Definition
Treasury stock refers to shares that were previously issued by a company and subsequently repurchased from the open market. These shares are held by the company itself and are not considered part of the outstanding shares. As such, treasury shares do not confer voting rights, nor are they eligible for dividend payments.

Key Aspects of Treasury Stock

• Repurchased Shares
  Treasury stock arises when a company buys back its own previously issued shares, thereby reducing the number of shares available in the open market.
• Not Considered Outstanding
  Treasury shares are excluded from the total outstanding shares of the company. Consequently, they are not included in calculations for earnings per share (EPS), dividend distributions, or shareholder voting.
• No Voting Rights or Dividend Entitlement
  Since the company is the holder of treasury shares, these shares do not carry any voting rights and are ineligible for dividend payments.
• Balance Sheet Presentation
  Treasury stock is recorded on the company’s balance sheet under the shareholders’ equity section as a contra-equity account. This means it reduces total shareholders’ equity, reflecting the outflow of resources used for the share repurchase.

Reasons for Share Repurchase and Creation of Treasury Stock

• Enhancing Shareholder Value
  By reducing the number of outstanding shares, a company can increase its earnings per share (EPS), which may lead to a rise in the stock’s market value, thereby benefiting existing shareholders.
• Optimizing Capital Structure
  Share repurchases can be a strategic tool for adjusting the company’s capital structure, making it more attractive to investors, or preparing for future mergers, acquisitions, or investment opportunities.
• Employee Compensation Plans
  Treasury shares are often used to meet obligations under employee stock option plans (ESOPs) or bonus schemes, thus avoiding the need to issue new shares.
• Strategic and Defensive Uses
  Companies may repurchase shares to prevent hostile takeovers by reducing the number of shares available in the open market. Treasury stock can also be held for future strategic purposes, including potential reissuance.

Conclusion
Treasury stock serves as a versatile financial instrument for companies, allowing them to manage their capital structure, support share price, and fulfill strategic and operational needs. While these shares do not participate in dividends or voting, their presence significantly influences key financial metrics and corporate decision-making.

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