What are Treasury Stocks in India

Stocks held in a firm's treasury that are repurchased by the company are referred to as treasury stock. Treasury stocks are important to a company's financial management, even though they may not be as popular as other stocks.

We'll look at what treasury shares are, why businesses buy them back, and how they impact financial statements in this blog. Additionally, we will explain to you how to use BlinkX to invest in the share market.
 

What is Treasury Stock Meaning?

Treasury shares definition "reacquired shares," are shares a company has previously issued in the past and then repurchased. These shares are held in the company's treasury, where they are not traded publicly, instead of retiring them.

Treasury stock can be acquired by a company in many ways and for a variety of reasons, including employee stock option plans (ESOPs) and open market purchases. These stocks help in the following aspects:

  • Boosting stock prices 
  • Preventing hostile takeovers
  • Compensating employees 
  • Providing liquidity for stockholders
     

 

What is the Treasury Stock Method?

The treasury stock method uses one technique to calculate the impact of dilutive securities. This could include convertible securities based on a company's earnings per share (EPS), warrants, and stock options. 

The approach is predicated on the idea that the money obtained from the exercise of these securities will be utilised to buy back publicly traded shares of the business, which will then be held as treasury stocks. 

The proceeds from the dilutive securities can be used to purchase an additional number of shares, which is calculated by dividing the proceeds by the average market price of the company's stock during the reporting period. To calculate EPS, this extra number of shares is added to the total number of outstanding shares.

The Treasury Stock Method formula is as follows: 

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

In addition, a lot of businesses compute the impact of dilutive securities on EPS in their financial reporting using the treasury stock approach.
 

Features of Treasury Stocks in India

Let’s look at the features of the treasury shares down below: 

  • No Voting Rights: Major shareholders' influence is diminished because Treasury shares are not eligible to vote on business issues.
  • No Dividend Payments: The total income of shareholders may be impacted if Treasury shares do not receive dividend payments.
  • Not Included in EPS: The earnings per share (EPS) computation does not account for Treasury shares. As a result, the EPS for the remaining shares may be rising.
  • Reduce Equity: Treasury stocks have an effect on financial ratios like debt-to-equity by reducing shareholders' equity.
  • Company discretion: The choice to retain, sell, or issue new treasury shares rests with the firm.
  • Strategic Flexibility: Keeping treasury stocks on hand might provide you flexibility for upcoming requirements such as market stabilisation, employee stock options, and acquisitions.
     

Factors to Consider Before Investing in Treasury Stocks in India

While purchasing treasury stocks in India, some aspects to take into account are as follows:

  • Financial Stability of the Company: Verify the stability of the company's finances.
  • Purpose of Buyback: One needs to understand why the company is behind in share buyback.
  • Regulatory Compliance: Do confirm that SEBI standards are being followed.
  • Valuation: You need to calculate the buyback price in relation to the market value.
  • EPS Impact: Understand the impact on earnings per share (EPS).
  • Market Conditions: Give the market some thought.
  • Dividend vs. Capital: Make a decision between capital gains and dividends.
  • Long-Term Strategy: Comply with the duration of your investments.
  • Tax Implications: Recognise the effects on your taxes.
  • Exit Plan: Make a plan for your escape.
     

What is the Cost Method of Treasury Stock?

Treasury stock is recorded at the cost of acquisition when using the cost method of accounting, and any necessary adjustments are made to reflect changes in the company's equity accounts.

Purchases of Treasury stock made with cash and reported at the moment of purchase are taken into account by this technique. According to the cost approach, Treasury stock is a contra-equity account. Its debit amount is subtracted from the company's total equity to find the net equity balance.

Many organisations choose the cost technique because it is easy to apply and gives a clear picture of the company's equity position.
 

How to Invest in Treasury Stocks in India? 

There are many ways to invest in Treasury equities, sometimes referred to as Government Securities or G-Secs in India. If you want to invest directly in government securities, you can speak with banks, financial institutions, or Primary Dealers (PDs). Electronic trading platforms for G-Secs are provided by stock exchanges such as NSE and BSE. Additionally, you can register a Retail Direct Gilt (RDG) Account with the RBI or certain institutions.

Online platforms and smartphone apps allow easy access, while mutual funds and stockbrokers offer alternate avenues. Furthermore, take into account savings options supported by the government, such as National Savings Certificates (NSCs). It's important to consider various factors  like tenor, interest rate, and tax implications when investing in these low-risk assets and to match your decisions with your risk tolerance and financial objectives.
 

How are Treasury Stocks Acquired?

