Investors in stocks are watching with great deal of interest the offer made this week by Alhamd Textile Mills Limited to repurchase its own shares.

In doing so, this little known textile spinning mill at Multan is writing a new chapter in the country’s corporate history, for, when the deal is done, it would go down as the first ‘buy-back’ by a company of its own shares.

The Securities and Exchange Commission of Pakistan (SECP) had issued the Companies (buy-back of shares) Rules, 1999 on December 14, 1999, that lays down in great detail the regulations and procedures that are required to be followed by corporates in repurchase of shares. Such repurchases are also called ‘treasury stock’.

When Alhamd Textile Mills first made the announcement of its decision to repurchase its own shares on April 9 (Tuesday), many people confused it with the purchase of minority shareholdings by the sponsors of companies. Such offers by sponsors have been on the rise in recent years. About half a dozen companies were de-listed from the Karachi Stock Exchange only last year after their sponsors bought back the shares of minority shareholders and sought delisting.

The KSE had brokered the buy-back price generally at great advantage for the small shareholders. About a dozen companies are currently in various stages of buy-back of minority stakes by sponsors. After the completion of those deals, such companies get to be delisted. Some worthy examples are those of Philips, Gillette, Novartis, Universal Leather, Karim Cotton, etc. The repurchase of their own shares by companies or treasury stock has been defined as shares of a corporation’s own capital stock that have been issued and later reacquired by the issuing company, but that have not been cancelled or permanently retired. Treasury shares may be held indefinitely or may be issued again at any time.

Corporations in developed world, frequently reacquire shares of their own capital stock by purchase in the open market. Paying out cash to reacquire shares reduces the assets of the corporation and decrease the shareholders’ equity by the same amount. One reason for such purchases is to have stock available to reissue to officer and employees under bonus plans. Other reasons may include a desire to increase the reported earnings per share or to support the current market price of the stock. Since shares of capital stock held in the treasury are not entitled to receive dividends or to vote, it was also believed that those two classes of companies would seize the opportunity of repurchasing the shares when the rules of Treasury stock were first issued in Pakistan.

Such companies were thought to be those that are not particularly enthusiastic about paying dividends and those that are loathe to meet shareholders face-to-face even once a year at the annual general meetings. In order to discourage larger participation of small shareholders at AGMs, companies are known to hold meetings at factory sites at remote locations and even to crowd the meetings on the last three days of every quarter. It was also believed that big corporations with heaps of spare cash would line up for ‘treasury stocks’. But more than two years since the buy-back rules were first issued, not a single publicly quoted company—neither local nor multinational—came up with such offer.

It is due to this reason that the decision by Alhamd Textile Mills— a lesser known and struggling textile mill— to take the plunge, has generated some excitement at the market. The company has called an extraordinary general meeting of the shareholders on April 30 at its registered office in Multan, when a resolution would be moved to buy-back 1.631 million shares—which account for nearly 19 per cent of the company’s total 8.43 million shares. The buy-back would be made through an open tender to be published in leading newspapers.

The company would repurchase the stock within four months of passing of the special resolution at the shareholders’ meeting on April 30. The company said that the payment would be made through un-appropriated profit of Rs 34.879 million that the company carries on its balance sheet (as at September 30, 2001).

The offer price has been fixed at a high Rs 21 per share, which would come as a big boon to the shareholders who may wish to quit, given that the ruling market value is just about Rs 4.70. Directors stated that the buy-back of shares would result in consolidation of shareholders’ equity and increased earning per share in the future. They also claimed that the purchase price would not have any adverse effect on company’s financial position.