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Own share buy-back and circuit breakers yet to affect the market (2)

Hope you read my recent article on “own share buy-back yet to affect the market”, it would be good to emphasize the issue of buy back provisions and rules. In a Securities and Exchange Commission published circular, dated 11th September 2008, the “Amendments to rules and regulations of the Securities and Exchange Commission, Rules on share Buy-Back.”
Some of the features in the amended rule 109B – Rules Relating to Acquisition of Own Shares by Companies, summarily includes: (1) A company can only purchase a maximum of 15 percent of its own existing issued and paid up equity shares, within a given financial year; (2) An illiquid company is prohibited from own-share-buy-back operations, as such the company’s Residual debt to Equity ratio should not be greater than ratio 2:1; (3) shares can only be re-purchased out of Share premium or distributable profit; etc.

The eagerness and volume of own shares these Nigerian Stock Exchange listed mega companies are willing to buy, will be a very strong indication of how buoyant they really are in terms of spendable profit, giving a clearer view of their true worth. More importantly it will lessen their equity liability to share holders, thereby reducing the number of share ranking for dividend.
Previously, the position of the ‘Company and Allied Matters Act 2004’, on this issue as stated in sections 160, 161 and 162 prohibits any company from acquiring its own shares safe for some narrow provisions contained in subsection (2) of section 160 of this act. Section 160 subsection (2) states that a company may only acquire its own shares for such purpose(s) as: (a) settling or compromising a debt or claim asserted by or against the company; or (b) eliminating fractional shares; or (c) fulfilling the terms of a non-assignable agreement under which the company has an option or is obliged to purchase shares owned by an officer or an employee of the company; (4) satisfying the claim of a dissenting shareholder; etc. Enough of business law, the point is that there used to be a strong legal restriction on companies before now prohibiting them from ordinarily purchasing their own shares from any secondary market. It’s now time to distinguish the boys from the men within the Nigerian capital market.

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