The following are a few methods for obtaining Treasury shares:

  • Purchase through the Open Market 
    Buying treasury stock on the open market is the most popular way to obtain it when a business repurchases its own stock from the general public. By doing this, the business is able to manage the quantity of outstanding shares and increase the value of the shares that remain.
  • Purchase through Tender Offer
    An additional method for obtaining Treasury Stock is via a tender offer when a business offers, at a premium, to buy shares straight from its owners. As a result, a business may be able to swiftly buy a sizable number of shares and combine ownership in this way.
  • Purchase through Employee Stock Options Plans (ESOPs)
    Businesses also obtain treasury stock via employee stock option schemes (ESOPs). In this case, the employer gives its staff stock options. The corporation fulfils the option by buying shares on the open market when the employees exercise such options.
     

Reasons for Acquiring Treasury Stocks

Companies frequently purchase treasury stocks for a variety of reasons, such as:

Raising Stock Values

To enhance demand for their stock and hence raise stock prices, companies may repurchase shares.

Stopping Inhospitable Acquisitions

The quantity of shares that are available for acquisition by other entities is decreased when a corporation buys a sizable portion of its shares. As a result, this increases the difficulty of a hostile takeover.

Paying Workers

Treasury stock may be used by businesses in employee stock ownership plans (ESOPs) as a form of compensation for employees.

Providing Investors with Liquidity

The quantity of shares that can be traded on the open market will decrease as a result of buybacks. As a result, the remaining shares may become more valuable. Additionally, it offers current investors liquidity
 

Difference Between Cash Dividends and Treasury Stocks Purchases 

Here's the difference between cash dividends and treasury stock purchases, presented in two columns:

Cash Dividends

Treasury Stock Purchases

Distribution of profits to shareholdersA company buying back its own shares
Paid out in cashShares are acquired and held by the company (treasury stock)
Reduces the company's cash and retained earningsUses the company's cash to buy back shares
Shareholders receive cash paymentsReduces the number of outstanding shares
No change in the number of outstanding sharesIncreases the ownership stake of remaining shareholders
Recurring payments decided by the board of directorsOne-time or periodic repurchases authorised by the board
Taxable income for shareholdersNo immediate tax implications for shareholders
Signal that the company is performing wellSignal that the company's shares are undervalued
Reward for shareholdersPotential increase in earnings per share and stock price

Limitations of Treasury Shares

Let's get to know the limitations of Treasury Shares.

  • No voting privileges
  • Not qualified to get dividends
  • Not included in calculating the number of outstanding shares unable to use shareholder preemptive rights
  • Not qualified to obtain net assets in the event that the business is liquidated
  • Some nations control the amount of treasury stock that businesses can own, making sure that the overall amount of treasury stock does not exceed the maximum percentage of capitalisation allowed by law.
     

Impact of Treasury Stocks on Financial Statements

Treasury stock significantly affects a company's financial results. This covers the cash flow statement, income statement, and balance sheet.

Balance Sheet

Treasury stocks are shown on the balance sheet as lowering total shareholders' equity. Reducing the total shareholders' equity involves deducting the cost of purchasing treasury stock. As a result, the company's net worth declined.

Treasury stock reduces the company's ownership because the balance sheet treats it as a reduction in the number of outstanding shares.

Income Statement

Treasury stocks do not directly affect the company's revenue or expenses as seen on the income statement. In the event that the business decides to resell the Treasury Stocks, any profits or losses realised from the transaction will be included as non-operating items in the income statement.

Cash Flow Statement

The cash outflow associated with the purchase of Treasury shares is noted in the financing activities section. Therefore, under the financing activities section, the sale of treasury stocks is recorded as a cash inflow.
 

Conclusion
Treasury stock can be a useful instrument for businesses to successfully manage their finances and accomplish their strategic objectives. As a result, these stocks support increased stock prices, thwart hostile takeovers, support employee compensation, and give investors access to liquidity. Additionally, investing in the stock market can be an easy and affordable method for you to be exposed to a diverse range of securities with a reliable stock market app.

As usual, before making an investment, investors should conduct independent research and/or speak with a financial professional.

FAQs

An organisation's financial resources, such as finances, assets, and investments, are managed through a treasury account.

Piecemeal cash distribution refers to allocating available monies incrementally rather than all at once, frequently in phases.

Treasury shares can be permanently removed from a company's issued capital by cancelling them, which lowers the total number of outstanding shares.

Investing in treasury stocks can be done through exchange-traded funds (ETFs), a broker, or directly from the corporation.

The current rates on 30-year Treasury bills are 3.93%, and 3-month Treasury bills are 5.24%. T-Bills are a fantastic choice, therefore, if you're searching for a secure investment alternative for a little amount of time.

Comparatively speaking, preferred and ordinary stocks are more popular than treasury stocks. Nonetheless, for some investors looking to reduce risk and increase EPS, they might be a wise purchase.

Treasury stock is shown on a company's balance sheet as a contra-equity account. There has been a decrease in the overall shareholders' equity of the corporation. Therefore, it is seen as an adjustment to the equity section of the balance sheet rather than an asset.