EARLIER this month, the Senate Standing Committee on Finance approved amendments to section 95 A of the Companies Ordinance 1984, which seeks to allow listed companies to purchase their own shares and hold them as ‘treasury shares’.

The amendment is a slight departure from the rules unveiled as far back as in 1999, which allowed companies to buy back their shares but also required the cancellation of those shares.

Under the amended section, a listed company would be able to buy back its shares and retain them as treasury shares “if it believes that the shares were being traded in the market below their par value”. The treasury shares do not have the right to cash dividends.

“They can be used as an effective measure to bring stability in the market and improve a company’s earnings-per-share (eps),” Akif Saeed, who is the commissioner of the securities market division at the Securities and Exchange Commission of Pakistan, told Dawn. He added that the concept of treasury shares existed in various international jurisdictions such as Malaysia, Singapore, the US and the UK.

The amended section requires the company to purchase its shares by a tender offer or through the stock exchange against cash and out of its distributable profits or reserves. The company can dispose of the treasury shares in a manner to be prescribed by the SECP. Akif said the rules would come into effect after their approval by both houses of parliament.

Raza Jafri, director research at Intermarket Securities, reckoned that the concept of treasury shares was another signal to investors in the developed markets of Pakistan’s endeavour to come up to the best standards and to integrate with those markets.

Yet, many market players say it remains to be seen if the amendment sparks interest in the corporate sector to buy back its own shares.

“At the current height of the bull run, it would be too expensive for corporates to repurchase their high-priced shares,” says a leading stock broker.

But he conceded that sponsors of companies whose stocks are trading dirt cheap may be interested in buying back their shares from the market. He also cautioned that the concept of treasury stock ought not to be confused with the purchase of minority shareholdings by a company’s sponsors.

Quite a few companies have sought delisting from the stock exchanges after their sponsors bought back shares held by minority shareholders. The most famous case was the acquisition by Unilever Overseas Holding Limited of the shares of its subsidiary Unilever Pakistan at a total cost of Rs50bn at a repurchase price of Rs15,000 per share.

A fund manager at one of the country’s three largest mutual funds said corporations in the developed world frequently purchase shares of their own capital stock from the open market. One reason for such purchases can be that the company would have stock available to reissue to its employees under share option plans. Other reasons can include a desire to increase the eps or to support the stock’s current market price.

Since the capital shares held in the treasury of a company are not entitled to the right to vote and dividends, it was believed that big corporations with heaps of spare cash will line up for ‘treasury stock’. But that was not to be. In the 15 years since the rules were released, only two companies come to mind that sought treasury stocks.

In April 2002, Alhamd Textile Mills, a little known and struggling spinning mill at Multan, took the plunge and bought back 1.631m or 19pc of its 8.43m shares, but at an attractive price of Rs21 against the market value of Rs4.70.

It was followed by Siemens Pakistan. The German engineering and electronics giant repurchased $8.47m worth of shares in its Pakistani subsidiary as part of a plan to buy back up to 4bn euros worth of its own shares.

So what holds corporates in Pakistan, particularly the small cap stocks, from seizing the opportunity to collect their shares from the market?

“It sure is surprising,” admits a major stock broker. “The sponsors and directors may be busy in picking up their stocks at the low levels for themselves; they may consider buying the stock for the company later,” he added.

As speculators and unsuspecting investors continue to accumulate low-priced worthless shares on ‘tips’ provided by self-proclaimed ‘gurus and pundits’ on various social media forums, the sponsors of those companies are alleged to be comfortably selling their long-held penny stocks at fabulously rising prices and seeking an exit.

Yet, some market pundits offer perfect explanations for the companies’ disenchantment with buying back treasury shares. “The sponsors can compare the market price with the break-up value of their stock. If the break-up value is negative, it will make little sense to throw good money after bad.”

Some analysts reckon that in spite of the roaring bull market over the last three years, many investors are not completely at ease with regards to both the economy and the political developments in the country. A stockbroker went so far as to say that the sponsors and directors of some lame duck companies were unwilling to buy back their shares as they had little faith in the future of their own companies.

Most sponsors of such small listed firms already hold over 70pc controlling stake in their companies, so they naturally have little inclination to pull back more shares from the market. Besides, there is the question of the cost of the funding.

“If corporates earn more by parking their surplus cash in other profitable avenues than what they hope to save by not paying dividends on the repurchased shares, why must they get into the hassle of buy-backs,” asked a market player.

Published in Dawn, Economic & Business, August 10th, 2015

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