Kenya has shelved plans that would have allowed companies with excess cash to buy back shares from shareholders, over concerns about eroding liquidity and stifling activity on the Nairobi Securities Exchange.
The EastAfrican has learnt that while most companies had expressed interest in reducing the supply of their shares in the market to enhance their value and boost dividends to shareholders, the regulators — the Capital Markets Authority and the NSE — have made a dramatic about turn on the policy after realising that it could hurt the stock market.
Although the legislation on corporate share buyback had been incorporated in the Companies Act 2015, former attorney general Githu Muigai suspended its implementation on the advice of the regulators.
The suspension, according to market sources, was to pave the way for an amendment that would bar companies from buying back their shares, only allowing the majority shareholders to boost their shareholding through the open market.
“There are concerns that allowing companies to buy back their shares is tantamount to removing liquidity from the market, something which goes against the NSE’s efforts to attract companies to list. Instead, significant shareholders should only be allowed to buy their shares from the open market.
These are the two areas that are being looked at,” said a source. “It was therefore prudent that the share buyback legislation be held back to allow for amendments that encourage major shareholders to buy shares from the open market.”
There are also fears that the move could open the door for listed companies to manipulate share prices.
NSE chief executive Geoffrey Odundo declined to comment on the matter, saying he needed time to consult, while CMA chief executive Paul Muthaura had not responded to our enquiries by the time of going to press.
Corporate share buybacks are common in the United States and Europe, and Kenya was looking to be among the pioneers of this financial engineering in East and Central Africa.
Under this arrangement, an investor who chooses to sell shares back to the company benefits from a ready buyer willing to take the stocks at a premium. However, they miss out on future dividends, which will only be paid out to investors who hold out.
It is also argued that companies that have expanded significantly to dominate their industries and have little headroom left for more growth are looking at share buybacks as a way of reducing the equity capital on their balance sheets, which they now view as a burden.
Kenya Airways, East African Breweries Ltd, Safaricom and Crown Paints have in the past contemplated share buybacks, but there has been no support in the Companies Act.
Kenya’s legislation on corporate share buyback allows limited companies that have share capital to buy back their own shares (including redeemable shares) on condition that the purchase doesn’t exhaust all the issued shares of the company, which could put the company at risk of bankruptcy.
In the US, it is estimated that over 80 per cent of the 500 companies constituting the S&P stock index buy back shares.
This year, S&P 500 companies are expected to allocate 49 per cent of their total spending on stock buybacks and dividends to shareholders.