All You Need to Know About Treasury Stocks

Treasury stock refers to shares of a company's own stock that have been repurchased from the open market and are held by the company. These shares are not considered outstanding and do not have voting rights or receive dividends. Companies repurchase their own stock for various reasons, including boosting the stock price, improving financial ratios, and using them for employee stock options.

Treasury stocks are shares bought back by a company from shareholders. These shares are not counted in earnings per share or dividends, and they lack voting rights. They can either be held in the company's treasury or reissued later.

Companies may choose to buy back their own shares for several strategic reasons:

• To reduce the number of shares outstanding, which increases earnings per share (EPS)
  

• To return surplus cash to shareholders in a tax-efficient manner
  

• To avoid hostile takeovers by reducing the number of shares available in the open market
  

• To signal confidence in the company’s future performance, as buybacks can imply the company believes its shares are undervalued
  

• To use shares for stock options for employees or mergers and acquisitions

This strategic move is part of broader capital management and shareholder value enhancement plans.

In accounting, treasury stocks are recorded as a contra equity account, meaning they reduce total shareholders’ equity.

There are two primary methods of accounting for treasury stocks:

Cost Method

• The treasury shares are recorded at the price they were bought back
  

• No impact on share capital or share premium

Par Value Method

• The buyback is recorded by reducing share capital and additional paid-in capital
  

• Any excess paid is adjusted through retained earnings

In both cases, treasury stock does not count as an asset and is not eligible for dividend payments or voting.

Holding treasury stock affects several financial metrics:

Investors often analyse these ratios to assess the effect of share repurchases on a company’s financial health.

While both involve shares no longer in circulation, there is a key difference:

• Treasury Stock: Can be reissued or cancelled in the future
  

• Retired Stock: Permanently cancelled and cannot be reissued

Companies may retire shares after holding them in treasury for some time.

In global markets (e.g., US): Companies typically utilise treasury stocks in a few specific ways:

• Reissuing for employee stock compensation plans
  

• Using in mergers or acquisitions as payment
  

• Reselling in the open market during favourable market conditions
  

• Retiring to permanently reduce share count

      In India: Treasury stock must be extinguished within 7 days post buyback. Hence, Indian companies cannot reissue or use them in any manner after buyback

Under the Companies Act, 2013 in India, companies are allowed to buy back shares under specified conditions. However:

• They cannot hold treasury stock indefinitely like companies in some other jurisdictions (e.g., the USA)
  

• Once shares are bought back, they must be extinguished and physically destroyed within 7 days as per SEBI regulations

Thus, in India, the concept of treasury stock functions more like a temporary phase before cancellation.

Buybacks influence shareholders in both direct and indirect ways:

• Share Price: May increase due to reduced supply and positive market sentiment
  

• Earnings per Share (EPS): Increases as the same earnings are distributed among fewer shares
  

• Dividend Allocation: May change if the company adjusts dividend per share post buyback
  

• Control and Voting Rights: More concentrated among fewer shareholders

Investors view buybacks as an indicator of a company’s efficient use of excess capital, although they must be weighed against long-term reinvestment opportunities.

No, treasury shares are excluded from the calculation of market capitalisation because they are not available for trading in the public market. Market capitalisation is calculated as:

Market Capitalisation = Share Price × Shares Outstanding (excluding treasury shares)

This ensures that only the publicly held, actively traded shares are considered in valuation.

Companies must carefully assess the impact before undertaking large-scale buybacks.

Treasury stocks show a company's strategy regarding capital structure and shareholder value. Though they don’t confer ownership or rights, their management reflects a company’s confidence and capital utilization approach.

This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.