ISLAMABAD (January 11 2009): The Securities and Exchange Commission of Pakistan (SECP) has allowed listed companies to buy back their own shares and hold them as treasury shares, which may be re-issued under the regulations being prescribed by the Commission.
The SECP on Saturday amended section 95A of the Companies Ordinance 1984 through Companies (Amendment) Ordinance, 2009.
Details showed that the declining trend in the securities market and the consequent reduction in the value of the shares of listed companies had made these shares quite attractive. Among others, this provides an opportunity to the listed companies, also, to buy back their own shares.
Therefore, on an initiative and proposal of the SECP, section 95A of the Companies Ordinance, 1984 has been amended vide Companies (Amendment) Ordinance, 2009 to enable the listed companies to buy back their own shares and hold them as treasury shares.
Previously, the Companies Ordinance permitted the listed companies to buy back their own shares. However, the purchased shares had to be cancelled forthwith resulting in reduction of the paid-up capital of the company.
As a result of latest amendment, the listed companies can buy back their own shares and hold them as treasury shares, which can then be re-issued/resold in the prescribed manner by SECP in the regulations.
According to the amended section 95A, the decision to buy back the shares decision is required to be taken by the board of directors as well as three-fourth of the members who are present and entitled to vote in a general meeting of the company.
The decision shall have to clearly specify the number of shares proposed to be purchased, purpose of purchase ie cancellation or holding the shares as treasury shares, the purchase price, period within which purchase shall be made, source of funds, justification for the purchase and effect on the financial position of the company.
The shares can be purchased either through tender process or through the stock exchange in the manner to be prescribed by the regulations. The law also provides that the purchase shall always be made in cash and only out of the distributable profits or reserves specially maintained by the company.
Importantly, it also provides that the voting rights and the right to receive dividend of the shares purchased shall remain suspended as long as they are held as treasury shares by the company itself. A hefty fine, of up to Rs 30 million, has been provided for violation of the law, in addition to liability for any losses or damage caused by such violation.
It is expected that listed companies, who feel that their shares are under-valued at the stock market and have cash reserves available with them will grab the opportunity to buy back their shares. In case the shares are cancelled after purchase, the earning per share of companies will be improved.
If they are retained as treasury shares, they can be resold at a higher price later. In any case, the purchase will bring stability in market price of such shares. The SECP is preparing regulations for this purpose which will be notified in the official Gazette for seeking public opinion during the coming week, the SECP said.