The shares buyback regulations grabbed the spotlight in the May 17 meeting with adviser on finance Dr Abdul Hafeez Shaikh where the desperate stockbrokers — who have watched market meltdown by 20,000 points, or 36pc, since May 2017 — forwarded several proposals to put a floor under the market fall.
Though most of those were drowned under the clamour of the Market Support Fund, the second most important demand by the stockholders was the approval of the buyback regulations on priority and enhancement of the limit of 10 per cent on treasury shares.
After a series of meetings with different stakeholders, the Securities and Exchange Commission of Pakistan on May 23 notified Listed Companies (Buyback of Shares) Regulations 2019”.
The market regulators have continued to point out the virtues of a buyback saying that they could be used to improve a company’s earnings per share due to decrease in number of outstanding shares
Accordingly, some of the major changes in the regulations included: removal of obligation to buy shares with cash and distributable profits from the eligible criteria. For disposal of treasury shares, volume and price restrictions were removed and now companies do not require special resolution from its members for disposal of treasury shares.
Although the buyback of shares rules were first unveiled in 1999, they received scant interest in corporate boardrooms. The regulations allowed companies to repurchase their shares but also required the cancellation of those shares.
In August 2015, the Senate Standing Committee on Finance approved amendments to section 95-A of the Companies Ordinance 1984, which sought to allow listed companies to purchase their own shares and hold them as treasury shares.
A company was permitted to retain the buyback shares as treasury stock “if it believed that the shares were being traded in the market below their par/book value”. The market regulators have continued to point out the virtues of a buyback saying that they could be used to improve a company’s earnings per share (EPS) due to decrease in number of outstanding shares.
The concept of treasury shares exists in various international jurisdictions such as Malaysia, Singapore, the US and the UK. 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 sitting on heaps of spare cash would line up for ‘treasury stock’.
But that was not to be. In almost two decades since the rules were first 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 1.631 million shares (almost 19pc of its stock). It was followed by Siemens which repurchased $8.47m worth of shares in its Pakistani subsidiary.
The amendments of 2015 also did little to spark interest in the corporate sector to buy back own shares, for they saw little benefit of it in a bull market where a buyback of the company’s high-priced stocks would have proved too expensive. But the situation has changed after three-year bear rampage, since market prices of scores of shares, blue-chips included, have eroded by 50pc to 75pc, which paves the way for the companies to exercise the buyback option.
On June 3, the board of directors of Arif Habib Corporation Ltd and Arif Habib Ltd in separately held meetings approved buyback of shares of their respective companies through tender offer, the companies told the PSX. The two companies are the first to take a plunge into a buyback under the SECP regulations.
The amended section in the revised rules of August 2015 requires a 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.
Market watchers caution that the concept of treasury stock ought not to be confused with 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.
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.
But there are reasons that may be holding back Pakistani corporates, particularly the small cap stocks, from seizing the opportunity to collect their shares from the market. These include such perfectly sound reasons as the directors’ faith in the future of their companies which they believe would eventually see a robust rally in those shares. Besides, most sponsors of 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 buybacks,” asked a market player.
Published in Dawn, The Business and Finance Weekly, June 10th, 2019