Capital Markets

CMA bars ailing companies from share buybacks

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Nairobi Securities Exchange trading floor. FILE PHOTO | NMG

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Summary

  • The regulator has ruled that directors of the companies which intend to repurchase stock from the market should ensure “assets … are equal to or exceed the liabilities of the listed company”.
  • While companies under negative equity are unlikely to afford share buybacks, the rules will prevent them from repurchasing stock even when they feel their share price is not reflective of the firm’s value.

The Capital Markets Authority (CMA) has barred listed firms with negative equity from rolling out share buybacks, locking out cash-strapped companies from the process largely applied to correct perceived undervaluation of stock.

The regulator has ruled that directors of the companies which intend to repurchase stock from the market should ensure “assets … are equal to or exceed the liabilities of the listed company”.

The directors will rely on the last audited financial statements in determining the solvency status, but should also ensure the numbers are reliable on the date they inform shareholders of the proposed share buyback.

The Guidelines on Buybacks for Listed Companies further require that listed a company should demonstrate the ability “to pay its debts as they come due in the ordinary course of business for a period of 12 months” before it is cleared to buy back shares.

While companies under negative equity are unlikely to afford share buybacks, the rules will prevent them from repurchasing stock even when they feel their share price is not reflective of the firm’s value.

Some of the listed companies which have in recent years slipped into negative equity positions include Kenya Airways, Mumias Sugar, TransCentury, Uchumi Supermarkets and Deacons East Africa.

The shares of the majority of these firms — some of which are in administration — are suspended from trading on the Nairobi Securities Exchange (NSE).

Companies typically repurchase their own stock from the market when they have excess cash from profit or a cash call, and feel their shares are underpriced.

Share buybacks are common in the developed capital markets where they are largely offered when companies believe the stock is trading at a significant discount to the intrinsic value.

The rules further prohibit listed firms from repurchasing shares from the market within 14 days before disclosing annual or half-year financial performance or have become aware of material information which could affect share prices.

The CMA has also confined firms to complete proposed share buyback within 18 months from the time the proposal is approved by shareholders.

Nation Media Group became the first company on the Nairobi bourse to repurchase its stock in an exercise conducted between June 28 and September 24, posting a performance of 82.25 percent of 20.74 million shares it sought to buy at Sh25 per unit.

Shareholders of Jubilee Holdings in June also approved a share buyback proposal subject to regulatory approval.

Centum Investment Company Plc has since last year also been considering a share buyback to address what it believes is an undervaluation of its stock.

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