The term normal course issuder bid, of Canadian origin, refers to the repurchase of one's own shares by a public company in order to cancel them. It is thus a repurchase of own shares that is used by publicly traded companies in Canada.
The NCIB is a practice used mainly for the following reasons:
- To force the share price upward
- Raise cash
- To avert a takeover
A company can buy back between 5% and 10% of its shares depending on how the transaction is conducted.
In order for LCIB to proceed, the NCIB must be approved in advance by the stock exchanges.
The issuer repurchases the shares gradually over a period of time, such as one year. This buyback strategy allows the company to buy back only when its shares are favorably priced.
How is the NCIB executed?
Public companies operating in Canada must file a notice of intention to do an NCIB with the exchanges on which they are listed and receive their approval before proceeding with a buyback. There are limits on the number of shares the company can repurchase in a single day.
In another type of approved issuer bid, a company will repurchase a specified number of shares from its shareholders at a predetermined date and price.
Once an NCIB has been approved, the company may proceed with repurchases as it sees fit during the predetermined period. The company may or may not repurchase the full number of shares it is authorized to purchase.
The reason an NCIB is launched is that the company's managers believe that the company's shares are currently undervalued. Thus, the NCIB allows for both buying at a favorable price and encouraging share prices to rise, going to reduce supply and thus unbalancing the market toward greater demand.
Once the value of the shares rises to the desired level, the company could sell part of its holding in order to raise cash, increase liquidity, and broaden its investor base.
Through a normal issuer bid, a company can take advantage of what it sees as a discount to the current share price.
Safeguarding the company
An NCIB can also be used to safeguard one's company from a hostile takeover attempt. In such cases, the company reduces the volume of its stock available in the market and regains more control over its shares.