'Share buy-backs exacerbate liquidity crisis'

Published: 12 November 2013

Listed companies are opting for share buy-backs instead of recapitalising their businesses, further exacerbating the prevailing liquidity crunch, the Securities and Exchange Commission (SecZim) has said.

This comes as most Zimbabwe Stock Exchange-listed firms have embarked on the scheme with more intending to.

"What makes the practice worrisome for Zimbabwe, however, is the already illiquid market made worse by reducing shares in circulation and chronic cash crunch choking most listed companies to justify spending on own shares rather than providing capital for business," said the capital markets regulator's chief executive Tafadzwa Chinamo.

He added that the prevalence of owner-managers on share registers, share options and failure to raise much needed capital was detrimental.

Chinamo said that most companies were "announcing share buy-backs regardless of financial performance".

"Besides there being a 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 what meets the eye," he said.

Share buy-backs are commonly used in advanced markets, to the extent that there is a creation of a pool of funds whose overriding objective is to buy shares of companies planning to carry out the exercise.

Share buy-backs are usually an indication that the company's management thinks the shares are undervalued.
The company can buy shares directly from the market or offer its shareholder the option to tender their shares directly to the company at a fixed price.

Chinamo said the local bourse should thoroughly examine share buy-backs to ensure that minority shareholders are not prejudiced.
- dailynews

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