TREASURY STOCK

Contents
Treasury stocks as a concept
Importance of Maintaining Treasury stocks
Treasury Stocks and Cash flows Relationship
Limitations of Treasury stocks
Conditions under treasury stocks
Why do companies use treasury stocks?
Treasury stock method
Treasury Management
How is Treasury stock shown in Balance sheet?
Why does it matters?
How does it works exactly ? (Example)

Treasury stocks as a concept

Treasury
stockisstockrepurchased by
theissuerand intended for
retirement or resale to the public.
It represents the difference
between the number
ofsharesissued and the number
ofshares outstanding.

Importance of Maintaining Treasury stocks

It offers stock to the employees.

It keeps devaluated stock off the market.
It prevents a takeover of the company.
It reduces in the Earnings Per Share (EPS) of the
company.

Treasury Stocks and Cash flows Relationship

When Cash Flow is Weak

Liquidation is Done

When Cash Flow is Strong

Maintains the Share Price in

the Market

Limitations of Treasury stocks

A person who is a shareholder of a treasury stock does not have

voting rights.
They also cannot collect dividends.
The total amount of treasury stock held by a company cannot
exceed the maximum total capitalization allowed by law.

Conditions under treasury stocks

Treasury stock refers to stock that has been repurchased by the issuing
company.
These shares do not pay dividends, have no voting rights, and should
not be included in shares outstanding calculations.
Treasury stock or shares may be purchased by the corporation, or
reacquired through donation, forfeiture, or some other method.
It is then regarded as the personal property of the corporation and part
of its assets.
The corporation can sell the stock for cash or credit, for par value or
market value, or upon any terms that it could be sold by a stockholder.
Treasury stock is also called reacquired stock or treasury shares.

Example on Treasury stock

Many companies like Reliance Industries Limited (RIL) have used treasury stock as a tool to hold shares for itself.
RIL before its merger with Indian Petrochemicals Corporation Limited (IPCL) held a 46% stake through four of
its fully-owned investment subsidiaries.
When RIL merged with IPCL, through a stock swap deal, all IPCL shareholders got RIL shares since IPCL would
be a part of RIL.
Thus RIL's four subsidiary companies got RIL shares.
However, since a company cannot hold its own shares, a trust was created to hold these shares which were under the
control of RIL. Such trusts were created by the other five companies also to deal with similar merger issues.
Besides RIL many other companies have held their own shares in the form of treasury stock like JP Associates and
its merger with Jaypee Hotels, Jaypee Cement, Jaiprakash Enterprises, Gujarat
Anjan Cement, the transaction between Punjab Tractors and Mahindra Finance and BPCL which merged with
Kochi Refineries.
However, this treasury stock lacks legal sanctity and has been conveniently used by companies to issue shares to
itself.
Internationally, treasury stock has been created by the US, UK, China and many other countries. Majority of these
countries have specific legislations governing treasury stock.

Why do companies use treasury stocks?

To increase the market value of each share by limiting supply;
To provide stock options and bonuses for officers and
employees of the company;
To have additional shares for the acquisition of another
company;
Or to prevent a takeover by another company.
Use indirect dividend to avoid taxes.
Liquidation
Having too many shares of stock on the market can be bad for
a company.

Treasury stock method

The net of new shares that are potentially created is

calculated by taking the number of shares that the in-themoney options purchase, then subtracting the number of
common shares that the company can purchase from the
market with the option proceeds.
This adds to the total number of shares in the denominator
and lowersthe EPS number.

Treasury Stock Method (Example)

In-the- Money Option
Exercise Price
Current Market Price
Further this needs to be added to the
diluted EPS denominator

10,000 Shares
$ 50
$ 100

The Company will receive:Allows to Repurchase shares on the

market

$ 5,00,000

Net new shares

5,000 Shares

5,000 Shares

=10,000 shares *
$50
= $ 5,00,000/$ 100
= 10,000 Shares
5,000 Shares

Treasury Management
Treasury
Management
includes
a
firm's
collections,
disbursements, concentration, investment and funding
activities.
Bank Treasuries may have the following departments: i. AFixed Income orMoney Marketdesk that is devoted to
buying and selling interest bearing securities
ii. AForeign Exchange or "FX" desk that buys and sells
currencies
iii. ACapital Market orEquitiesdesk that deals in shares listed on
the stock market.

How is treasury stock shown in Balance sheet?

If Treasury Stock Reissued - If a company decides to reissue treasury
stock for a new private placement, the treasury stock basis is the share
price as of the repurchase date. If the treasury stock is revalued and sold
above the basis, the balance sheet shows a debit to cash for all the
money received. In the stockholders' equity section, the treasury stock
account is credited with the total basis price, and the additional paid-in
capital account is credited with the gain.
If Treasury Stock Reissue Loss - If the treasury stock revalue amount is
less than the basis, the money received is debited to the cash account,
and the loss is debited to the additional paid-in capital account. The cash
amount received and the loss amount are added together and credited to
the treasury stock account.

ContinuedHow is treasury stock shown in Balance

sheet?
If Treasury Stock Retirement - If a company decides to retire its treasury
stock, it uses the share price as of the repurchase date as the basis. If
the retirement stock revaluation price is higher than the basis, the
balance sheet shows the transaction as a debit to common stock at the
basis price and a debit to paid-in capital for the amount over the basis.
Treasury stock is credited for the full amount.
If Treasury Stock Retirement Loss - If the retirement stock revaluation
price is lower than the basis, the transaction is shown as a debit to
common stock at the basis price. A credit is made to paid-in capital for
the amount under the basis and a credit is made to treasury stock at
the basis price.

Why does it matters?

Treasury Stockconsists ofshares issued but not
outstanding. Thus, treasury shares are not included in
earnings per share ordividend calculations, and they do
not have voting rights.
In general, an increase in treasury stock can be a good
thing because it indicates that the company thinks the
shares areundervalued.
By buying back itsstock, a firm reduces the number
ofshares outstanding, which in turn gives each shareholder
a larger piece of earnings.
Likewise, the lower number of shares can improveEPSand
other ratios. However, treasury stock can be abused.

How does it works exactly ? (Example)

Let's assume Company XYZ decides to buy back some of itsshares because it
feels that Company XYZ shares areundervaluedin themarketright now.
When Company XYZ acquires those shares, they become treasury stock.
Treasury stock appears at cost orat parvalue in theshareholders equitysection of
thebalance sheet and thus appears as a "negative" in the shareholders equity
section (known as a contra equity account).
It is important tonotethat if and when income statementrecognition ofgainsor
losses on treasury stock transactions.
That is, if the company profits (or loses) from the resale of treasury shares, it
simply records an increase in cash and a corresponding decrease in shareholders'
equity.
Note that purchases of treasury stock are uses of cash, and some states limit the
amount of treasury stock acorporationcan own at a given time (this ensures that
shareholders do not jeopardize the interests of debtholders).

Thank you