Columnists

Tighten regulations to guard against share buyback abuse

traders

Traders at the Nairobi Securites Exchange. FILE PHOTO | NMG

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Summary

  • In other markets, top executives have used the option to enrich themselves at expense of key investment.
  • It is an odd year for the Capital Markets Authority (CMA) to release Guidelines on Share Buybacks for Listed Companies.
  • Companies are in cash preservation mode as a result of the global health pandemic— but that's what regulators do; lay the ground rules proactively.

It is an odd year for the Capital Markets Authority (CMA) to release Guidelines on Share Buybacks for Listed Companies.

Companies are in cash preservation mode as a result of the global health pandemic— but that's what regulators do; lay the ground rules proactively.

It is important to remember that the CMA is building on the Companies Act (2015) which introduced the concept of share buybacks. The Act provides for the procedure and rules on share buybacks.

So, exactly what is a stock buyback and why all the fuss?

Typically, companies flush with excess cash sometimes opt for share buybacks, which involves a company repurchasing its own shares at market value, and reducing the number of shares that are being traded.

The repurchased shares are absorbed by the company. Often, this results in driving up the price of its stock and may improve market sentiment of the listed company. Essentially everything stays the same. The company will have the same earnings, but fewer shares outstanding.

Stock buybacks have been a common practice over the last several years, with companies looking to return value to shareholders in ways other than paying dividends.

Notably, Japanese conglomerate SoftBank Group completed a Sh470 billion stock repurchase plan in June this year. The plan, announced early in the year, was funded by sold company assets. As a result, the stock has more than doubled from its coronavirus lows in March to its highest in two decades.

That said, the general debate surrounding stock buybacks has always been present. For instance, critics have long argued that companies can use it to artificially inflate their stock prices— a move that benefits executives whose fortunes are often tied to stock ownership (through stock options) in their companies.

Others deem buybacks pointless as cash is not used to invest in the economy and create additional benefits. Others also resist the practice on the basis that buybacks do not help workers and nor with unemployment.

Specifically, for Kenya, a buyback of shares from a shareholder will trigger capital gains tax at the rate of five percent on the gain payable by the shareholder.

The company on the other hand will also be liable to pay stamp duty at the rate of one percent on the share purchase price when buying back the shares. So, are share buybacks a good thing? It depends.

Yes, if companies can clearly explain why using their excess cash for stock buybacks is better than making important investments, such as higher employee wages, building more factories, creating more jobs, and innovation.

No, if buybacks are enriching CEOs at the expense of everyone else - sadly, this is the state of affairs in most countries where this practice is allowed.

The abuse of stock buyback is widespread.

It seems buybacks are the underlying problem of the corporate obsession with stock price performance that makes many investors more vulnerable.

We hope our case will be different - but hope is a dangerous thing for a market like the Nairobi Securities Exchange to have.

Mwanyasi is managing director, Canaan Capital Ltd