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Treasury Stock

Treasury stock refers to shares that a company repurchases from the market and holds in its own treasury. These shares are not publicly traded and do not contribute to the company’s market value or indices like BSE Sensex or Nifty 50 Price. Instead, they remain with the company for strategic purposes, such as stabilizing stock prices or managing ownership structures.

What is treasury stock?

Companies may acquire treasury stock through buyback programs, often using funds from retained earnings or proceeds generated through margin trading facility (MTF). While these shares do not carry voting rights or earn dividends, they can be reissued later to raise capital or compensate employees. Investors monitoring stock buybacks often assess their impact on intraday trading trends and broader market movements.

What is Treasury Stock?

Treasury stock, also known as reacquired stock, refers to shares that were once issued by a company but have since been bought back from the open market or existing shareholders. These shares are not considered part of the company’s outstanding stock and do not carry voting rights or dividend entitlements. Instead, they are held in the company’s treasury and recorded as a deduction from shareholders’ equity on the balance sheet. Unlike newly issued shares, treasury stock does not generate additional capital for the company but serves specific strategic and financial purposes.

Companies repurchase shares for various reasons, including influencing stock prices, consolidating ownership, or improving financial metrics such as earnings per share (EPS). The repurchased shares can be reissued in the future for raising capital, employee stock compensation, or funding acquisitions. However, if the company decides to retire them permanently, they will be removed from circulation, reducing the total number of outstanding shares. This financial maneuver is governed by regulatory frameworks, ensuring transparency and shareholder protection.

Understanding Where Treasury Stocks Come From

Treasury stocks originate from shares that were initially issued by a company and later repurchased. When a company goes public, it issues shares to investors, making them publicly traded. Over time, companies may choose to reacquire some of these shares through open market purchases, employee stock option plans (ESOPs), or structured buyback programs. Once repurchased, these shares are no longer part of the outstanding shares available for trading. Instead, they are held in the company’s treasury and recorded as contra-equity on the balance sheet.

These stocks are distinct from permanently retired shares. While retired shares are removed from circulation entirely, treasury stocks remain in the company’s control for potential future use. Companies may reissue these shares for various purposes, such as raising capital, fulfilling stock-based employee compensation plans, or supporting corporate restructuring efforts. However, while held as treasury stock, these shares do not carry voting rights, receive dividends, or contribute to earnings per share (EPS) calculations.

Objectives Behind Treasury Stock Acquisition

  • Increasing Stock Prices – Reducing the number of publicly available shares can drive up demand, potentially increasing the stock price.
  • Preventing Hostile Takeovers – By repurchasing shares, a company limits their availability in the market, making it harder for external entities to gain controlling interest.
  • Employee Compensation via ESOPs – Treasury shares can be used for stock-based compensation plans, offering incentives to employees without issuing new shares.
  • Providing Liquidity for Shareholders – A buyback program allows existing shareholders to sell their shares back to the company, providing liquidity when needed.
  • Capital Restructuring – Companies use treasury stock to optimize their capital structure, adjusting the debt-to-equity ratio for financial stability.
  • Future Reissuance – Treasury shares may be held for later reissuance to raise funds, support mergers, or facilitate corporate acquisitions.

Methods Companies Use to Buy Back Stocks

A stock buyback is a strategy used by companies to repurchase their own shares from the market, reducing the number of outstanding shares in circulation. This approach allows companies to manage ownership distribution, optimize financial ratios, and utilize treasury shares for strategic purposes. Below are the primary methods companies use to execute stock buybacks:

  • Tender Offer
    A company announces a formal offer to repurchase shares directly from existing shareholders at a predetermined price. This price is typically set at a premium to the current market value. The offer remains valid for a specified period, during which shareholders can choose to tender their shares for buyback. Once accepted, the company reacquires the shares, reducing the total number of publicly traded shares.
  • Open Market Operation
    Also known as a market-based repurchase, this method involves the company gradually buying back shares from the stock exchange at prevailing market prices. Unlike a tender offer, there is no set premium or fixed price. The company repurchases shares as per its financial strategy, often depending on market conditions and available capital. These repurchases can influence investor sentiment and may lead to price fluctuations.
  • Dutch Auction
    In this method, the company specifies a price range at which it is willing to repurchase shares. Interested shareholders submit offers, specifying the price at which they are willing to sell their holdings within the given range. After collecting responses, the company determines the lowest price at which it can acquire the required number of shares. This allows for greater flexibility compared to a standard tender offer and helps companies optimize the cost of repurchase.

