Healing from COVID-19 : OJK's Buyback Policy
Observing these circumstances on how COVID-19 affects public health, the pandemic also brings chaos in stock market progress. COVID-19 outbreak raises concerns of stock market investors, thereby selling their stocks at any price to avoid further loss. This led to the declining value of IDX Composite to lower than 5000. But now, lots of companies decided to take back their stocks from the market. When a company buys back its own outstanding stocks through the open stock market, it’s called stocks buybacks or shares repurchase. Outstanding stocks are the number of company’s stock currently held by its shareholders. Stock buybacks will reduce the number of outstanding stocks, which increases both the demand for its stocks and its price.
When the stocks are considered undervalued, the company can choose to repurchase all or some of the outstanding stocks. Stock buybacks will increase the demand for the company’s stock by the company itself while the supply is being reduced. So, the stock's price will rise as a result. Besides that, by reducing the number of outstanding stocks, each stock becomes more valuable because each stock now holds a greater percentage of ownership in the company.
Reduced number of outstanding stocks will increase the company’s Earnings Per Share (EPS). EPS can be calculated by dividing the total earnings of a period with the number of outstanding stocks. The result serves as an indicator of how much money the company makes for each stock. The higher the company’s EPS, the more profitable it is considered. A company with higher EPS will attract more investors.
Stock buybacks give the company lots of benefit. However, stock buybacks have no contribution to increase the company’s productivity. Companies should use their cash to gain more capital and increase their productivity. During this pandemic, the company can also transfer their buyback expenses to other matters such as do more Company Social Responsibility (CSR).
Responding to these circumstances, OJK issued the license for all issuers or public companies in order to do ‘buyback stocks’ without the General Meeting of Shareholders (GMS). The provisions are issued in OJK Circular Letter No. 3/SEOJK. 04/2020 dated 9 March 2020 concerning other conditions as market conditions that fluctuate significantly in the implementation of shares buyback issued by the issuer or public company. "The existence of relaxation without the General Meeting of Shareholders (RUPS), there are already 60 issuers who will buy back with the amount of Rp 17.28 trillion, " said chairman of the Board of Commissioners of OJK, Wimboh Santoso, Sunday, 5 April 2020.
Mr. Wimboh said, a decrease in the value of the Consolidated stock price Index (IHSG) which is happening is the impact of the spreading negative sentiments on other exchanges. These sentiments are the corona virus outbreak that has been declared a pandemic by the World Health Organization (WHO).
With this regulation, the public companies or issuers become more free to do buyback when their stock price is too cheap.
IDX Composite Fluctuation in the past 3 months
Therefore the announcement of stock buyback by issuers is able to reduce the selling chaos of stocks and should make market participants turn to make a purchase of shares. This pushes the stock price up and becomes more stable and can eliminate the panic of market participants. However, not necessarily all companies can do buyback. It depends on the availability of cash or funds in the company. Other reasons that cause the company not to do buyback are that they have a lot of priority projects to do or they want to allocate the funds to face any risks or problems in the future.
Some issuers have done a stock buyback when the market is panicked, and the average activity is successfully raising the stock price. Indeed, some cases when starting stock buyback does not directly raise the price. It took a while but it opened the issuer's opportunity to make a purchase at several levels of price and after that the price started going up.
Interestingly, the average issuer when reselling the stock multiplies the profit. It means the welfare of shareholders increased due to buyback action because the company's value also rises. In our opinion, the OJK regulation gives the issuer more flexibility to do a stock buyback strategy to improve the welfare of shareholders.
Written by : Felicia Rebecca Togiuli Aritonang, Safina Dhita Ardiwidana
Illustrated by : Felicia Rebecca Togiuli Aritonang, Safina Dhita Ardiwidana