KARACHI, June 25: On Tuesday, the company told the stock exchange that an extraordinary general meeting of the shareholders held on June 20, had approved buy-back of 631,055 shares at Rs80 per share. It is an interesting development for the country’s corporate sector. The decision of Universal Leather & Footwear Industries Limited to repurchase its own shares, is only the second such offer by a listed company in Pakistan. Alhamd Textile Mills Limited — a slightly known textile mill at Multan — had made the first ever buy-back offer of shares in April, thus written a new chapter in the country’s corporate history.

The Companies Ordinance, 1984 covers the ‘powers of a company to purchase its own shares’ under section 95A, wherein it requires such companies to stipulate the maximum number of shares to be purchased; maximum price at which those are to be purchased and the period within which purchases are to be made.

The Securities and Exchange Commission of Pakistan (SECP) had issued the Companies (buy-back of shares) Rules, 1999 on December 14, 1999, which lays down in great detail the regulations and procedures that are required to be followed by corporates in repurchase of shares.

But the repurchase or buy-back of shares by companies, which are also called ‘treasury stock’, ought not to be confused with the purchase of minority shareholdings by the sponsors of companies. About half a dozen companies were de-listed from the Karachi Stock Exchange only last year after their sponsors bought back the shares of minority shareholders and sought delisting.

By contrast companies that buy-back shares or ‘treasury stock’, do not automatically get delisted. Corporations in developed world, frequently reacquire shares of their own capital stock by purchase in the open market. Paying out cash to reacquire shares reduces the assets of the corporation and decreases the shareholders’ equity by the same amount.

Alhamd Textile Mills is buying back 1.631m shares, which account for nearly 19pc of its equity. The company had fixed the price at Rs21 against the market value of Rs4.70 and stipulated a period of four months for buy-back, from April 30 to August 31.

Universal Leather has a sound record of profitability and dividends. Cash dividend at 100pc was paid for 2000 and 50pc for 2001.

Built up over many years of sound operations, the company’s reserves have ballooned to several times its paid-up capital of Rs40.0m, which produced the break-up value of Rs87.77 for the 10-rupee share at the close of financial year 2001. The board had disbursed the last bonus to the shareholders at 3.78pc in 1996.

At the extraordinary general meeting on June 20, the company told the shareholders that the decision to buy-back 631,055 shares (15pc of the outstanding shares) had been taken by the company “to facilitate those shareholders who intend to dispose of their shares but cannot do so as shares of the company are seldom traded”. The highest price quoted on the stock exchange in 2000 stood at Rs58.

The buy-back price of Rs80 appears to be reasonably high, but the company has possibly given a very short maximum time to the shareholders to submit the offer for buy-back on prescribed form: From June 20 to July 5 — fifteen days.

Universal Leather reported sales of Rs1.5bn for the financial year to end-June 2001. For the latest nine months to March 31, 2002, the company has posted after tax profit of Rs51m on sales valued at Rs735m. This is lower than profit of Rs57m on turnover of Rs1.04bn for the comparable nine months of last year, and the decline has been attributed to the Sept 11 events. Exports sales suffered, which historically has been the company’s major forte.

All said and done, there is a more interesting end to the saga of the buy-back of shares by Universal Leather. The 15-per cent stock that the company has offered to buy-back must represent about all the shares held by outside shareholders. If all stockholders were to exercise their option, there would be nil floating stock and the share might never come up for trading. Does the company then — technically speaking — remain a publicly traded company?