Idigbe tasks SEC on share buy-back
By Gbenga Agbana
AS stakeholders in the capital market move to put the stock market on the path of recovery, a renowned lawyer, Chief Anthony Idigbe, has tasked the Security and Exchange Commission (SEC) on the need to review the rules on share buy-back.
Idigbe, who delivered a paper: Legal Implications of Share Buy-backs, pointed out that the imposition of a two to one of debt equity ratio is arbitrary, as gearing ratio varies from industry to industry, share buy-back is one of the measures put in place to arrest the problem of free fall in share in the equities sector of the Nigerian Stock Exchange recently.
Share buy-back is a situation whereby a company uses cash to buy its own shares, in other words investing in itself. It is carried out in the context of publicly quoted companies whose shares are freely traded on the market.
According to Idigbe, who is the past chairman of the Capital Market Solicitors Association (CMSA), Rule 109b of SEC provides that residual debt-equity ratio after a buy-back programme shall not exceed two to one, the equity being the shareholder's funds.
While commending SEC for using the rule to have companies doing share buy-back to avoid too much exposure to the volatile conditions of the market by fixing a maximum of 50 per cent loan to value ratio, Idigbe submitted: "It seems that imposition of a 2:1 of debt equity ratio is arbitrary. Gearing ratio varies from industry to industry. So to put a one-fits- all solution may not have been appropriate.
He commended the policy standpoint of SEC for a strong regulation of share buy-back programme, while he said it makes a lot of sense, especially with regard to the crisis being faced globally by capital markets.
He however, said: "It would seem that some aspects of the regulation are either arbitrary or too stringent and it is expected that after sometime, there would be further review of the regulation to enable the achievement of positive aims of share buy-back, while averting any abuse of the concept.
He continues: "It is also hoped that the commission would give closer scrutiny to publicly quoted companies that seem to be abusing the related concept of share reconstruction at the expense of the returns on value they are meant to give to their shareholder portfolio.
On the problems associated with share buy-back, Idigbe said the main disadvantage is inappropriate use, especially if the source of the fund is not from profit or share premium account.
Besides, he said some companies sometimes use is as a tool to perpetrate themselves in office, while chances are there to do fraud, but said the rule given by SEC would not allow fraud.