Definition of separation of ownership from trading

Solution

Demutualization is a process through which member-owned organization gets converted into a shareholder-owned company. This company can be listed on a stock exchange or can be closely held by its shareholders. In India, demutualisation is related to more in the context of stock exchanges, most of the Indian stock exchanges, for that matter world over, were non-profit and mutual or co-operative organizations. The brokers who trade on these exchanges are collectively owned them too. Since the objective of a stock exchange and those of the brokers trading on them are different, the vesting of ownership and managerial rights with the brokers can often lead to a conflict of interests. It is the interest of brokers that takes over the interest of wider investing public. Therefore, demutualization was suggested which leads to the separation of the ownership and trading rights of the brokers. In other words, Demutualisation refers to the transition process of an exchange from a “mutually-owned” association to a company “owned by shareholders”. In other words, transforming the legal structure of an exchange from a mutual form to a business corporation form is referred to as demutualization. The above, in effect means that after demutualization, the ownership, the management and the trading rights at the exchange are segregated from one another