An existing shareholder who wishes to participate in a buyback may offer their shares at a chosen price within the company's predefined range. Once the company evaluates all submissions, it purchases the required shares at the most cost-effective rate. Investors monitoring buyback activity often consider its impact on intraday trading, especially in relation to market trends like BSE Sensex and Nifty 50 Price movements.

Rationale Behind Share Repurchases

Following are some of the reasons why a company may decide to repurchase its shares from its shareholders:

  • Enhancing Share Value
    When a company buys back its own shares, the reduced supply in the market can lead to an increase in stock price. Investors tracking Nifty 50 Price and BSE Sensex often monitor share repurchases for potential price movements.
  • Strengthening Ownership Control
    Reducing the number of outstanding shares increases the percentage holding of existing shareholders. This move also acts as a safeguard against hostile takeovers, ensuring that control remains within the company's intended structure.
  • Optimizing Capital Structure
    Companies use buybacks to balance debt and equity levels, adjusting financial ratios for long-term stability. Share repurchases can be strategically aligned with corporate funding needs or surplus cash allocation.
  • Utilization for Employee Benefits
    Treasury stocks may be reissued as part of stock-based employee compensation plans, such as margin trading facility (MTF)-backed incentives or performance-based stock options. This method helps retain key talent without further diluting shareholder value.
  • Financial Flexibility
    Holding treasury shares gives a company the flexibility to reissue them in the future for fundraising, acquisitions, or capital restructuring. Unlike permanently retired shares, these stocks can serve as a reserve for strategic corporate decisions.

Limitations of Treasury Stock

  • Does not grant shareholders voting privileges
  • Cannot earn dividends from company profits
  • Excluded when calculating the total number of shares in circulation
  • Does not allow holders to maintain proportional ownership right
  • Holds no claim to company assets in case of liquidation
  • Subject to regulatory limits in certain markets to prevent excessive accumulation by companies

Treasury Stock Formula

  • Purpose – The treasury stock formula is used to calculate the number of additional shares that may impact earnings per share (EPS) due to exercised stock options and warrants.
  • Formula Representation – The calculation follows:
    Additional shares outstanding = n × (1 – K / P)
  • Components of the Formula:
    • n – Number of shares from exercised options and warrants
    • K – Average exercise price (strike price) of the options or warrants
    • P – Average market price of the stock during the reporting period
  • Impact on Financials – This formula helps companies and investors assess how stock dilution affects EPS and shareholder value.
  • Application in Financial Reporting – The method is widely used in corporate accounting to evaluate potential changes in outstanding shares and earnings distribution.

What is the Treasury Stock Method?

The treasury stock method is a calculation used to assess the potential dilution of earnings per share (EPS) due to outstanding stock options and warrants. This method assumes that when these securities are exercised, the proceeds generated are used to repurchase shares at the prevailing market price. Investors tracking Nifty 50 Price and BSE Sensex often consider EPS dilution when evaluating a company's stock performance. Since share buybacks influence financial ratios, companies strategically use this method to manage equity dilution while maintaining shareholder value.

In financial reporting, the treasury stock method helps determine the net additional shares that affect diluted EPS calculations. The formula considers the number of exercised options, their strike price, and the average stock price during the reporting period. Traders utilizing futures and options or engaging in intraday trading monitor such corporate actions closely, as they can impact market volatility. Regulatory guidelines mandate that companies include this method in disclosures, ensuring transparency for investors who may wish to invest in bonds or invest in mutual fund schemes based on stable earnings metrics.

