Treasury Stock

A repurchased stock which is bought by the issuing company, thereby reducing the outstanding stock in the open market is known as treasury stock or reacquired stock. Such repurchases save tax since the company pays cash instead of dividends. When a company feels that its stock is undervalued in the market or if it wishes to give bonus incentive compensation to its employees, it buys backs its shares. Stock repurchase also protects a company from being taken over. These reacquired stocks have certain limitations such as they are not eligible for dividends, do not have voting rights and such stock cannot exceed the maximum proportion of capitalization prescribed by the concerned country.

However, there are some benefits too. When a company buys back a share, it has to pay money to do so, but has lesser shares outstanding. When the market performance is low and the company buys shares it helps the shareholders. If the company shares are overpriced and the shares are bought back, it is hurting the remaining customers by buying back the stock. Holders of stock options are rewarded when company offers to buy back.

After reacquiring the shares the company can either retain it or open it for resale. When the numbers of outstanding shares are reduced, the company’s asset is also reduced.

Treasury stock in the balance sheet

Information regarding the treasury stock is found in the balance sheet of a company. This refers to the shares that are reacquired through share repurchase programs or through donations. Repurchase of stocks result in less cash in hand and total shareholder equity. This could be misunderstood by investors as debt or losses. Repurchased stock clarifies such doubts. Repurchased stock is listed as a negative number. Since the shares could be sold at any time, the current market price of the reacquired stock is not listed.

Regulations in the United States and United Kingdom

In the United States, the company could repurchase stocks from only one broker per day. The repurchase cannot be the first trade of the day and it could only be done in the last thirty minutes of the trading day. Repurchase price cannot exceed the highest bid than the last trade. Repurchase value cannot exceed 25 percent of the average daily volume of the previous four calendar weeks. In United Kingdom, however, companies are not allowed to hold their own shares. Treasury stock in United Kingdom is known as government bonds or gilts.

Questions:

• Why are details regarding treasury stock mentioned in the balance sheet?
• What are the United Kingdom regulations for treasury stock?