Summary
- The Capital Markets Authority (CMA) in a notice Wednesday invited stakeholders to provide input on the regulations.
- The Companies Act, 2015 allows firms to repurchase stock but such transactions have been put on hold awaiting guidance from the regulator.
- The new rules will see companies disclose all the critical information, including the risks and pricing of the share repurchase.
Nairobi Securities Exchange (NSE)-listed firms may soon be able
to buy back shares from the market after the regulator published new
guidelines directing the process.
The Capital Markets Authority (CMA) in a notice Wednesday invited stakeholders to provide input on the regulations.
The
Companies Act, 2015 allows firms to repurchase stock but such
transactions have been put on hold awaiting guidance from the regulator.
The
new rules will see companies disclose all the critical information,
including the risks and pricing of the share repurchase. “The draft
guidelines provide additional requirements for share buyback
transactions by listed companies, including disclosures, approval
requirements and timelines,” said the CMA.
“The
guidelines seek to enhance investor protection, promote liquidity and
ensure transparency in share buyback transactions.” Share buybacks are
common in the West where they are ideally implemented when companies
believe their stock is trading at a major discount. These transactions
have the effect of forcing share prices up besides increasing stakes of
long-term shareholders.
Companies typically buy back shares when they have idle cash.
Share repurchases have also been controversial, with some companies
implementing ill-timed trades to help executives cash in stock options.
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.
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
the future.
The repurchase also allows companies to
postpone income tax payments because, unlike dividends, which are taxed
on pay-out, the reinvested cash becomes taxable only when the stock
changes hands and there are capital gains.
The
repurchases reduce the volume of outstanding shares as some investors
sell holdings to the company, with those remaining having a greater
claim on the firm’s assets and future cash flows on their enlarged
stake. This makes companies an extra class of traders in the market,
with boards and majority owners having some flexibility in deciding when
to buy shares and at what price.
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