The content below, written by Tan Boon Gin, CEO, SGX RegCo, is republished from the SGX website. SGX RegCo is Singapore Exchange Regulation, an independent regulatory subsidiary of SGX, which undertakes all front-line regulatory functions to promote a fair, orderly and transparent market. Before joining SGX, Mr Tan was the Director of the Commercial Affairs Department of the Singapore Police Force.
What companies should observe when conducting share buy-backs
Companies buy back their own shares for a variety of capital management reasons, such as to modify the company’s capital structure to improve the return on equity or to enhance earnings per share.
While share buy-back serves as a useful capital management tool and is a legitimate commercial activity, share buy-back transactions, like any on-market trading activities, are subject to relevant market conduct provisions of the Securities and Futures Act (SFA).
This means that like any other trading activity, share buy-backs should not be used to carry out any form of market misconduct such as insider trading or creating a false market. Such misconduct is illegal and if Singapore Exchange Regulation (SGX RegCo) suspects such an activity is taking place, we can intervene such as working with our Members to stop any attempt at further wrong-doing and issuing a “Trade with Caution” to alert the public to the findings of our investigation, if necessary.
A company is a legal person and therefore subject to the law including the SFA. Should the company undertake share buy-backs during periods when it is in possession of inside information, this may be construed as insider trading under the SFA, particularly if the person(s) authorised to give instructions for the share buy-back account is/are privy to such information.
To avoid all doubt, companies should refrain from any share purchases under a share buy-back 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.
The Listing Rules do not expressly prohibit a company from buying its own shares during any particular period. However, as best practice, a company should refrain from carrying out share buy-backs during the 2 weeks immediately preceding the announcement of its quarterly financial statements and 1 month immediately before the full-year financial statements.
A company should always seek to buy back its shares as cheaply as possible and with as little impact as possible on the prevailing share price. This is to ensure that the share buy-back is conducted in a manner aligned to the interests of shareholders. However, some companies have bought back shares in ways which have caused concern:
1. Some companies conduct share buy-backs near or at the market close, thereby influencing the closing prices of their own shares. They may even place 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.
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. The fact that the broad market was in a general decline then and that there was no positive corporate development to support the increase in share price further led to SGX RegCo labelling these incidents as “unusual trading activities”.
2. Rather than prudently trying to buy back the shares at relatively low prices, as is often the case with most share buy-backs, some companies seemed to be buying despite increasingly higher prices. The share buy-backs in these cases were executed at prices which, prima facie, adhere to the Maximum Purchase Price Limit. Nevertheless, given the entire set of circumstances, SGX RegCo is of the view that the share buy-backs were likely executed for the purpose of influencing the closing price as opposed to being bona fide purchases.
3. Some share buy-back activities were excessive, for instance, purchases that exceeded 30% 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.
Accordingly, where a company is observed to undertake share buy-backs in a manner that does not appear to be in the best interests of its shareholders as a whole, SGX RegCo expects Members and trading representatives (TRs) to enquire on the reasons for the orders. As with any orders received in the ordinary course of business, Members and TRs should satisfy themselves that the orders for share buy-back were executed for a legitimate commercial purpose and not for any ulterior motive. In particular, for securities with low liquidity which are more susceptible to price fluctuations, Members and TRs should also exercise care in ensuring that the share buy-back trades were executed in an orderly manner.
As mentioned earlier, SGX RegCo can use various means to tackle suspected cases of misconduct in share buy-backs.
For example, if the company conducting share buy-back activities as described above is also on the SGX watch-list, a steady increase in its market capitalisation could provide the company with the opportunity to leave the watch-list. In such circumstance, we will consider whether the increase in the market capitalisation has been obtained through artificial means and if so, SGX RegCo has the discretion of excluding the increase when evaluating the company’s application to exit the watch-list.
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.
Share buy-backs on the open market could potentially have a significant impact on the price and volume of a security and could extend over a considerable period in light of the share buy-back mandate. These transactions, like all others, should be conducted in accordance with the laws, regulations and rules that govern the marketplace.
If the price and volume of a security have been artificially interfered with through share buy-back activities, the investing public would be misled and deceived as to the genuine market value of the security. This will undermine the operation of a fair, orderly and transparent market.
Tan Boon Gin