Treasury Stocks in India (2025) – Meaning, Features and Market Impact
Treasury stocks are shares of a company that have been repurchased by the company and held in its treasury. Although treasury stock might not be as popular as other types of stocks, they play an essential role in the financial management of companies. This blog will examine what treasury shares are, why companies repurchase them, and how they affect financial statements. Moreover, we will also tell you how you can invest in the share market via smallcase.
Treasury Stock Definition: What Are Repurchased Shares?
Treasury shares, also known as “reacquired shares,” are stocks that a company has previously issued and then repurchased. These shares are kept in the company’s treasury rather than being retired, meaning they are not available for public trading. Companies can acquire treasury stock for various purposes and through multiple methods, such as open market purchases or employee stock option plans (ESOPs).
Where Is Treasury Stock Reported?
Treasury stock appears on the balance sheet under the shareholders’ equity section. It is categorised as a contra-equity account, alongside other equity accounts.
What is the Treasury Stock Method?
The treasury stock method is a way of calculating the impact of dilutive securities. This may include stock options, warrants, and convertible securities on the earnings per share (EPS) of a company.
The method assumes that the company uses the proceeds from the exercise of these securities to repurchase its own shares in the open market, which it then holds as treasury stock.
The company determines the number of additional shares that investors can purchase with the proceeds from the dilutive securities by dividing the proceeds by the average market price of the company’s stock during the reporting period. Thus, they add this additional number of shares to the outstanding shares for the EPS calculation.
Here is the Treasury Stock Method formula:
Additional Shares Outstanding = [Gross “In-the-Money” Dilutive Securities] – [Repurchased Shares]
*Additional shares outstanding = n – (n x K / P)
*Additional shares outstanding = n x (1 – K / P)
Where:
| Repurchased Shares | Option proceeds |
| n | Shares from exercised options and warrants |
| K | Average exercise share price (strike price) |
| P | Average share price for the reporting period |
Note: Companies widely use the treasury stock method to calculate the effect of dilutive securities on EPS in their financial reports.
What is the Intention Behind Share Repurchases?
Companies often repurchase their shares for various reasons, each having different impacts on the company and its shareholders:
Re-selling
Companies might buy back shares to hold them in reserve as treasury stock. These shares can be reissued later, either to raise funds or as part of strategic moves like mergers or acquisitions.
Gaining a Controlling Interest
By buying back shares, a company reduces the number of outstanding shares, which can increase the ownership percentage of existing shareholders. This also helps in preventing hostile takeovers.
Undervaluation
When a company’s stock price is undervalued in the market, it might repurchase shares to reduce supply and potentially drive the price up. This can benefit the remaining shareholders by increasing the stock value.
Retiring Shares
In some cases, repurchased shares are permanently retired, meaning they’re removed from circulation. This reduces the total share count, which can affect dividends and the overall distribution of profits.
Improving Financial Ratios
A stock buyback in India can improve important financial ratios, like Return on Assets (ROA) and Return on Equity (ROE), by decreasing the equity base and potentially increasing the company’s profitability.
Reasons for Acquiring Treasury Stocks
Acquiring treasury stocks is a common practice for companies for various reasons, including:
Boosting Stock Prices
Companies may buy back shares problems and solutions to increase demand for their stock and thereby boost their stock prices.
Preventing Hostile Takeovers
When a company acquires a significant number of its shares, it reduces the number of shares available for purchase by other entities. Thus, this makes it more difficult for a hostile takeover to occur.
Compensating Employees
Companies may use treasury stock to compensate employees in their employee stock ownership plans (ESOPs).
Providing Liquidity for Stockholders
Buying back shares will reduce the number of shares available for trading in the open market. This can increase the value of the remaining shares. Additionally, provides liquidity for existing stockholders who may want to sell their shares.
How are Treasury Stocks Acquired?
A few ways to acquire treasury shares are as follows:
Purchase through the Open Market
The most common method to acquire treasury stock is to purchase it from the open market. When a company buys back its shares from the public, it allows the company to control the number of outstanding shares and thereby boost the value of the remaining shares.
Purchase through Tender Offer
Another way to acquire treasury stock is through a tender offer. When a company offers to purchase shares directly from its shareholders at a premium price, it can be a way for the company to quickly acquire a large number of shares and consolidate its ownership.
Purchase through Employee Stock Option Plans (ESOPs)
Companies also acquire treasury stock through employee stock option plans (ESOPs). In this case, the company issues stock options to its employees. When the employees exercise those options, the company purchases shares on the open market to fulfil the option.
Features of Treasury Stocks in India
Let’s have a look at the treasury shares in India down below:
- No Voting Rights: Treasury shares may not vote on company matters, reducing the influence of major shareholders.
- No Dividend Payments: Treasury shares may not receive dividends, impacting overall shareholder income.
- Not Included in EPS: Treasury shares are not included in the calculation of earnings per share (EPS). Thus, this might be increasing EPS for remaining shares.