Features of Treasury Stocks in India

  • No Voting Rights – Treasury shares do not grant shareholders any voting privileges in corporate decisions.
  • No Dividend Entitlement – Since these shares are held by the company, they do not receive dividends.
  • Excluded from EPS Calculation – Treasury stocks are not considered when calculating earnings per share (EPS), which can make outstanding shares appear more valuable.
  • Recorded as Contra-Equity – These shares are listed as a deduction from shareholders’ equity on the balance sheet rather than as an asset.
  • Not Actively Traded – Treasury stocks are not available for intraday trading or transactions through a trading account online.
  • Strategic Corporate Use – Companies may retain treasury shares for future reissuance, employee stock option plans (ESOPs), or capital restructuring.
  • Regulated by SEBI – The Securities and Exchange Board of India (SEBI) sets guidelines for buybacks and treasury stock management to ensure market stability.
  • Potential for Reissuance – Unlike retired shares, treasury stocks can be resold in the future, helping companies raise capital when needed.

Treasury Stock vs. Common Stock

The table below highlights the key differences between treasury stock and common stock, ensuring clarity for investors and market participants.

Feature

Treasury Stock

Common Stock

Ownership Rights

Held by the company; not owned by public investors

Owned by shareholders who have voting rights

Voting Rights

No voting rights

Grants shareholders voting rights

Dividend Eligibility

Not entitled to receive dividends

Eligible for dividend payouts

Trading Availability

Cannot be traded in the open market

Traded freely on stock exchanges

Impact on EPS

Excluded from EPS calculations

Included in EPS calculations

Balance Sheet Treatment

Recorded as a contra-equity item

Part of shareholders' equity

Market Influence

Does not contribute to BSE Sensex or Nifty 50 Price movements

Affects stock market indices based on demand and supply

Usage by Companies

Used for employee stock plans, capital restructuring, or reissuance

Used for raising capital and public investment

Regulatory Oversight

Subject to SEBI regulations on buybacks and treasury stock limits

Issuance and trading regulated by stock exchanges and SEBI

This comparison ensures investors and traders—whether engaging in intraday trading, futures and options, or long-term investments—can differentiate between these two stock categories when making financial decisions.

Things to Keep in Mind Before Buying Treasury Stocks in India

  • Company’s Financial Health – Assess the company's financial stability and performance before considering its stock repurchase actions.
  • Purpose of Buyback – Understand why the company is repurchasing shares—whether for capital restructuring, stock-based compensation, or defending against takeovers.
  • Regulatory Compliance – Ensure the buyback adheres to SEBI regulations, which govern share repurchase limits and disclosure requirements.
  • Market Valuation – Compare the buyback price with the prevailing market value to determine if the repurchase is at a fair price.
  • Impact on EPS – Since treasury stock reduces outstanding shares, it may increase earnings per share (EPS), affecting stock valuation.
  • Liquidity Considerations – Treasury stock buybacks reduce the number of publicly available shares, potentially affecting liquidity in intraday trading.
  • Long-Term Investment Goals – Investors should evaluate whether the buyback aligns with their financial objectives, such as capital appreciation or dividend income.
  • Tax Implications – Consider any tax liabilities associated with capital gains from buybacks compared to dividends when deciding whether to invest in bonds or invest in mutual fund alternatives.
  • Market Conditions – Analyze broader stock market trends, including BSE Sensex and Nifty 50 Price movements, to determine if buybacks indicate positive growth signals or financial distress.
  • Exit Strategy – Develop a plan for selling shares post-buyback, especially if engaging in futures and options or leveraging margin trading facility (MTF) for investments.

How to Invest in Treasury Stocks in India?

