BUY BACK OF SHARES IN PAKISTAN AS TREASURY SHARES

[kamranACA]

Dears,

Following press release on aired on 10 January 2009 is a nice step forward by SECP to bring the regulations at par with some other advanced countries and help the corporate sector in maintenance and strengthening of the shares' prices.

In current scenario this would also be proved a measure to maintain or improve the share prices and provide the companies a chance to earn by holding/reselling their own shares.

This goes

QUOTE

Securities and Exchange Commission of Pakistan
Internal & External Communications Department

PRESS RELEASE
FOR IMMEDIATE RELEASE

SECTION 95A OF COMPANIES ORDINANCE, 1984 AMENDED

ISLAMABAD – JANUARY 10, 2009 The declining trend in the Securities Market and the consequent reduction in the value of the shares of listed companies has made these shares quite attractive. Amongst others, this provides an opportunity to the listed companies also to buy-back their own shares.

Therefore, on an initiative and proposal of the Securities and Exchange Commission of Pakistan (SECP), section 95A of the Companies Ordinance, 1984 has been amended vide Companies (Amendment) Ordinance, 2009 to enable the listed companies to buy-back their own shares and hold them as treasury shares. Previously the Companies Ordinance permitted the listed companies to buy-back their own shares, however the purchased shares had to be cancelled forthwith resulting in the reduction of the paid-up capital of the company. After the latest amendment, the listed companies can buy-back their own shares and hold them as treasury shares, which can then be re-issued/resold in the manner to be prescribed by SECP in the regulations.

According to the amended section 95A, the decision to buy-back the shares is required to taken by the board of directors as well as three-fourth of the members who are present and entitled to vote in a general meeting of the company. The decision shall clearly specify the number of shares proposed to be purchased, purpose of purchase i.e. 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. The shares can be purchased either through tender process or through the stock exchange in the manner to be prescribed by the regulations. The law also provides that the purchase shall always be made in cash and only out of the distributable profits or reserves specially maintained for the purpose by the company. Importantly, it also provides that the voting rights and the right to receive dividend of the shares so purchased shall remain suspended as long as they are held as treasury shares by the company itself. A hefty fine of up to thirty million rupees has been provided for violation of the law in addition to liability for any losses or damages caused by such violation.

It is expected that listed companies which feel that their shares are under-valued at the stock market and have cash reserves available with them will grab the opportunity to buy-back their shares. In case the shares are cancelled after purchase, the earning per share of companies will be improved. If they are retained as treasury shares, they can be resold at a higher price later. In any case the purchase will bring stability in market price of such shares.

SECP is preparing regulations for this purpose which shall be notified in the Official Gazette for seeking public opinion during the coming week.


Sd.
Imran Ghaznavi (Head of Internal & External Communications/Official Spokesman)


UNQUOTE


Regards,


KAMRAN

[Afzaal Rasheed]

Very useful information.
What will be the accounting treatment and how the profit on sale of share will be treated.

[kamranACA]

Dear,

The president of Pakistan has issued Companies (Amendment) Ordinance, 2009 to promulgate the above press release as a binding law. The URL link is given below

http//www.secp.gov.pk/corporatelaws/pdf/Comp_ord_amend.pdf

However, it appears further regulations will be issued to provide for certain procedures under this Ordinance.

President cannot issue an Ordinance if the National Assembly is in session. It's peculiar but I could not find out the date of issuance of this Ordinance either from the text or the website of SECP to check whether or not National Assembly was in session on that date. I mentioned it here so that some body may help me in this regard.

Accounting treatment and procedure under section 95A of the Companies' Ordinance, 1984 was prescribed earlier on but I believe it would be different now.

In my view, it would be simple purchase and sale transcation of securities in case the bought back shares are not cancelled. These will appear as treasury shares (investment) on assets side and continue as equity (share capital) on liabilities side in the balance sheet. Now, I can't say with certainity that how these will be classified; either under IAS 39 or otherwise, and what will be the measurement basis on each balance sheet date. I think the upcoming regulations should elaborate this fact. To my apprehension, the classification should be as per IAS 39.

In other case (where shares will be cancelled) the earlier procedure of section 95 A of the Companies' Ordinance, 1984 will be followed, I guess.

Let's see what regulations will come up with.


Regards,


KAMRAN.

[Owais Bhai]

Since treasury shares has been allowed first time in Pakistan, the CO84 does not provide accounting as such. There are two methods i.e. at cost and at par. Generally cost method is used whereby actual acquisition cost is recorded in a separate account to be shown on the Balance Sheet as part of equity after net equity balance. Any difference on resell/reissue is kept in another seperate account which is finally closed in the retained earnings.

Can someone further add to this for the benefit of all.