Companies may be allowed to buy back under-valued shares: Cabinet to consider amendment bill today

The government has decided to allow the listed companies to buy back their undervalued shares to improve earnings per share aimed at bringing stability in the market price of such shares, sources in Finance Ministry told Business Recorder. For this purpose, the Federal Cabinet, which is scheduled to meet on Wednesday, will consider the Companies (Amendment) Bill 2011.
"The Bill seeks to provide for the listed companies to either cancel the repurchased shares or retain them as treasury shares. Listed companies, which feel that their shares are undervalued on the stock market, may buy back/repurchase their shares, which may improve the earnings per share of such companies, and bring stability in the market price of such shares," sources quoted Finance Minister as arguing in his comments on the summary. According to the Finance Ministry, since section 95 A of the Ordinance does not allow for retention of a company's repurchased shares as treasury stock, therefore it has been revised.
At present, the limited liability companies listed on the stock exchange are entitled to buy back publicly traded shares under the Companies Ordinance, 1984. The buyback of a listed company's shares benefits both the shareholders and the company itself for example reducing outstanding shares in the market, increasing value of remaining shares and earning per share, saving any potential dividend grants, awarding employees with assets in the form of buyback shares rather than cash and averting any take-over threats in the market. In particular, during the times when a listed company's shares are undervalued in the capital market, the shareholders can achieve the benefit of the value differential.
To allow the companies to either cancel the repurchased shares or retain them as treasury shares section 95 A was amended through an Ordinance called Companies (amendment) Ordinance 2009 in January 2009. However, the said Ordinance could not be laid before the Parliament due to delay in some administrative approval. Subsequently, it was decided to amend section 95A through normal legislation.
Accordingly, a legislative Bill for the required amendment in sector 95A of the Companies Ordinance 1984 was placed before the Cabinet in August 2009. The Cabinet in its meeting on October 7, 2009 constituted a committee, headed by the Minister for Finance, with Minister for Parliamentary Affairs, Minister for Interior and Minister of State for Law as its members to discuss the proposed amendments in the Companies Ordinance, 1984 and submit its report within two weeks for consideration of the Cabinet.
The committee prepared its report after a year, instead of two weeks, which will be placed before the Cabinet on Wednesday. According to official documents, the proposed provision - power of a company to purchase its own shares states:
1) Notwithstanding anything contained in this Ordinance or any other law for the time being in force or the memorandum and articles, a listed company may, subject to the provisions of this section and the regulations framed by the Commission in this behalf, purchase its own shares (hereinafter in this section referred to as "purchase").
2) The shares purchased by the company may, in accordance with the provisions of this section and the regulations, either be cancelled or held as treasury shares.
3) The shares held by the company as treasury shares shall, as long as they are so held, in addition to any other conditions as may be prescribed, be subject to the following conditions: (a) the voting right of these shares shall remain suspended; and (b) no cash dividend shall be paid and no other distribution whether in cash or otherwise of the company's assets to members on a winding up shall be made to the company in respect of these shares.
Provided that nothing in this section shall prevent:
(a) Allotment of shares as fully paid bonus shares in respect of the treasury shares and; (b) The payment of any amount payable on the redemption of the treasury shares, if they are redeemable.
4- The board of directors shall recommend the purchase to the members. The decision of the board of directors shall clearly specify the number of shares proposed to be purchased, purpose of purchase including cancellation or holding the shares as treasury shares, the purchase price, period within which purchase shall be made, source of funds, justification for the purchase and effect on the financial position of the company.
5-The purchase shall be made only under the authority of a special resolution.
6-The purchase shall be made within a period as specified in the regulations.
7-The proposal of the board of directors to purchase shares shall be communicated to the Commission and to the stock exchange on which shares of the company are listed on conclusion of the meeting of the board of directors.
8-The purchase shall always be made in cash and shall be out of the distributable profits or reserves specifically maintained for the purpose.
9 -The purchase shall be made either through a tender offer or through stock exchange(s) in the manner specified in the regulations.
10 -The company may dispose of the treasury shares in the manner specified in the regulations.
11- Where a purchase has been made under this section, the company shall maintain a register of shares so purchased and enter therein the following particulars; (i) number of shares purchased; (ii) consideration paid for the shares purchase; (iii) mode of purchase; (iv) the date of cancellation or re-issuance of such shares; (v) number of bonus shares issued in respect of treasury shares; and (vi) number and amount of treasury shares redeemed, if redeemable.
12 -Whosoever contravenes any provision of this section, or any regulations made hereunder shall be punishable with a fine which may extend to thirty million rupees and shall also be individually and severally liable for any and all losses or damages arising out of such contravention.