These are shares bought back by the issuing company, thus reducing the amount of the outstanding shares in the open market, including insiders? holdings. Such repurchases are done with some objectives. Firstly, as a tax-efficient method to put cash into shareholder's and thus ?save? the money that the company might have to pay as dividends. Secondly, when the company feels that the stocks are undervalued in the open market. Thirdly, this is an incentive compensation plan for employees. Instead of cash bonus, the employees will receive assets which are likely to grow faster than savings/fixed deposits in a bank account. And finally, a clever devise against the takeover threat, to protect the company.



These shares have certain limitations:

No dividend is payable on treasury stocks and they have no voting rights. The total amount can not exceed the maximum proportion of total capitalization, as per the laws of the country, governing such matters. On repurchasing the shares, they may be held for reissue or cancelled. When not cancelled, they are referred to as treasury shares. In reality, a repurchased share is company's own share that has been bought back by the company under special circumstances, after being fully subscribed and paid.

The possession of these shares does not confer any special rights to the company such as right to vote, pre-emptive rights as a shareholder, the benefit of cash dividends etc. In case of liquidation of the company, no proceeds are apportioned. In short, it is as good as un-issued capital and hence it is not classified on the balance sheet. To be classified as an asset, it needs to have probable economic benefits. The ordinary share capital stands reduced by the amount equivalent to the aggregate of such shares.

In a just and efficient market, buying back its own share to convert them into such shares has no effect on the share price. For example, if the price of one share of the company is $100, and if the company buys back 100 shares for $10000, its cash holdings stands reduced by $10000 but 100 less shares are outstanding as well, and the value per share remain unchanged. But this could result in change of certain financial ratios, such as earnings per share stands increased. But the value per share remains unchanged, as the market risk increases by the same amount.

In USA, buybacks are covered by certain laws. Accordingly, the company that intends to repurchase the share should not use more than one broker to acquire shares per each day. A repurchase may not be the first trade of the day nor can it be made in the last ten minutes of the trading day. A repurchase price may not be bid at a price higher than the highest independent bid or last price of the last trade. Repurchases per day may not exceed 25% of the average daily volume of the previous 4 calendar weeks. This restriction is however, not applicable to block purchases not effected by a broker-dealer.

Some companies retain shares o use later. These are known as treasury shares. The company may release such shares in to the market, to enable them to acquire money for a project, or research and expansion. There are many companies that hold a good chunk of the shares in this category.