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Historic vote to demutualise exchange not without dissent


Friday 18th October 2002

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The historic vote to demutualise the New Zealand Stock Exchange was passed on Wednesday but not without dissent.

While it is by no means an end to the body that had beginnings in the gold mining days of the 1860s and 1870s, it marks a major turning point.

Regional exchanges were established in 1872 and these formed a loose-knit association in 1915 which finally morphed into the New Zealand Stock Exchange in 1983.

Exchanges have until now always being closed organisations owned and controlled by "members".

Now the way is clear for the exchange to be run as a company focused on making profits and not necessarily owned and controlled by stock brokers.

There was never much doubt the necessary 75 percent majority would be carried, although 15 percent opposition was probably more than proponents of the transformation would have wished.

The naysayers were divided into two groups -- those opposed to the demutualisation and those against how it was done.

Christchurch investment banker Brian Kreft led the latter group, arguing the exchange should be holier than the Pope when it came to raising new capital which NZSE Ltd plans.

He was concerned the exchange's planned IPO (initial public offering) should exemplify best practice on corporate governance and it failed by not providing financial forecasts, valuations and the like.

Members have given the board power to double the capital without recourse to shareholders and without having given them the financial information and independent valuations.

"The exchange in my view had to demutualise. That was not an issue for me," said Mr Kreft, who voted against on principle.

The exchange argues it has not yet agreed to list and had to first get agreement on demutualisation.

Leading the charge against the demutualisation itself was Bill Garlick, principal of Garlick and Co.

He was reluctant to voice criticisms publicly, saying now the vote had been lost "the challenge is to make NZSE Ltd, when it is formed, work".

"Time will tell if it was the right decision, I don't think it was," he said.

He argued demutualisation will not lead to an improved operation of the market and he blames the exchange's business plan, not its structure, for its poor performance.

The mutual structure is superior because brokers had direct control over their destiny while corporatisation reduced stock exchange members to the position of franchisees.

Mr Garlick said he suspected the 15 percent who voted against demutualisation were mostly long-standing members "who have a different perspective on what makes a good stock exchange".

"I don't think a demutualised Stock Exchange will be good for the capital markets, and certainly not at this time."

He said the exchange's problems centre on two issues -- that the market has steadily lost trading liquidity over the last few years, and that a diminishing number of companies are public listing.

For a company focused on profit to address those two issues is "one mighty big challenge", he said.

Exchange chief executive Mark Weldon, the driver of reform and a major beneficiary, said Mr Garlick's argument "is exactly why demutualisation is critical -- because you don't want the capital markets controlled by one interest group".

"I have absolutely no sympathy for Bill Garlick's position."

Corporatisation would increase transparency and gradually transfer ownership to reflect the market's stakeholders -- institutions, companies, retail investors and brokers.

"By mandate, which is to grow the capital market, the company will have to be responsive to all of those groups," said Mr Weldon.

Retired broker John Rattray expressed some scepticism about the exchange being able to improve the declining trends in turnover and listings by moving to a corporate structure.

As a mutual, the exchange essentially operated on a break even basis. Lifting listing and transaction fees was hardly likely to reverse those trends.

"There is no magic wand here," Mr Rattray noted.

Corporatisation is basically a transfer of wealth from the group of 300-odd stock exchange members to a group of investors, some of whom will be members but not all, he said.

"There will be a cost to the broking fraternity and its clients and the wealth will go to the investors."

However, Mr Weldon, said that while New Zealand will finally fall into line with the rest of the world by basing transaction fees on value, it was ludicrous to suggest a huge increase in fees for a small transactions.

He said Verizon's recent $1.6 billion sale of Telecom fees cost the same $2.84 as the sale of a 500 share parcel. That would change, but he was not about to do anything that would shrink turnover.

"The exchange has been run on a break-even basis and it has been no good for anyone but the brokers," he said.

"It hasn't focused at all on growing the market and we are going to require investment to do that."

Mr Weldon also flatly rejects the Shareholders Association argument that the exchange should quit trying to regulate the market. It says encouraging companies to list and policing the rules is an inherent conflict of interest.

He said the interests of making profits and providing trustworthy regulation were actually perfectly aligned.

"If you cut your regulatory obligations you won't make money because the markets won't be healthy."

The exchange is still awaiting a Government order in council before it can be restructured. That is expected shortly. NZSE Ltd comes into action after restructuring and next month the NZSE board will decide on an IPO and listing.

It won't be until next year that the listed entity comes into being.

"Time will tell whether in fact the new structure is more effective than the old structure," said Mr Garlick.

"If it doesn't work there will be nothing worth taking over."

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