The issuing company repurchases treasury shares to reduce the number of shares outstanding on the market.
Understanding Treasury Shares for Singapore Startups
All startups have an authorized amount of equity capital that can be issued as shares. These shares can be classified as:
- Outstanding shares: The total number of shares owned by investors, including management and employees
- Float: The amount of equity available to the public for sale and purchase of the company’s stock from share markets
- Treasury shares: The shares that were once outstanding shares or a part of the float but were subsequently repurchased by the company.
Treasury shares are the same as unissued equity capital. They are not classified as an asset on the balance sheet as they don’t have any probable future economic benefit. These shares reduce ordinary share capital. They are usually presented under the equity capital in the balance sheet as a negative number.
- When repurchased, these shares can either be canceled or held for reissue
- They neither pay dividends nor have voting rights
- The possession of these shares does not sanction the right to receive any assets on liquidation or any other pre-emptive shareholder rights
- The number of shares cannot exceed the maximum proportion of total capitalization specified by the laws and regulations of Singapore
Why are these shares issued?
Treasury shares, being bought-back shares, reduce the number of outstanding shares and thus positively affect the earning per share and price to earnings ratio (PE ratio). However, the value of shares remains the same as market risk increases with the inclusion of the treasury shares.
Despite this, these shares are useful as they can be distributed to shareholders. By distributing these shares, founders can avoid paying dividends to investors and save tax at the same time. They are also leveraged to protect the company from hostile takeovers.
Click here for a blog on the ESOP Tax implications in Singapore!