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Friday, May 20, 2011

Treasury Stock tricks come to an end with IFRS

Treasury stocks are company’s own-stocks which company owns. A company gets treasury stocks either by a way of a merger (amalgamation) or share buyback by the company.
In simple words, these are stocks which are not issued to investors and kept in treasuries.
But as per company law in India a company or its subsidiary can’t hold own shares and hence shares are held in a trust.
Companies can sell these shares at their will and generally  sell during the time of good market valuation.
When treasury stocks are subtracted from issued stocks, we get outstanding stocks.Thus number of outstanding share is less than (or at most equal) to issued shares.
Since April 1, 2011, sell proceeds of treasury stocks shall not be counted as 'profit or loss' under IFRS (International financial reporting standard) regime.
Earlier under Indian accounting standard, companies use to recognise profit or loss, when they sold treasury shares. But now under IFRS, selling treasury stocks is considered as fresh capital issuance and thus increases share capital of the company.
Under IFRS, proceeds of treasury stock-sales go to the company reserve and not to the promoters. Companies (both listed and none listed) with net worth of 1000 crore and above shall necessarily have to comply IFRS from April 1, 2011.By the year 2014 companies with net worth less than 500 too shall be included.
So for, companies used to sell treasury shares in open market through block deals. Selling of treasury stocks generates funds for the company but exerts a downward pressure on the stock price.
In developed markets like the US and UK, company sells treasury stocks as soon they get the allotment resulting in reduction of the equity and enhanced EPS; but Indian promoters used to hold treasury stocks which gave them greater control over the company.
Promoters often sell treasury stocks to boost up profit and the proceeds to distribute as dividend. But in IFRS regime as proceeds go to reserves so proceeds can be used for expansion but not for paying dividends.
RIL’s (Reliance Industries Ltd.) merger with RPL (Reliance Petroleum Ltd), treasury shares were created. All RIL shares with RPL were converted into treasury shares and were parked in ‘Petroleum Trust’, which constituted 7.2% stake of RIL.As per June 2010 RIL shareholding pattern, only 3.68 percent of shares were in the trust, and the rest were sold by RIL.RIL sold large chunk of its treasury shares in the year 2009 and 2010.
RIL is supposed to further sell its treasury shares and the price at which this shall be done is worth watching.This fear of selling treasury shares shall keep RIL share price under pressure in coming days.

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