Share buy-back refers to repurchasing of shares by a Company that issued them. The Companies Act, 2015 introduced the concept of share buyback in Kenya. Its aim was the pioneering financial engineering in East and Central Africa. For a Company to implement the proposed share buyback, its Articles of Association must authorize the same. Thereafter, the share buyback must be approved by shareholders in a General Meeting. Share buy backs do not generate tax liabilities unlike payment of dividends. The mode of financing the share buyback is either from the proceeds from a fresh issue of shares or out of distributable profits of the Company.
Increased earnings per share… through share buy-back
A Company may repurchase its own shares to take advantage of undervaluation. In the event of a share buy-back, the shares of a Company may have been undervalued. As a consequence the issuing Company can repurchase its shares at the reduced price. Thereafter, they can re-issue them at a later date following correction of the market value. Consequently, this leads to the company increasing its equity capital without issuing any additional shares. In various circumstances, share buybacks may be used, to facilitate the exit of a member through the disposal of their shares, with the Company purchasing the exiting member’s shares. Share buybacks reduce the number of shares available in the market and this has the potential of increasing earnings per share on the remaining shares and ultimately benefiting shareholders.
Role of Capital Markets Authority
Upon conclusion of the buyback transaction, the repurchased shares are either classified as treasury shares or are cancelled. It is important to note that the Capital Markets Authority issued draft guidelines in 2020 on share buyback to provide additional requirements for share buyback transactions by listed companies, including disclosures, approval requirements and timelines. The said Guidelines are to enhance investor protection, promote liquidity and ensure transparency in share buyback transactions. Should you require additional information on the same, please feel free to contact us.