It is reported in today news that the Commercial Affairs Department (CAD) has launched an investigation into the share buybacks of No Signboard, seizing documents and records of the listed company and requested statements from both the CEO and CFO, with the former passport impounded. The share buybacks of No signboard was done above the regulatory limit (bid price of 14c > 5% over the last 5 day average closing price) and purchased during a black-out period (before the public release of FY31 Dec 2018 annual report). This share buybacks caused the stock to surge by 24% to 15c on Jan 31, resulting in trading halt and the standard query from SGX.
Share buybacks is used frequently as a capital management tool and is a legitimate commercial activity. However, because of its ability to influence market prices, it is prima facie deemed to be a form of market manipulation with the aim of insider trading and creation of a false market. Therefore, both the Company Act and SGX listing rules have spelt out specific regulations on how share buybacks can be allowed to be carried out by company.
The general guidance is any conduct of share buybacks should not materially impact the share price or trading volume. It should therefore not be conducted if there are material developments or any unannounced material information or the existence of any inside information relating to the Company. The Board has to perform strict due diligence to clear primarily 4 elements: no existence of undisclosed information, not within black-out period, within the regulatory limit (both on volume of < 10% and bid price <5%) and that the company is solvent with the ability to fund for the share buybacks before it provides the approval for any share buybacks to proceed. While all companies incorporated in Singapore have a volume limit on share buybacks of 20% (subject to constitution and shareholders’ approval) of the total issued shares under s76B, listed companies is further restricted to just 10% due to the market tradability of shares.
Share buybacks can be funded by the capital or retained profit of the company and depending on either it is purchased out of capital or retained profit, the amount of share buybacks is offset against capital or retained profit or pro-rata if both, accordingly.
For accounting disclosure, treasury shares from share buybacks is either disclosed separately in either the statement of financial position (SFP) or the notes to the financial statements (Notes).
In a survey of 108 listed companies with share buyback activities in 2016 done by NTU in 2018, none of the share buyback is purchased out of profit. Majority of the companies disclosed the treasury shares as a separate item from share capital in the statement of comprehensive earning (SCE) as well as a separate line in SFP. In addition, most share buybacks did not have any significant impact on key financial ratios eg dividend payout ratios, ROE etc probably due to the small size of < 5% of share buybacks executed. As to whether share buybacks is really effective in capital management in reality, it seems that it may be less so given that perhaps it is tightly regulated. So, if share buyback really done for capital management or is it for the evil market manipulation ? Perhaps it is time to relook at the role of share buybacks and its effectiveness in capital management.