SHARE BUYBACK, CANCELLATION AND RECONSTRUCTION - WHAT YOU MUST KNOW The capital market is no doubt an obligatory interface between users of funds and suppliers of same for reciprocated benefits in the sense that suppliers of funds in the long run are expected to emerge with good returns while users of funds on the other hands are ensured of continuity in business and in the long run, expansions in varied capabilities but hey, who is at the receiving ends in the process of this obligatory relationship in exchange of funds between users and suppliers of funds? The answer is in what kind of instruments. It behoves therefore on every supplier of funds otherwise referred to as investor to note that exchange of funds in a capital market transaction involving fixed income instruments like bond or preference shares is a wholesome shift of transactional obligations to the user of funds; in other words, suppliers of funds have very little to fear as the funds have a higher rate of returning back with the agreed interest but the equity market is not so. The common divisions of the capital market as popularly stated include the primary market where there is a direct relationship between the user and supplier of funds and the secondary market which is a relationship between suppliers of funds in the exchange of existing shares/holdings without any funds transfer to the user. That being said, To my mind, the term ‘wholesale’ and ‘retail’ should be more plausible in the description and expression of the differences between fixed income and the equity markets; fixed income market being the wholesale and the retail end being the equity market. This is so to me because really, though fixed income investment could still be done at the secondary level but with relative higher amount than what obtains in the equity market; much more, there are lots of what could be termed as ‘transactional dementia’ that obtain in the equity market as against the fixed income arm of the capital market. This is what this piece seeks to address but what do I mean by transactional dementia? It is that process which impairs severely and negatively too, the existing quantities of shares being held by investors with a higher tendency of resulting in loss of money/investment and also prone to fraud from the managers of quoted companies. These include share buyback, share cancellation and share restructuring. SHARE BUYBACK: This is a process as enabled by law where a quoted company buys back a proportion of its existing shares either by a direct method from existing investors or in the secondary market- the stock exchange. To my mind, certain questions would naturally come to mind; these include, where does the funds for the share buyback come from, what is the probable direct impact of share buyback on the company and how does the regulatory authorities curb insider dealings in the process among others? Let’s tackle some of these questions one after the other. FUNDING OF SHARE BUYBACK: Quoted companies are allowed to buy own shares from retained earnings but why? Shouldn’t the retain earnings be spent to further expand the company’s operations or at the worse issued to existing investors as cash dividend? Couldn’t the retained earnings be invested to further secure the company’s future instead of buying back shares once created? The company might truly be financially buoyant today quite right but since the future is always an unknown, would it not be wise to rather utilise the period of plenty to secure the unknown future than spending binge called share buyback? This piece is timely because I strongly perceive that a number of quoted and listed companies on the Nigerian stock exchange might soon inform of share buyback and such as we have seen share restructuring in recent times. How does the regulatory authority prevent insider dealing in the process of share buyback? We have heard in this country a situation where the Chief Executive of a company went to borrow to invest in own company shares only to announce a mouth watery dividend in cash and scrip to thereafter sell off those stocks thereby making huge returns in the process? How would the regulatory authority curb insider dealing seeing that share buyback will shrink existing outstanding shares thereby resulting in enhanced share price? It would take those with information to mop up those shares long before the process of buy back is commenced only to sell off after the completion of the process, period! And huge profits are made at the expense of the general market. I will therefore suggest that the regulatory body should be wary in approving any process of share buyback as the approval for one is approval to all and an abuse of trust. The regulatory authorities however reserves the right to do as they wish but some of us are watching and will be bold enough to air our views appropriately and at the appropriate time even if such views don’t change anything. One critical fact in share buyback is what the company does with the shares so purchased and really, there are two possibilities here. The first is to keep those shares intact to later push to the market at most possibly higher price while the second is to retire or cancel the shares. This is my take; companies should rather focus on their primary businesses, grow and deliver returns to investors than share price manipulations to be generated by share buyback because, share buyback is nothing more than share price manipulation. This assertion is premised on the fact that share price in the long run is just about the price the general market is willing to pay for a unit of a stock and really, this can be anything at anytime on the strength of so many variable factors to which most times, the company in question might have no input. We have seen share reconstruction up to three times or so in a company like International Energy Insurance plc but hey, the stock price still largely finds it difficult to scale through the par value margin and so who is at the receiving end if not the sincere retail investors. I will strongly opine therefore that Nigerian investors should not be bamboozled into any of such retrogressive and manipulative tendencies that the rules of the capital market allow. The case is worse if a company so chooses to cancel the shares so repurchased for whatever reason because to my mind, that is only tantamount to capital destruction as it is akin to setting physical cash on fire for whatever reason; I’m sure only an idiot would do that in the real sense. Can you see why I termed this transactional dementia? That leads us to the next which is share cancellation. SHARE CANCELLATION: A company like I earlier stated reserves the right to do whatever it desires with repurchased shares. In other words, it could either retain to later push into the market or entirely cancel same. When repurchased shares are cancelled, it technically infers that The company had wasted its retained earnings utilised in the repurchase of the own shares in totality instead of engaging same in some profit making venture. The company’s share price in the short run might inch up but without a guarantee for the future thereby suggesting mortgaging future potentials for temporary possibilities In view of the foregoing therefore, it is my opinion that share buyback under whatever guise should be discouraged, I will suggest that all well meaning shareholders should rise and fight against such even when the regulatory authorities might be in favour of same. The common experience in Nigeria is to convene a mushroom court ordered extra ordinary general meeting of induced shareholders who will gather to raise their hands and voices in favour of an abuse and outright tapping on their right just for the morsels of bread the company has to offer in the interim as against future possibilities; I hereby challenge the few well meaning and incorruptible shareholders to rise to the challenge for the souls of Nigerian shareholders. In conclusion, if share buyback to my mind is bad enough, share reconstruction is an outright fraud.
Posted on: Fri, 15 Nov 2013 16:57:37 +0000
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