COMPANIES with no history of paying dividends should not be allowed to buy back their shares amid concerns of abuse by majority shareholders, the country’s capital markets regulator has said.
The directive could thrust listed companies on collision with the Securities and Exchange Commission of Zimbabwe (SECZ) after the capital markets regulator disqualified owner-managers from voting on resolutions relating to share buybacks.
Since the introduction of multiple currencies in 2009, less than 10 out of the 66 listed companies have declared dividends.
More companies have, however, announced share buybacks.
A share buyback occurs when a company repurchases its own shares when management believes that the stocks are undervalued.
The shares purchased are either retired, cancelled or kept for Treasury purpose for re-issuance to a strategic investor.
SECZ chief executive officer Tafadzwa Chinamo said the Zimbabwe Stock Exchange should examine share buybacks to ensure that minority shareholders are not prejudiced.
The SECZ chief outlined a raft of measures required to ensure transparency on the local bourse.
Chinamo said while there was nothing illegal about the repurchasing of shares, some listed companies announced share buybacks regardless of poor performance.
“There is, however, merit in re-examining share buybacks in our market, not to eliminate them, but rather minimise abuse and subversion of true price discovery mechanisms,” Chinamo said in a SECZ first ever quarterly report launched last week.
“To achieve this, firstly ZSE in granting approval for share buybacks should ensure sound financial performance; past and present. Companies with no history of paying dividends should not be allowed to buy back their shares. Declaration to the market when actual share buyback trades are done should be introduced.”
Minority shareholders, Chinamo added, should resist blind endorsement of share buyback resolutions at annual general meetings by insisting that detailed analysis of the proposed buyback be carried out by third party financial advisors.
“Zimbabwean companies announce share buybacks regardless of poor financial performance. Actually, it is when performance is suspect and fails to excite the share price that buybacks are conceived,” Chinamo said.
“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 share buybacks than meets the eye.”