What Is Treasury Stock: Definition And Benefits

What Is Treasury Stock? #

Treasury stock means shares that a company buys back from the people who once owned them. After the company buys them, these shares stay with the company. They do not count as part of the total number of shares. They also don’t give voting rights or money from profits.

This move is called a stock buyback. It helps companies reduce the number of available shares, increase earnings per share (EPS), and make their stock look better in the market.

Why Should Small Businesses in India Care About Treasury Stock? #

If you own a small business in India, knowing about treasury stock can help you. A smart way to manage your money and plan exists. If you’re trying to grow your business, buy another company, or stop someone from taking control, treasury stock can help. It lets you make better decisions around your company’s value and who owns what.

What Makes Treasury Stock Special? #

• Companies Repurchase Shares: Initially, a company issues shares to the public to raise capital. Over time, it may choose to repurchase a portion of these shares from the open market. Once reacquired, these shares are classified as treasury stock.
• Lack of Voting Rights: Shareholders typically have the right to vote on major corporate matters. However, treasury stock holds no voting power, as the company cannot vote on its behalf.
• No Dividend Entitlement: While shareholders may receive dividends—profits distributed by the company—treasury stock is not eligible for such payouts.
• Reduced Market Float: When a company buys back its shares, the total number of outstanding shares available to investors decreases. This reduction can lead to an increase in the value of the remaining shares due to enhanced scarcity.

How is Treasury Stock Recorded? #

Cost Method

This is the most common way. The company writes the amount of money it spent to buy back the shares.

Par Value Method

Here, the company writes the shares at their original value (called the par value). This method is not used as much in India.

In both ways, the company shows treasury stock as a “negative” under its equity section. This means it lowers total shareholder money on the balance sheet.

What Does Indian Law Say? #

In India, share buybacks must follow rules. These rules are given by:

• The Companies Act, 2013
• SEBI (Buy-back of Securities) Regulations, 2018

These rules tell companies:

• How many shares they can buy back
• How much money they can use
• How and when they can buy shares
• What paperwork do they need to file

Companies must always follow these rules when doing a buyback.

How Treasury Stock Helps Small Businesses #

• Capital Flexibility: Treasury stock provides financial agility, allowing businesses to reissue shares for future funding or strategic use.
• Enhanced Ownership Control: Reducing public share count helps founders and core stakeholders retain decision-making authority.
• Signal of Confidence: Share repurchases often indicate management’s confidence in the firm’s prospects, potentially boosting investor trust and share value.
• Defence Against Takeovers: With fewer shares in circulation, hostile takeovers become more difficult, safeguarding corporate autonomy.

Benefits of Treasury Stock for Small Businesses #

•  Flexibility: It gives you more control over your money.
•  Strong Control: You stay in charge of your business.
•  Higher Share Value: This can make the remaining stock more valuable.
•  Business Safety: Useful during threats like takeovers.
•  Financial Tool: Use it for significant strategic moves like mergers or investments.
• Personal Planning: Plan for long-term goals without needing outside funds.

How Can Small Businesses Use Treasury Stock? #

Here is a simple step-by-step plan:

• Assess Financial Readiness: Before initiating a buyback, ensure the company’s financial health is sound by reviewing cash flow, reserves, liabilities, and overall capital structure.
• Obtain Necessary Approvals: Secure consent from the board of directors, followed by shareholder approval, to ensure transparency and regulatory compliance.
• Strategic Timing: Monitor market conditions to identify optimal periods for repurchase—typically when share prices are undervalued.
• Adhere to Legal Frameworks: Comply with all statutory guidelines under SEBI regulations and the Companies Act. Maintain proper documentation and file requisite disclosures.
• Maintain Accurate Records: Document the quantity and cost of repurchased shares meticulously, and reflect these changes in your accounting ledgers and balance sheet.
• Determine Share Utilisation: Decide whether to retain the treasury stock for future use, reissue it, or cancel it permanently, based on strategic objectives.

What Problems Might Small Businesses Face? #

•  Lower Equity: Buying shares back reduces equity, which can affect how investors view your company.
•  Money Use: You will spend a lot of cash to buy shares. This can limit spending on other parts of your business.
•  Regulations: The rules in India are strict. Not following them can cause legal trouble.
•  Market View: Some people may think your buyback shows weakness if not explained well.
•  Tracking: You’ll need systems to keep track of treasury shares.

Smart Tips for Using Treasury Stock #

• Know Your Goal: Why are you buying the shares? To boost value? Protect your control? Make sure you know why and have a plan.
• Study the Market: Watch the stock market closely. Pick the best time to buy back shares. Avoid panic buys.
• Talk Openly: Let your team and investors know what you’re doing. Clear talk builds trust.
• Follow the Law: Stick to SEBI and Companies Act rules. Don’t skip steps, and always file reports on time.
• Review Often: Often check how the strategy is working. Adjust if needed.

FAQ’s: #

What is treasury stock?

Stock that your company buys back from others. After you buy it, it no longer counts for voting or dividends.

Why do businesses do stock buybacks?

To raise share value, keep more control, or show faith in their company.

Are there laws about buybacks in India?

Yes. The Companies Act and SEBI rules explain what companies must do during buybacks.

Can a company re-use treasury stock?

Yes. Companies can resell them or cancel them completely.

Can buybacks reduce the risk of a takeover?

Yes. Fewer available shares mean it’s harder for others to buy control of your company.

Conclusion #

Treasury stock is not just for large corporations. A smart tool for small businesses in India exists too.

Use it to:

• Protect your company
• Show confidence to investors
• Handle growth more smoothly
• Keep control of your business