Economy

AG puts share buyback clause in new Companies Act on hold

GITHU

Attorney-General Githu Muigai. The new law allows limited companies to buy the shares using their distributable profits. PHOTO | FILE

Firms wishing to buy back their shares to support their stock price will have to wait longer after the Attorney-General deferred gazetting a clause in the Companies Act allowing the repurchase.

Prof Githu Muigai has in a gazette notice put the effective date of Companies Act at November 6, but noted that the share buyback clause will not apply.

Shares buybacks are used by companies to prop up their share price when they feel the units are undervalued in the market. Such purchases also enhance value for continuing shareholders.

Several companies, including Safaricom, have previously expressed a desire to repurchase shares offered to investors during the 2008 IPO.

Other firms that could benefit from the new law include Unga Group, Kenya Power, Total Kenya, and HF Group that are all trading below their net assets.

The new law allows limited companies to buy the shares using their distributable profits. The repurchases reduce the volume of outstanding shares as some investors sell their holdings to the company, with those remaining having a greater claim on the firm’s assets and future cash flows on their enlarged stake.

READ: Companies Act passage opens door for firms to buy back issued shares

For instance, an investor holding one million shares in a company with 100 million issued shares has a one per cent stake. If the company buys back 20 per cent of the outstanding shares, the investor will see his interest rise to 1.25 per cent, boosting one’s future dividend income, among other distributions.

Share buybacks are common around the world, especially in the United States and Europe with most of these transactions carried out in the open market.

Companies making up the Standard & Poor’s 500 Index spent $553.2 billion (Sh58 trillion) on share repurchases last year alone. Share repurchases offer an alternative to issuing dividends and spending of retained earnings.

During a year of high profits, some companies prefer to issue part of the profits as dividends and use the rest for share repurchase to avoid a sharp dip in dividends when earnings drop in future years.

The repurchase also allows companies to postpone income tax payments because, unlike dividends, which are taxed on payout, the reinvested cash becomes taxable only when the stock changes hands and there are capital gains.

The AG has also given legal backing to the delay in effecting the clause in the Companies Act that demanded foreign firms to allocate 30 per cent shareholding to local investors.