  • Through Stock Exchanges – Investors can indirectly gain exposure to treasury stocks by tracking companies listed on BSE Sensex and Nifty 50 Price that engage in share buybacks.
  • Via Primary Dealers and Banks – Certain financial institutions facilitate investment in corporate securities, including stocks affected by buyback programs.
  • Retail Direct Gilt Accounts – Investors can explore government-backed platforms offering securities and buyback-related instruments.
  • Mutual Funds and ETFs – Some funds allocate capital to companies that actively manage treasury stock, allowing investors to invest in mutual fund schemes with such exposure.
  • Brokerage Firms – Using a trading account online, investors can monitor companies with ongoing buyback programs to assess potential investment opportunities.
  • Margin Trading Facility (MTF) – Investors looking for leveraged positions can use MTF trading to participate in stocks undergoing buybacks while managing capital efficiently.
  • Online Investment Platforms – Many apps and websites provide research tools to track companies repurchasing shares, aiding informed investment decisions.
  • Government Securities and Bonds – Some companies engage in treasury stock buybacks while also issuing corporate bonds, offering investors an opportunity to invest in bonds for diversified exposure.
  • Market Analysis and Reports – Staying updated with SEBI guidelines, earnings reports, and corporate announcements helps investors evaluate stock repurchase trends.
  • Professional Advisory Services – Investors can consult financial advisors to assess risk factors and portfolio strategies related to companies conducting stock buybacks.

Conclusion

Treasury stock plays a significant role in corporate financial management, allowing companies to repurchase shares for strategic purposes. These shares are held in the company’s treasury and are not publicly traded, nor do they carry voting rights or dividend entitlements. By reducing the number of outstanding shares, companies can influence stock prices, adjust capital structures, and enhance earnings per share (EPS). Investors tracking market movements, including BSE Sensex and Nifty 50 Price, often analyze buyback trends to assess their potential impact on stock performance.

For investors, understanding treasury stock buybacks is crucial when making informed financial decisions. Whether through direct equity exposure, investing in bonds, or opting to invest in mutual fund schemes that hold buyback-driven stocks, analyzing the financial health and purpose behind such acquisitions is essential. Additionally, traders engaging in intraday trading, futures and options, or using margin trading facility (MTF) must evaluate buyback effects on liquidity and price fluctuations. Proper research and market awareness are key to leveraging treasury stock movements effectively.

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Disclaimer: Investments in the securities market are subject to market risk, read all related documents carefully before investing.

This content is for educational purposes only. Securities quoted are exemplary and not recommendatory.

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ADDITIONAL DISCLAIMER FOR CANADIAN PERSONS

Bajaj Financial Securities Limited is not a registered adviser or dealer under applicable Canadian securities laws nor has it obtained an exemption from the adviser and/or dealer registration requirements under such law. Accordingly, any brokerage and investment services provided by Bajaj Financial Securities Limited, including the products and services described herein are not available to or intended for Canadian persons.  

This mailer and its respective contents do not constitute an offer or invitation to purchase or subscribe for any securities or solicitation of any investments or investment services.  

DISCLAIMER FOR REPORT

DISCLOSURES UNDER THE PROVISIONS OF SEBI (RESEARCH ANALYSTS) REGULATIONS 2014 (REGULATIONS)

Bajaj Financial Securities Limited ("Bajaj Broking" or "Research Entity") is regulated by the Securities and Exchange Board of India ("SEBI") and is licensed to carry on the business of broking, depository services and related activities.  

This Report has been prepared by Bajaj Financial Securities Limited in the capacity of a Research Analyst having SEBI Registration No. INH000010043 and distributed as per SEBI (Research Analysts) Regulations 2014. This report does not constitute an offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. The information contained herein is from publicly available data or other sources believed to be reliable. This report is provided for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision. The user assumes the entire risk of any use made of this information. Each recipient of this report should make such investigation as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this document (including the merits and risks involved), and should consult his own advisors to determine the merits and risks of such investment. The investment discussed or views expressed may not be suitable for all investors.  

