,
composition, appointmentcomposition, appointmentand operation of the Board ofand operation of the Board of
Agree
Neutral
should follow the CMAshould follow the CMAguidelines and internationalguidelines and international
Agree
39%
,,respondent were neutral.respondent were neutral.
Most respondents commentedMost respondents commented
rong y agree
58%
the CMA corporatethe CMA corporategovernance guidelines. Thisgovernance guidelines. Thisshould be extended toshould be extended to
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brokers and all other marketbrokers and all other market
intermediaries to bring theintermediaries to bring therequired market disciplinerequired market discipline
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Regulation and control of the demutualisedRegulation and control of the demutualised
In the world over, there is an ongoing debate as to whetherIn the world over, there is an ongoing debate as to whetherdemutualized exchanges should also act as the capital markets selfdemutualized exchanges should also act as the capital markets self
regulating organization (SRO) as part of its core activities. 77.6%regulating organization (SRO) as part of its core activities. 77.6%were in favour or neutral.were in favour or neutral.
Disputes between the demutualized company and the parties itDisputes between the demutualized company and the parties itregulates, that are not resolved by mutual agreement, should beregulates, that are not resolved by mutual agreement, should be
referred to the Regulator for resolution to avoid conflicts of interest.referred to the Regulator for resolution to avoid conflicts of interest.88.1% of the respondents were in favour.88.1% of the respondents were in favour.
demutualized company should itself be regulated by the Securitiesdemutualized company should itself be regulated by the SecuritiesMarket's Regulator through an amendment of the securities lawsMarket's Regulator through an amendment of the securities laws
and issuance of guidelines, in order to ensure that the company'sand issuance of guidelines, in order to ensure that the company'scommercial activities do not override public interest. In particularcommercial activities do not override public interest. In particularregulation fees should be varied after sanction by the regulator.regulation fees should be varied after sanction by the regulator.
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. o e respon en s were n avour. o e respon en s were n avour
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Conclusions from the studyConclusions from the study
Majority of the respondents are in favour ofMajority of the respondents are in favour of
demutualization to address structure weaknessesdemutualization to address structure weaknesses
There were major concerns over the capabilities of theThere were major concerns over the capabilities of theNSE in identifying and managing conflict of interestNSE in identifying and managing conflict of interest
There is need to adopt best practice corporateThere is need to adopt best practice corporate
governance standards by all the market playersgovernance standards by all the market playersThere is need to separate membership fromThere is need to separate membership from
shareholdingshareholding brokers do not need to be shareholdersbrokers do not need to be shareholders
o e a oca e seao e a oca e seaThe demutalized NSE should be a company listed inThe demutalized NSE should be a company listed in
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considerations and process forconsiderations and process foremu ua z ng eemu ua z ng e
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Key considerations in demutualizing the NSE-
identif in & mana in conflict of interest
Key considerations in demutualizing the NSE-
identif in & mana in conflict of interest
Background to ConflictsBackground to ConflictsSelf Listing of the NSE CompanySelf Listing of the NSE Company
Regulation of Other ListingsRegulation of Other Listings
Supervision of intermediariesSupervision of intermediariesSet standards for disciplinary and dispute resolutionSet standards for disciplinary and dispute resolution
Profit Motive versus Supervisory FunctionProfit Motive versus Supervisory Function
Set standard for the commercial & supervisorySet standard for the commercial & supervisoryoperationsoperations
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The process for demutualizing the NSEThe process for demutualizing the NSE
Obtaining members approvalObtaining members approval through special resolution to change thethrough special resolution to change thecompanies liability clausecompanies liability clause
Mechanism for conversionMechanism for conversion
Changes to the regulatory frameworkChanges to the regulatory framework
Stand alone law on demutualization preferable. However, it may not be easy to passStand alone law on demutualization preferable. However, it may not be easy to passthrough parliamentthrough parliament
,,self listing, allocation of value of NSE, corporate Governance and supervision.self listing, allocation of value of NSE, corporate Governance and supervision.
Demutualization processDemutualization process
Vest the assets & liabilities of the current NSE to the demutualised NSEVest the assets & liabilities of the current NSE to the demutualised NSE
Determine the share structureDetermine the share structure
Change memorandum and ArticlesChange memorandum and Articles
Allocate value of the demutualised NSEAllocate value of the demutualised NSE
Establish and implement corporate governance structureEstablish and implement corporate governance structure
Develop financial management policies including dividends policyDevelop financial management policies including dividends policy
Establish employee policies and benefits schemesEstablish employee policies and benefits schemes
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Amend the trading and other rules to reflect the new corporate structure of NSEAmend the trading and other rules to reflect the new corporate structure of NSE
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The process for demutualizing the NSEThe process for demutualizing the NSE
Memorandum of Understandin between NSE and theMemorandum of Understandin between NSE and theCMACMA
The MoU cover the relationship between theThe MoU cover the relationship between the
and surveillance of NSE once it lists.and surveillance of NSE once it lists.
Demutualization resultsDemutualization resultsthose allocated shares before the IPO should be free tothose allocated shares before the IPO should be free totrade the shares over the countertrade the shares over the counter
NSE should have the ob ective of self listin in theNSE should have the ob ective of self listin in the
medium termmedium termCMDF should offer 20% of the shares of NSE to theCMDF should offer 20% of the shares of NSE to the
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resen er s con ac e a sresen er s con ac e a s
John KiruthiJohn Kiruthi
ar ner, nanc a v soryar ner, nanc a v sory
ServicesServices
+254 (20) 2806000+254 (20) 2806000
. . .. . .
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The information contained herein is of a general nature and is not intended to address thecircumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that suchinformation is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriateprofessional advice after a thorough examination of the particular situation.
KPMG KPMG I S A P
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