HARARE – Listed grain processor and miller National Foods Holdings Limited (NatFoods) plans to buy back at least 10 percent of its issued ordinary shares.
The group will seek shareholders’ approval at an annual general meeting to be held in November.
Since 2009 most companies in Zimbabwe including CFI Holdings, Delta Corporation, NicozDiamond and TA Holdings have been embarking on share buyback programmes in moves aimed at retaining shareholder value.
However, the Securities Commission of Zimbabwe (SecZim) recently condemned companies’ share buybacks arguing the schemes were exacerbating the liquidity crisis and “keeping the Zimbabwe Stock Exchange (ZSE) obscure”.
Tafadzwa Chinamo, the 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.
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,” he said.