 | SEC drafts stock buyback policy
16 March, 2011
The securities regulator is in the process of preparing a draft proposal on stock buyback policy in a bid to protect investors in the battered stock market.
As part of the process, the Securities and Exchange Commission, yesterday, met with officials from Dhaka Stock Exchange, Chittagong Stock Exchange and Association of Bangladesh Publicly Listed Companies, to seek recommendations for a draft proposal. Prices of some stocks have gone down below face value, due to recent tumble in share prices – when the market lost nearly 40 per cent, prompting the government to enact the buyback law.
When a company purchases shares of its own publicly traded stock, or its own bonds in the open market, it's called a buyback.
The most common reason for a company to buy back own shares is to make the stock more attractive to investors, by increasing its earnings per share. While the actual earnings stay the same, the earnings per share increases as the number of shares in free float get reduced.
The stakeholders recommended that no company will be allowed to raise its paid-up capital and to issue any security, except bonus shares, within two years from the date of buyback.
Management of a listed company might be sent to custody for two years or fined, if the company fails to obey the buyback law. A company can buy its stocks back using its free reserve, premium from the securities, and profit gained from its operation. If any company wants to buy its stocks back, it needs to take permission of its shareholders in the annual general meeting. The company will have to go for buying, within a year, after the decision of the buyback.
A company will not be allowed to buy its stocks back, if its debts are two times higher than its total paid-up capital and free reserves, and it fails to disburse dividends, preference shares, or pay its loans.
No company will be allowed to declare bankruptcy, within a year from the date of buyback, and the securities should be declared invalid after seven days of buyback.
Economist Abu Ahmed said the buyback law should be introduced carefully and should follow the practices of other countries. “Buying stocks within a year after decision of buyback is too long. The time should be reduced, as it might create scope for manipulation,” he said, adding that use of premium to buy stocks back should be dropped.
He said that the SEC might seek public opinion through advertisements in newspapers, before enacting the law.
After scrutinising the recommendations made by the stakeholders, the SEC will send the proposal to the finance ministry, for consideration.
The finance ministry, earlier, had asked the SEC to prepare a draft proposal on buyback policy, that is expected to be placed in the ongoing session of Parliament. On March 6, finance minister Abul Maal Abdul Muhith had announced that the government will introduce the buyback law in the ongoing session of Parliament.
Release link:http://www.theindependentbd.com/business/stockmarket/39249-sec-drafts-stock-buyback-policy.html
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