The three, pioneering, share-repurchase agreements in blue chips during the last three months have raised questions from the stock market community about the farsightedness of this provision in the new Companies' Act.
"The Companies' Act has allowed share buy-backs without thinking it through, because presently you do not need shareholder approval or Colombo Stock Exchange (CSE) sanction to go through it," a stock analyst told The Sunday Times FT.
He said a share repurchase is when a listed firm decides to buy back its shares from shareholders. "This is the reverse of a rights issue. A rights issue is to increase the shares in a firm, but a repurchase reduces the shares," he explained.
He also pointed out that a rights issue under the Companies' Act needs both shareholder and CSE sanction-so why does the same rule not apply for a repurchase. "In the case of DIMO buying Hayleys' stake in DIMO, only Hayleys' was offered a repurchase, because of an agreement 20 years ago. But other shareholders were not given this option which is discriminatory, because in a share repurchase, the same terms have to be extended to 'all' shareholders.”
Another stock analyst said the rules on share buy-backs are not regulated "Therefore it can be abused, "he said.
Harsha Fernando, CEO Sampath Securities said a share buy-back should be fair to all shareholders.
"Now companies can do it like inviting only one person for lunch in a family," he said. The first stock analyst said the Associated Electrical Company (AEC) share buy-back is also peculiar. "Share buy-backs are meant to prop up share prices, but at AEC the share price has not dipped like it has at JKH and has already hit a high at Rs. 1,800. AEC seems to have done the share buy-back on a reverse manner," he said.
Mr. Fernando said taken as a whole, share buy-backs are not good as they take away the liquidity in the share market. The second stock analyst said that a chairman of a firm with even a quarter percent shares can use the company funds and buy the shares back at any price.
"The pricing in the repurchase needs to be regulated. It should be connected to the market price, the net asset value or the earnings in a company. Now the situation is you can buy your friendly consortium shares at five times the market price and it will be legal," he said. "A share repurchase also changes the buyers' holding in a firm. Inadvertently this can help them to take control of the company," he added.