Stock buybacks, also commonly referred to as share repurchases, occur when a company purchases its own shares from the market. This process reduces the number of outstanding shares, often leading to an increase in the value of the remaining shares. In Nepal, stock buybacks have gained attention, particularly among companies listed on the Nepal Stock Exchange (NEPSE). However, the process is regulated by the Companies Act 2063, and specific rules must be followed.
In this article, we will explore how stock buybacks work in Nepal, the legal framework governing them, and whether companies listed on NEPSE actually engage in stock repurchases.
What Is a Stock Buyback?
A stock buyback occurs when a company repurchases its own shares from the stock market, reducing the number of shares available for trading.
Companies typically buy back shares for several reasons, including:
- Improving Shareholder Value - By reducing the number of shares outstanding, the company can increase earnings per share (EPS), potentially boosting the share price.
- Signalling Confidence - Buybacks often signal to investors that the company believes its stock is undervalued, thereby increasing investor confidence.
- Excess Cash Reserves - Companies with surplus cash reserves may repurchase shares as an efficient use of capital, especially if they have limited investment opportunities.
Stock Buyback Rules in Nepal
In Nepal, stock buybacks are governed by both the Companies Act, 2063, and regulations issued by the Nepal Stock Exchange (NEPSE).
The Companies Act has specific provisions regarding share buybacks, while the Securities Board of Nepal (SEBON) also provides guidelines to ensure that such repurchases are conducted fairly and transparently.
Key Legal Provisions Under the Companies Act, 2063
The Companies Act, 2063, under Section 61, provides strict regulations concerning the repurchase of shares by a company:
According to Section 61 of the Companies Act, 2063, companies are generally prohibited from purchasing their own shares unless specific conditions are met.
This provision is designed to prevent companies from artificially inflating their stock prices by buying back shares.
- A company may repurchase its own shares if it has sufficient free reserves and if shareholders approve the buyback.
- The repurchase must not exceed 25% of the total number of shares issued by the company.
- The buyback should be within the framework of the company’s financial position, ensuring that it does not affect the company’s solvency or ability to meet its liabilities.
A special resolution must be passed by the shareholders in the Annual General Meeting (AGM) or an Extraordinary General Meeting (EGM) to approve the buyback.
The company’s board also needs to approve the plan, ensuring that all necessary financial and regulatory checks are met.
Regulations by SEBON and NEPSE
In addition to the Companies Act, the Securities Board of Nepal (SEBON) has established guidelines for listed companies on NEPSE to carry out stock buybacks.
These regulations ensure transparency, fairness, and adequate disclosure during the buyback process. Key points include:
- Public Disclosure – Companies must disclose their intention to repurchase shares to SEBON and NEPSE, including the number of shares, the purpose of the buyback, and the financial implications.
- Buyback Program – The buyback must be executed openly and transparently, often through an open market purchase or via tender offers where shareholders are invited to sell their shares.
- Timeframe – Companies are typically given a defined time limit for completing the buyback, and they must adhere to the price range set during the buyback announcement.
Do NEPSE Companies Actually Engage in Stock Buybacks?
Although stock buybacks are a widely recognised practice globally, Nepalese companies listed on the NEPSE have been relatively slow to adopt them.
Several factors contribute to this cautious approach:
Legal and Regulatory Constraints
The legal framework, especially the prohibition under Section 61 of the Companies Act, makes buybacks a complex process for companies.
Many companies may find it challenging to meet regulatory requirements, such as obtaining shareholder approval and maintaining required reserves.
Lack of Cash Reserves
Stock bubbles require substantial capital. Many Nepalese companies focus more on reinvesting profits in the business or expanding operations than on using cash for buybacks.
Market Conditions
Nepal’s stock market is relatively negligible compared to more developed markets, and companies may be more cautious about engaging in buybacks, as there may not be sufficient liquidity to execute large repurchases without disrupting the stock price.
Alternative Strategies
Instead of buybacks, some companies focus on dividends or capital expenditures to return value to shareholders or enhance their growth prospects.
Despite these challenges, public companies have at times engaged in stock repurchases.
These companies typically view stock buybacks as a means to enhance shareholder value and demonstrate financial strength.
Why Do Companies Consider Stock Buybacks?
Even though stock buybacks are not common in Nepal, companies that do consider buybacks typically have specific goals in mind:
- Boosting Shareholder Value - By reducing the number of outstanding shares, companies can increase the earnings per share (EPS) and potentially boost the market price of shares.
- Optimising Capital Structure - If a company has surplus cash, it may choose to repurchase shares rather than hold the money or invest it in low-return assets.
- Signalling Market Confidence - A buyback may indicate that the company believes its stock is undervalued, reassuring investors and potentially boosting market confidence.
- Improved Financial Metrics - Stock buybacks can improve certain financial ratios, such as return on equity (ROE), by reducing the number of outstanding shares.
Comparison Between Bonus Shares and Buybacks in Nepal
In Nepal, companies generally prefer issuing bonus shares instead of repurchasing shares through buybacks. Here is a comparison of the two:
| Features | Bonus Shares | Stock Buybacks |
|---|---|---|
| Increases Share | Yes, bonus shares increase the number of shares. | No, stock buybacks reduce the number of shares. |
| Dilutes EPS | Yes, issuing bonus shares dilutes EPS as the earnings are spread over more shares. | No, EPS increases as fewer shares remain outstanding. |
| Market Reaction | Often speculative and temporary, with short-term effects. | Often positive and sustained, as it signals financial strength. |
| Tax Implications | No immediate tax on bonus shares; tax applies on capital gains when shares are sold. | No dividend tax for shareholders holding repurchased shares. |
| Regulatory Ease | Familiar and straightforward process in Nepal. | Complex process in Nepal requiring multiple approvals. |
| Promoter Benefit | Often used to increase the promoters' stake without additional cash investment. | Less direct benefit for promoters, mainly benefits shareholders. |
While both bonus shares and stock buybacks serve different purposes, bonus shares are more common in Nepal due to their familiarity, simplicity, and tax advantages.
Stock buybacks are less common because they involve greater regulatory complexity and offer fewer immediate benefits to promoters.
Challenges of Stock Buybacks in Nepal
While the practice of stock buybacks can offer benefits, companies in Nepal face several challenges when considering this option:
The Companies Act, 2063, restricts the ability of companies to repurchase their shares unless certain conditions are met. This adds complexity to the process.
For many companies, especially smaller ones, using available cash for stock buybacks may not be a viable option due to the need for investment in growth or to cover operational costs.
The smaller size of Nepal’s stock market means there may not be sufficient market liquidity to facilitate large-scale buybacks without influencing the stock price.
Conclusion
Stock buybacks, although an established practice globally, remain a relatively new concept in Nepalese corporate practice.
While the Companies Act, 2063 and SEBON regulations provide a clear framework for such transactions, the practical adoption of buybacks by Nepal Stock Exchange (NEPSE)-listed companies remains limited due to various regulatory and financial challenges.
However, for companies with substantial cash reserves and strong growth potential, stock buybacks can be a powerful tool to enhance shareholder value, thereby providing investors with a sense of security and reassurance.
As Nepal’s capital market matures, stock buybacks may become more common among companies seeking to boost competitiveness and investor appeal.
