Meaning of treasury stock
- Treasury stock or treasury shares refers to the number of shares that the company wishes to retain with itself.
- Sometimes it is also termed as reacquired stock.
- It is recorded in the balance sheet under the contra-equity account, as in essence they are the same as unissued equity capital.
- It is a part of either the float (i.e. the number of shares available for the public to buy and sell) or the shares outstanding prior to being repurchased or may not have been issued at all.
- The company has the option of either-
- holding onto the treasury stock indefinitely;
- reissue them to the public; or
- cancel them altogether.
- The amount of treasury shares cannot, at any point of time, exceed the maximum proportion of total capitalisation that has been specified by the laws of the country.
Rationale Behind the Treasury Stock
Treasury stock is often kept for the purpose of reselling, for controlling interest in the company, to prevent hostile takeovers of the company, to prevent undervaluation of shares, and for improved financial ratios such as the earnings per share ratio, the price earnings ratio etc.
Effect of Having the Treasury Stock on the Company
- One cannot derive any voting rights or receive dividends on the treasury stock. However, the main advantage associated with this is that the company can limit outside ownership and reserve it for circumstances where additional capital is to be raised in the future.
- In the short term, adding treasury stock weakens the balance sheet of the company. This is because the company has to pay for its own stock through an asset, thereby reducing the overall equity amount.
- The treasury stock cannot be included in the calculation of outstanding shares of the company.
- In case the company liquidates, then the treasury stock will not draw out any portion of the net assets for itself.