- Reduce Equity: Treasury stocks reduce shareholders’ equity, impacting financial ratios like debt-to-equity.
- Company Discretion: The company decides whether to hold, resell, or reissue treasury shares.
- Strategic Flexibility: Holding treasury stocks can offer flexibility for future needs like acquisitions, employee stock options, or market stabilisation.
Benefits of Treasury Stocks
Here are the five most important benefits of treasury stocks:
- Increased Earnings Per Share (EPS): Repurchasing shares reduces the number of outstanding shares, boosting EPS and potentially increasing shareholder value.
- Support for Stock Price: Treasury stock buybacks can help support or increase the stock price by reducing the supply of shares in the market.
- Flexibility for Future Use: The company can reissue or sell treasury stocks in the future to raise capital, fund acquisitions, or reward employees through stock-based compensation.
- Improved Financial Ratios: Reducing outstanding shares can improve financial ratios like Return on Equity (ROE) and Return on Assets (ROA), making the company more attractive to investors.
- Prevention of Hostile Takeovers: Repurchasing shares reduces the number of shares available for external parties, helping prevent hostile takeovers and maintaining control within the company.
What is the Cost Method of Treasury Stock?
The cost method of treasury stock accounting involves recording treasury stock at its cost of acquisition and making necessary adjustments to reflect changes in the company’s equity accounts.
This method accounts for treasury stock purchases made with cash and records them at the time of purchase. Under the cost method, treasury stock serves as a contra-equity account. Its debit amount reduces the company’s overall equity to determine the net equity balance.
The cost method is simple to use and provides a clear picture of the company’s equity position, making it a popular choice for many businesses.
Impact of Treasury Stocks on Financial Statements
Treasury stock has a significant impact on the financial statements of a company. This includes the balance sheet, income statement, and cash flow statement.
Balance Sheet
A treasury stock in balance sheet is reported as reducing the total shareholders’ equity. Deducting the cost of acquiring treasury stock contributes to the reduction in total shareholders’ equity. This results in a decrease in the company’s net worth.
Because the balance sheet considers treasury stock as a decrease in the count of outstanding shares, it consequently diminishes the company’s ownership.
Income Statement
On the income statement, treasury stocks do not have a direct impact on the revenue or expenses of the company. However, if the company opts to resell the treasury stocks, it will record any gains or losses from the sale in the income statement as a non-operating item.
Cash Flow Statement
The financing activities section records the acquisition of treasury shares as a cash outflow. Thus, the sale of treasury stocks, on the other hand, is recorded as a cash inflow in the financing activities section.
Is Treasury Stock an Asset?
On a balance sheet, the company records treasury stock in the equity section as a contra-equity account, reducing total shareholders’ equity. The company typically lists it as a negative amount under “Shareholders’ Equity” or “Equity Capital.” Treasury stock reflects the cost of shares the company repurchased, not their current market value.
Are Dividends Paid on Treasury Stocks?
No, companies do not pay dividends on treasury stocks. Since the company owns these stocks, it cannot receive dividends on them. Additionally, paying dividends on treasury stock would essentially be transferring money from one account to another within the same company, which does not make sense. Therefore, companies do not pay dividends on treasury stock.
Difference Between Cash Dividends and Treasury Stocks Purchases
Cash dividends and treasury stock purchases are two separate actions that a company takes. Cash dividends are a distribution of profits to shareholders, typically paid out in cash. Treasury stock purchases, on the other hand, involve a company buying back its own shares on the open market or through other means.
To Wrap It Up…
The role of treasury stocks in the stock market and in a company’s capital management can be an indicator of financial health. While they can lead to short-term stock price gains, investors should carefully assess the reasons behind buybacks and the company’s overall financial situation. As always, doing your research and consulting a financial advisor can help you make informed investment decisions.
Frequently Asked Questions About Treasury Stocks
By reducing the number of outstanding shares, treasury stocks increase the earnings per share (EPS). This is because the same amount of earnings is now spread across fewer shares.
Outstanding shares refer to the total number of shares that are actively being traded in the market, excluding treasury stocks. Treasury stocks are those shares that the company has repurchased and are not part of the outstanding shares.
The tax implications of treasury stock transactions vary depending on whether the company resells or retires the shares. If the company resells, it may recognise a capital gain or loss depending on the sale price versus the repurchase price. When the company retires treasury stocks, it doesn’t result in tax implications, but it reduces the number of shares outstanding.
Treasury stocks do not classify as assets or liabilities. Instead, they reduce shareholders’ equity. While they represent shares previously issued, they do not provide the company with resources and reduce total equity.
Treasury stocks reduce a company’s outstanding equity and can impact various financial ratios, such as return on equity (ROE). While they don’t change the company’s debt or asset levels, treasury stocks can affect the company’s financial flexibility and shareholder ownership structure.
