Share buybacks have become a common event in the
financial markets worldwide. In a share buyback programme, the company
distributes the excess cash flow among the shareholders by way of repurchasing
its own shares, generally at a premium.

Despite
becoming an important corporate practice, there exists a paucity of systematic
study regarding the motives, nature and impact of buyback on share prices of
respective companies.

 

Share
buyback, also known as repurchase is the purchase by a company of its
outstanding shares in the market that reduces the number of shares in the open
market. The most common reason a company buys back its stock is to make the
shares look more attractive to investors by increasing its earnings per share
because the number of shares is reduced. A buy back allows companies to invest
in themselves by reducing the number of shares outstanding on the market thus
increasing the proportion of shares owned by enduring investors. Issuers’ main
reasons for repurchasing some its shares are as a means of putting cash into
the hands of specific shareholders, as opposed to distributions or dividends,
which pay out to shareholders as a whole. The other reason is as a means of
increasing the market value of its shares or the earnings per share and also as
a means of consolidating voting power in the hands of certain large
shareholders in order to protect the company against takeover threats. 

There
are four ways in which companies can repurchase its shares through; Open market
purchases, issuer tender offers, privately negotiated
repurchases and structural programs also known as accelerated share repurchase.

Essentially,
some of the key benefits of a share buyback program to a listed company
include; appreciation in stock price due to an increased demand for the company
shares, prevents companies from hoarding cash, returning capital to
shareholders in a more tax efficient manner than declaring dividends, offsetting
the dilutive impact of a merger and acquisition activity and acts as a
marketing strategy to potential and current company investors.

To
investors, share buy backs is an indication of a boost in share prices, rising
dividends, better earnings per share and less excess cash. On the flip side,
share buyback programs also pose some risks to an investor where sometimes an
investor could experience sinking dividends because of a listed company
spending a substantial amount of its capital buying up shares and then cut
their dividend as a result. Additionally, a repurchase program could act as a
cover for stock handouts in the case of a share buyback to reducing the number
of shares on the market thus distracting investors from the fact that excessive
stock handouts are taking place.

Some
of the jurisdictions in the emerging markets that have implemented share
buyback programs and that have set in place laws and regulations to govern the
same include but are not limited to; South Africa, Nigeria, Malaysia, Singapore,
United Kingdom, Australia and India.

In
India for example, share buyback practices by the listed companies are
regulated by the SEBI (Buyback of Securities) Regulations, originally framed in
1998 and thereafter amended to incorporate other modes of repurchase of
shares.  The maximum number of share
buyback is limited to twenty five percent (25%) of the total paid up capital
and reserves of the concerned company. The resources permissible to employ in
the repurchase include; free reserves, securities premium account and the proceeds
of any shares or other specified securities however a company cannot buy back
its own shares or other specified securities out of the proceeds of an earlier
issue of the same kind of shares or specified securities.

Share
buy backs offer regulatory challenges in terms of treatment of shareholders and
market integrity whereby in repurchase programs some concerns on fair treatment
of shareholders, information asymmetry issues, transparency and market
manipulation have been raised.

Jurisdictional
assessment indicates that, In the majority of jurisdictions of EMC
members, off-market share repurchases are prohibited while in Thailand,
selective buy-backs are allowed when the repurchase is conducted for dissenting
shareholders.

According
to the IOSCO Principles some of the key requirements to be adhered to in a
share repurchase program include; Treatment of shareholders in a fair manner, regulatory
authorities should ensure that the insider dealing regulations apply to the
issuers trading; and conduct the program in a manner that is in consistency
with an orderly market and market integrity.

The Companies Act, 2015 Kenya provides for the procedure and the
rules on share buybacks and the companies intending to undertake share buyback
are obligated to fully comply with the provisions of the Act.

In the Interim, and in exercise of its powers under section 11(3) (d) of the Capital Markets Act, Cap 485A
Laws of Kenya, the Capital Markets Authority shall issue a Circular providing
guidance on share buybacks by listed companies. The Circular is currently being
finalized and shall be issued in due course.

In the medium-term to long-term, the
Authority shall issue comprehensive guidelines or regulations on share buyback.

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