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SGX lays out what to observe when conducting share buybacks
THE Singapore Exchange (SGX) has advised companies to be careful not to breach insider trading or market manipulation rules when conducting share buybacks.
It advised, for instance, that companies refrain from buybacks shortly before the release of financial statements, and highlighted share buyback approaches which have caused concern.
In a regulator's column on Nov 26, Singapore Exchange Regulation (SGX RegCo) chief executive officer Tan Boon Gin cautioned that while a share buyback "serves as a useful capital management tool and is a legitimate commercial activity", using one to carry out any form of market misconduct such as insider trading or creating a false market is illegal, and SGX RegCo can intervene if it suspects such an activity is taking place.
SGX’s listing rules allow a company to purchase its own shares if it has obtained the prior approval of shareholders in a general meeting, with the share buyback limited to 10 per cent of the total number of issued shares as at the date that such approval is obtained. In addition, companies buying back shares via on-market acquisitions must not pay more than 105 per cent of the average closing market price of the security over the last five consecutive active trading days.
On insider trading, Mr Tan noted that should a company undertake share buybacks when it is in possession of inside information, this may be construed as insider trading. "To avoid all doubt, companies should refrain from any share purchases under a share buyback programme at any time when there are material developments or any unannounced material information which may have an impact on the company’s share price or trading volume, until such inside information has been publicly disclosed," he said.
While the listing rules do not expressly prohibit share buybacks in any particular period, Mr Tan said that as best practice, companies should refrain from share buybacks during the two weeks immediately preceding the announcement of quarterly financial statements, and one month immediately before the full-year financial statements.
Noting that companies should always seek to buy back shares "as cheaply as possible and with as little impact as possible on the prevailing share price", the column also highlighted how some companies have bought back shares in ways which have caused concern. These include doing so near or at the market close, thereby influencing the closing prices of their own shares.
Some have even placed orders for as few as 100 to 300 shares near or at the market close, "which would hardly make a dent in any capital management programme", noted Mr Tan. "In a number of cases, this led to the closing price of the company’s shares climbing progressively and created the impression that the share price was on a rising trend." With the broad market in a general decline then and no positive corporate development to support the increase in share price, this led to SGX RegCo labelling these incidents as 'unusual trading activities'.
Also cause for concern is when companies seem to be buying back shares despite increasingly higher prices. Though such buybacks were executed at prices which, at first sight, adhere to the maximum purchase price limit, SGX RegCo was of the view that these buybacks "were likely executed for the purpose of influencing the closing price as opposed to being bona fide purchases".
It also flagged "excessive" share buyback activities such as purchases that exceeded 30 per cent of the daily on-market traded volume. "These may interfere with the trading of shares, and result in the artificial inflation of the trading volume and price of the security," said Mr Tan.
Where a company is observed to undertake share buy-backs in a manner that does not appear to be in shareholders' best interests, members and trading representatives should enquire on the reasons for these orders, and satisfy themselves that the orders were executed for a legitimate commercial purpose and not for any ulterior motive, he said.
In particular, for securities with low liquidity which are more susceptible to price fluctuations, members and trading representatives (TRs) should also exercise care in ensuring that the share buyback trades were executed in an orderly manner.
The column also noted that if a company suspected of misconduct is also on the SGX watch list, a steady increase in its market capitalisation could provide the company with the opportunity to leave the list. In such a case, SGX RegCo will consider whether the increase in the market capitalisation has been obtained through artificial means. If so, SGX RegCo has the discretion of excluding the increase when evaluating the company’s application to exit the watchlist.
"We will also advise members and TRs who suspect potentially manipulative activities when assessing orders for share buy-back to be prepared to reject such orders," said Mr Tan.