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NCIB – What Is A Normal Course Issuer Bid?

NCIB – What Is a Normal Course Issuer Bid?

NCIBNCIB – Normal Course Issuer Scheme is a stock buyback program in Canada where a publicly-traded firm repurchases its shares to cancel them.  The term NCIB is an acronym for normal course issuer bid. Depending on how the transaction is carried out, a corporation may buy back between 5% and 10% of its shares. The issuer progressively repurchases the shares over a period of time, such as a year. This repurchasing approach allows the corporation to buy only when the price of its stock is favorable.

In most cases, a corporation will launch an NCIB normal-course issuer bid because it believes its publicly traded stock is cheap. Repurchasing shares reduces the number of shares available for purchase in the market. The approach raises demand while decreasing supply, resulting in higher stock prices.

NCIB – A Closer Look

Before proceeding with a repurchase, public firms in Canada must file a Notice of Intention to Make an NCIB.  This filing is made to the stock exchanges on which the firm is listed to obtain their approval. The amount of shares that the business can repurchase in a single day is limited. Another sort of approved issuer bid involves a corporation repurchasing a certain number of shares from its owners at a predetermined date and price. When a business repurchases all of its outstanding shares in this manner it is called going private.  As a result, the shares can no longer be publicly traded and the firm is delisted from that exchange.

NCIB – Steps to Make a Normal Course Issuer Bid

Notice of Intention

A Notice of Intention is required for every publicly traded firm to execute a normal course issuer bid.  This is in accordance with Section 6 of the policy. The number of shares to be acquired must be specified by the board of directors. Nonetheless, if the corporation does not intend to purchase stocks at this time, the Notice of Intention does not need to be filed. If the company fails to meet the ongoing listing standards, the exchange will reject the Notice of Intention. It applies even after the issuer has completed all of the acquisitions outlined in the notice. An NCIB cannot extend for more than one year beyond the commencement date.

Press Release

The next stage in making the bid is to issue a press release.  This announces the company’s intention to make a normal course issuer bid. The contents of the news release should include a synopsis of the notice’s material components. For example, the identity of the person carrying out the bid on behalf of the company, the prior purchase, the rationale for the bid, and the percentage of the outstanding and number of stock sought are some of the main parts of the release. If the news release is delayed, the issuer is required to submit a draft to the exchange.  This is followed by a news release as soon as the notice is approved by the exchange.

Disclosure

The company’s next report must provide a summary of the notice’s material information. The disclosure must be mailed to shareholders and include instructions on how to receive a free copy. Following that, the purchase will begin three days after all documentation is delivered. The exchange is required to issue an exchange circular reporting the bid after accepting the Notice of Intention.

Amendment

The publishing of the exchange circular is followed by an amendment.  At this point, the firm can revise its notice to raise the number of shares to be purchased.  Nevertheless, the total must remain within the policy’s required number of shares. The overall stock ownership can be altered if the normal course issuer bid is large enough. For example, the company might reclaim a controlling interest in its stock ownership.  This would prevent outside parties from disputing the firm’s ownership and decisions.

Ways an NCIB Can Be Used

Once an NCIB is approved, the corporation may proceed with repurchases as it deems fit over the stated term. For instance, the corporation may or may not repurchase the entire number of shares allowed to be purchased. When a company’s leadership believes its stock is undervalued in the market, an NCIB is launched. A corporation initiates an NCIB, like any other stock repurchase program, because its executives think that the company’s publicly traded stock shares are undervalued. They are limiting the number of shares accessible on the market by taking them back. As a result, their own purchasing behavior diminishes supply and increases demand, causing the price to rise.

Once the share price has reached the targeted level, the corporation may sell a portion of its stock to raise cash, boost liquidity, and broaden its investor base. A normal-course issuer bid allows a corporation to take advantage of what it perceives to be a discount on the stock’s existing price.

Regain Controlling Interest

An NCIB can also be used to thwart a hostile takeover effort. In such circumstances, the corporation reduces the number of shares accessible on the market.  At the same time, the firm gains more control over its own stock. If the repurchase is large enough, it has the potential to affect the concentration and composition of stock ownership. In other words, a third party may not be able to contest the company’s controlling interest. Once this occurs, the corporation can maintain control by simply issuing insufficient new shares.  In this way, management can limit any single investor from acquiring enough shares to influence shareholder votes.  In turn, no third party can impose its agenda on the company’s board of directors.

NCIB Example

MEG Energy Corp. (TSX: MEG) announced in March 2022, that the Toronto Stock Exchange (the “TSX”) has approved the Corporation commencing a normal course issuer bid.

Pursuant to the Bid, MEG will purchase for cancellation, from time to time, as it considers advisable, up to a maximum of 27,242,211 common shares of the Corporation. The Bid will become effective on March 10, 2022, and will terminate on March 9, 2023, or such an earlier time as the Bid is completed or terminated at the option of MEG. (Source: newswire.ca)

MEG’s intention to initiate a share repurchase program is consistent with the Corporation’s capital allocation strategy.  This includes increasing shareholder returns through share repurchases and continuing debt reduction. In an earlier press release, MEG disclosed that the market price of its ordinary shares does not always properly reflect the fundamental value of its business and future prospects. The Corporation believes that purchasing common shares provides an attractive investment opportunity.  Further, the stock buy-back is in the best interests of MEG and its shareholders.  Of course, this is dependent on the trading price of its common shares and other relevant variables.

Up Next: What Is an Option Chain?

Option ChainAn option chain is a list of all available option contracts for a particular stock or security.  The information is quoted in a matrix table called a chain sheet. An option chain lists all the possible options contracts for a specific stock or investment. It displays all listed puts and calls, as well as their expiration dates, strike prices, volume, and pricing statistics. The information is provided for a specified underlying asset over a range of maturity periods. Typically, the chain is classified by expiration date and divided into calls and puts. An options chain contains detailed quotation and price information. It is distinct from an options series or cycle, which just indicates the available strike prices or expiration dates.

An option chain may appear to be rows of random numbers at first glance.  However, the chain sheet contains vital information about the stock or security.  Not only its present value but where it may trend in the future. Options are not available for all publicly traded stocks.  However, for those that are, the information is given in real-time and in a consistent order. Learning to decipher an option chain can help investors become more informed.  Ultimately, this can mean the difference between making or losing money in the options markets.

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