Companies must take care not to breach insider trading or market manipulation rules when conducting share buybacks, the Singapore Exchange (SGX) has warned.
The guidance also advised firms to refrain from buybacks shortly before the release of financial statements and pointed to buyback approaches that have caused concern.
Singapore Exchange Regulation (SGX RegCo) chief executive Tan Boon Gin said in a published column on Monday that while a 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.
SGX listing rules allow a company to buy its own shares if it has obtained prior approval from shareholders in a general meeting. The buyback is limited to 10 per cent of the total number of issued shares as of the date the approval is obtained.
Mr Tan noted that if a company undertakes a buyback when it has inside information, it may be construed as insider trading.
"To avoid all doubt, companies should refrain from... a buyback programme... when there are material developments or any unannounced material information which may have an impact on the share price or trading volume, until such inside information has been publicly disclosed," he said.
PLAYING IT SAFE
To avoid all doubt, companies should refrain from... a buyback programme... when there are material developments or any unannounced material information which may have an impact on the share price or trading volume, until such inside information has been publicly disclosed.
SGX REGCO CHIEF EXECUTIVE TAN BOON GIN, on when companies should avoid buyback programmes.
While the listing rules do not expressly prohibit share buybacks in any particular period, he said companies should hold off during the two weeks immediately preceding quarterly statement releases and one month before full-year results.
He also noted how some companies have bought back shares in ways that caused concern. These include doing so near or at the market close, thereby influencing the closing prices of their own shares.
Some firms 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", he noted. "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 share price rise, SGX RegCo, SGX's regulation unit, opted to label these incidents as "unusual trading activities".
There is also concern when companies seem to be buying back shares despite increasingly higher prices. Though such buybacks were executed at prices which, at first sight, adhered to the maximum purchase price limit, SGX RegCo felt 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," Mr Tan said.
Where a firm is undertaking buybacks in a way that does not appear to be in shareholders' best interests, trading representatives should make inquiries and satisfy themselves that the orders were executed for a legitimate commercial purpose and not for any ulterior motive, he added.
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 it with the opportunity to leave the list. SGX would then consider whether the increase in the market capitalisation had been obtained through artificial means.
If so, it can exclude the increase when evaluating the company's application to exit the watch list.