This information is strictly confidential and is being furnished to you solely for your information. This information should not be reproduced or redistributed or passed on directly or indirectly in any form to any other person or published, copied, in whole or in part, for any purpose. This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject Bajaj Financial Securities Limited and associates / group companies to any registration or licensing requirements within such jurisdiction. The distribution of this report in certain jurisdictions may be restricted by law, and persons in whose possession this report comes, should observe, any such restrictions. The information given in this report is as of the date of this report and there can be no assurance that future results or events will be consistent with this information. This information is subject to change without any prior notice. Bajaj Financial Securities Limited reserves the right to make modifications and alterations to this statement as may be required from time to time. Bajaj Financial Securities Limited or any of its associates / group companies shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. Bajaj Financial Securities Limited is committed to providing independent and transparent recommendation to its clients. Neither Bajaj Financial Securities Limited nor any of its associates, group companies, directors, employees, agents or representatives shall be liable for any damages whether direct, indirect, special or consequential including loss of revenue or lost profits that may arise from or in connection with the use of the information. Our proprietary trading and investment businesses may make investment decisions that are inconsistent with the recommendations expressed herein. Past performance is not necessarily a guide to future performance .The disclosures of interest statements incorporated in this report are provided solely to enhance the transparency and should not be treated as endorsement of the views expressed in the report. The information provided in these reports remains, unless otherwise stated, the copyright of Bajaj Financial Securities Limited. All layout, design, original artwork, concepts and other Intellectual Properties, remains the property and copyright of Bajaj Financial Securities Limited and may not be used in any form or for any purpose whatsoever by any party without the express written permission of the copyright holders.  

We offer our research services to clients as well as our prospects. Though this report is disseminated to all the customers simultaneously, not all customers may receive this report at the same time. We will not treat recipients as customers by virtue of their receiving this report.  

Bajaj Financial Securities Limited and its associates, officer, directors, and employees, research analyst (including relatives) worldwide may: (a) from time to time, have long or short positions in, and buy or sell the securities thereof, of company(ies), mentioned herein or (b) be engaged in any other transaction involving such securities and earn brokerage or other compensation or act as a market maker in the financial instruments of the subject company/company(ies) discussed herein or act as advisor or lender/borrower to such company(ies) or have other potential/material conflict of interest with respect to any recommendation and related information and opinions at the time of publication of research report or at the time of public appearance. Bajaj Financial Securities Limited may have proprietary long/short position in the above-mentioned scrip(s) and therefore should be considered as interested. The views provided herein are general in nature and do not consider risk appetite or investment objective of any particular investor; readers are requested to take independent professional advice before investing. This should not be construed as invitation or solicitation to do business with Bajaj Financial Securities Limited.  

Bajaj Financial Securities Limited or its associates may have received compensation from the subject company in the past 12 months. Bajaj Financial Securities Limited or its associates may have managed or co-managed public offering of securities for the subject company in the past 12 months. Bajaj Financial Securities Limited or its associates may have received compensation for investment banking or merchant banking or brokerage services from the subject company in the past 12 months. Bajaj Financial Securities Limited or its associates may have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company in the past 12 months. Bajaj Financial Securities Limited or its associates have not received any compensation or other benefits from the Subject Company or third party in connection with the research report. Research analyst or his/her relative or Bajaj Financial Securities Limited’s associates may have financial interest in the subject company. Bajaj Financial Securities Limited, its associates, research analyst and his/her relative may have other potential/material conflict of interest with respect to any recommendation and related information and opinions at the time of publication of research report or at the time of public appearance.  

Research analyst has served as an officer, director or employee of subject Company: No  

Bajaj Financial Securities Limited has financial interest in the subject companies: No  

Bajaj Financial Securities Limited’s Associates may have actual/beneficial ownership of 1% or more securities of the subject company at the end of the month immediately preceding the date of publication of research report.  

Research analyst or his/her relative has actual/beneficial ownership of 1% or more securities of the subject company at the end of the month immediately preceding the date of publication of research report: No  

Bajaj Financial Securities Limited has actual/beneficial ownership of 1% or more securities of the subject company at the end of the month immediately preceding the date of publication of research report: No  

Subject company may have been client during twelve months preceding the date of distribution of the research report.  

