SecZim 'condemns' share buybacks

HARARE - Equities market regulator, Securities Commission of Zimbabwe (SecZim), has condemned companies’ share buybacks arguing the schemes were exacerbating the liquidity crisis and “keeping the Zimbabwe Stock Exchange (ZSE) obscure”.

Tafadzwa Chinamo, SecZim chief executive, said share buybacks were common and ideal in advanced markets where there are funds whose overriding objective is to buy back shares.

“What makes the practice worrisome for Zimbabwe, however, is the already illiquid market and chronic cash crunch choking most listed companies,” he said.

Chinamo said the buybacks worsen the liquidity crisis by reducing the number of shares in circulation.

This comes as numerous ZSE-listed firms, including CFI Holdings, Delta Corporation, NicozDiamond, National Foods and TA Holdings have recently announced plans to embark on share buybacks.

A share buyback is a process when a company buys some of its own shares back from investors or shareholders.

The shares are then either cancelled or held in Treasury until directors decide to reintroduce them on the market.

While Chinamo does not totally disagree with the schemes, he said a lot of Zimbabwean share buybacks fail one key test — not putting forward the arrangement as an alternative to paying a dividend.

“Zimbabwean companies announce share buybacks regardless of poor financial performance,” he said adding that as a matter of fact, it’s when performance is suspect and fails to excite the share price that buybacks are conceived.

“Besides there being no dividend option for shareholders to consider, at times cash flows would actually be zero or negative, an accounting paradox to prudent allocation of scarce resources. Failure of this litmus test leads to speculation that perhaps there is more to our share buybacks than meets the eye,” said Chinamo.

The SecZim boss argues that share options in the context of buybacks reveal more self-interest motives.

“Share options only make sense when the share price moves up. So it’s not surprising that shareholders who are employed by the company would find it beneficial to devise strategies such as share buybacks that increase the share price,” he said.

Chinamo proposes that going forward the ZSE should ensure sound financial performance of a company before granting approval for share buybacks as a way of minimising abuse and subversion of true price discovery mechanisms.

“Companies with no history of paying dividends should not be allowed to buy back their shares,” he said adding that declaration to the market when actual share buyback trades are done should be introduced.

“Alerting the market of a company’s intention to buy back its shares eliminates insider advantages and perceptions of price manipulation.

Further, the exchange should, as per its mandate, cause audits of all share buybacks to be done on an annual basis,” he said.

Chinamo also advised minority shareholders to resist blind endorsement of share buyback resolutions at Annual General Meetings by insisting that a detailed analysis of the proposed buyback be carried out by third party financial advisors.

Further, he noted, when it comes to voting for the resolution, owner managers should be disqualified from voting.

“Our market has a long and proud history and we are all working hard to regain our rightful place as a preferred destination for international capital,” said Chinamo.

Comments (2)

that sounds more like a response to a worse economic situation and companies are not governments and its natural that they play their cards right. sir Chinamo address the correct audiance . thank you in advance.

chenhamo - 28 August 2013

This share buy back is the final nail on the coffin to this economy ,we should not just look at the shareholding part only .It is bigger than that ,our industry as we speak is not viable so this automatically can not change soon due to these INDEGINISATION policies so if they buy back with these policies in place .Which investor would come to put his money were there is no security .

CASHTALK - 28 August 2013

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