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.