There were no instances of non-compliance by Bajaj Financial Securities Limited on any matter related to the capital markets, resulting in significant and material disciplinary action during the last three years. A graph of daily closing prices of the securities is also available at https://www.nseindia.com/

ANALYST CERTIFICATION

The analyst for this report certifies that all of the views expressed in this report accurately reflect his or her personal views about the subject company or companies and its or their securities, and no part of his or her compensation was, is or will be, directly or indirectly related to specific recommendations or views expressed in this report.  

RISK DISCLOSURE ON DERIVATIVES

  • 9 out of 10 individual traders in equity Futures and Options Segment, incurred net losses.
  • On an average, loss makers registered net trading loss close to ₹ 50,000.
  • Over and above the net trading losses incurred, loss makers expended an additional 28% of net trading losses as transaction costs.
  • Those making net trading profits, incurred between 15% to 50% of such profits as transaction cost.

SEBI study dated January 25, 2023 on “Analysis of Profit and Loss of Individual Traders dealing in equity Futures and Options (F&O) Segment”, wherein Aggregate Level findings are based on annual Profit/Loss incurred by individual traders in equity F&O during FY 2021-22.

BROKERAGE DISCLAIMER

All leveraged intraday positions will be squared off on the same day. There is no restriction on the withdrawal of the unutilised margin amount. Brokerage will not exceed the SEBI prescribed limit. Visit : https://www.bajajbroking.in/pricing

MTF 

As subject to the provisions of SEBI Circular CIR/MRD/DP/54/2017 dated June 13, 2017, and the terms and conditions mentioned in the lights and obligations statement issued by the TM (if applicable).  

US INVESTING

International investment is not supervised by any regulatory body in India. Thus, any claim or dispute relating to such investment or enforcement of any agreement/contract /claim will not be under laws and regulations of the recognized stock exchanges and investor protection under Indian Securities Law. The account opening process will be carried out on Vested platform and Bajaj Financial Securities Limited will not have any role in it.  

MARKETSMITH / GOLDENPI / SOVEREIGN GOLD BONDS

Bajaj Financial Securities Limited is only distributor of this product. These are not exchange traded products and all disputes with respect to the distribution activity, would not have access to exchange investor redressal forum or Arbitration mechanism. Bajaj Financial Securities Limited is not a registered Investment Advisory. User discretion is required before investing. Client is requested to independently evaluate and/or consult their professional advisors before arriving at any conclusion to make any investment. The decision to invest shall be the sole responsibility of the Client and shall not hold Bajaj Financial Securities Limited, its employees and associates responsible for any losses, damages of any type whatsoever. 

IPO 

This should not be construed as soliciting investment. Investors’ discretion is required. Kindly consult your financial expert before investing. No need to issue cheques by investors while subscribing to IPO. Investments in securities markets are subject to market risks, read all the related documents carefully before investing.  

SCREENERS 

Screeners is not Exchange-approved products and any disputes related to the same will not be dealt on the Exchange platform. 

SECURITIES 

Securities quoted are exemplary and not recommendatory. 

IPV 

Account would be open after all procedure relating to IPV and client due diligence is completed. 

IMAGES 

The images used are only for representation purpose. Proper due diligence has been done for the images and the image is not of any artist. The same is captured from royalty free sites. 

DISCLOSURE TO CLIENTS REGARDING PAYOUT OF FUNDS

As per SEBI circular no. SEBI/HO/MIRSD/MIRSD-PoD-1/P/CIR/2023/84 dated June 08, 2023, Stockbrokers are required to upstream the entire client funds lying with them to the Clearing Corporation. Based on client’s request the funds’ release request must be placed with the Clearing Corporation. Based on the internal process and cut-off timelines of the Clearing Corporation the funds will be released to the Stock Broker. In view of this new process, as specified by the regulatory and the cut-off time of Clearing Corporation/Banks processing the funds, Bajaj Financial Securities Limited cannot commit the exact time for releasing funds payout to its client. Clients are requested to note that, Bajaj Financial Securities Limited will not be responsible for any inconvenience caused to clients due to delay in release of funds payout, including fines, delayed charges, defaults, etc.