SVKMS

Narsee Monjee Institute of Management Studies

Anil Surendra Modi

School Of Commerce

Project Report
Corporate Financial Management
Reliance Industries

By:
Group 2
SYBBA-C
S No.
Name Roll No.
1
Ashwin Gupta
C006
2 Ayush Bhowmick
C007
3
Ayushi Kothari
C008
4
Devika Goel
C009
5
Dhruv Gupta
C010

Table of Contents
Acknowledgement................................................................................................
AbouttheProject..................................................................................................
AbouttheCompany..............................................................................................
Introduction...........................................................................................................
NatureofDividends..............................................................................................
TypesofDividendsaccordingtoTimePeriod.....................................................
RegularDividend...............................................................................................
InterimDividend................................................................................................
SpecialDividend...............................................................................................
TypesofDividendsaccordingtoPaymentPeriod...............................................
DividendPolicy....................................................................................................
TypesofDividendPolicy.....................................................................................
FactorsAffectingDividendPolicy.....................................................................10
BonusShares......................................................................................................12
DividendPolicyofRelianceIndustriesLimited................................................12
DivdendTrendofRelianceIndustriesLimited..................................................13
BonusSharesIssuedByRelianceIndustriesLimited........................................14
RelianceIndustriesLimitedincomparisontoitscompetitors...........................15
IndianOilCorporationLimited.......................................................................15
BharatPetroleumCorporationLimited...........................................................17
CoRelation.........................................................................................................18
CorrelationbetweenCashandDividend.........................................................18
CorrelationbetweenProfitsandDividends.....................................................19
Bibiliography......................................................................................................20

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ACKNOWLEDGEMENT
We would like to express our special thanks to our teacher Mr Kushagra Goel who gave us
the golden opportunity to do this wonderful project, which also helped us in conducting a
lot of Research and we came to be aware of a variety of new things. We are really grateful
to him.
We also appreciate the help and guidance provided to us by our friends and family, without
which we would not have been able to successfully complete this project.
This project has not only assisted us in increasing our knowledge but also helped us gain
and improve new skills of interacting with Corporates.
THANKS AGAIN TO ALL OF THOSE WHO HELPED US
Ashwin Gupta
Ayush Bhowmick
Ayushi Kothari
Devika Goel
Dhruv Gupta

ABOUT THE PROJECT

The group had to study the dividend policy of a company and of other companies in the
same sector & mention the same for the past 3 years. The group also needed to find the
relationship between the dividend and cash and dividend and profit for that company.
The objective of the project was to understand the factors which affect the companys
decision in deciding the dividend for the year.
The group chose Reliance Industries Limited and studied its dividend policy for the past
three years.

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ABOUT THE COMPANY

Reliance Industries Limited (RIL) is an Indian conglomerate holding
company headquartered in Mumbai, Maharashtra, India. It was
founded by Mr. Dhirubhai Ambani in 1966. It is currently headed by
his son, Mr. Mukesh Ambani
Logo of Reliance
In 200102, Reliance Petroleum was merged with Reliance Figure 1:Industries
Industries.
It is Ranked No. 99 on Fortune Global 500 and is the Second largest traded company in
India by market capitalisation. It contributes about 14% of Indias Total Exports and is
Second largest company in India by revenue after state run Indian Oil Corporation.

The Major Segments in which the company is working are:

1. Oil Exploration and Production
2. Petroleum Refining and Marketing
3. Petrochemicals
4. Retail
5. Telecommunications
6. Financial Position
The Group's annual revenues are in excess of US$ 28 billion and it has got more than 3
Million Shareholders (One of the most widely held stocks)

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INTRODUCTION

A dividend is a payment made by a corporation to its shareholders, usually as a

distribution of profits. When a corporation earns a profit or surplus, it can re-invest
it in the business (called retained earnings), and pay a fraction of this reinvestment
as a dividend to shareholders.

Distribution to shareholders can be in cash (usually a deposit into a bank account)

or, if the corporation has a dividend reinvestment plan, the amount can be paid by
the issue of further shares or share repurchase.

A dividend is allocated as a fixed amount per share, with shareholders receiving a

dividend in proportion to their shareholding. For the joint stock company, paying
dividends is not an expense rather , it is the division of after tax profits among
shareholders.

Retained earnings (profits that have not been distributed as dividends) are shown in
the shareholders' equity section on the company's balance sheet - the same as its
issued share capital. Public companies usually pay dividends on a fixed schedule,
but may declare a dividend at any time, sometimes called a special dividend to
distinguish it from the fixed schedule dividends. Cooperatives, on the other hand,
allocate dividends according to members' activity, so their dividends are often
considered to be a pre-tax expense.

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NATURE OF DIVIDENDS

A dividend is not regarded as an expenditure; rather, it is considered a

distribution of assets among shareholders. The majority of companies keep a
component of their profits as retained earnings and distribute the rest as
dividend.

Dividends offer consistent returns on relatively low risk investments. While

companies experiencing rapid growth are unlikely to offer dividends,
established companies with stable business and less room to grow do pay
dividends to shareholders.

A firm's dividend decision may also serve as a signalling device about a firm's
future prospects. Due to information asymmetry between investors and the firm
managers, investors will look to indicators like dividend decisions, which may
give clues about what the firm managers forecast for the firm.

Critics of dividends contend that company profits are better used reinvested
back into the company for research, development, and capital expansion

TYPES OF DIVIDENDS ACCORDING TO TIME PERIOD

1. Regular Dividend

By dividend we mean regular dividend paid annually, proposed by the board of

directors and approved by the shareholders in general meeting. It is also known
as final dividend because it is usually paid after the finalization of accounts.

It is generally paid in cash as a percentage of paid up capital, say 10 % or 15 %

of the capital. Sometimes, it is paid per share.

No dividend is paid on calls in advance or calls in arrears. The company is,

however, authorized to make provisions in the Articles prohibiting the payment
of dividend on shares having calls in arrears.

Example: Let's assume a person own 100 shares of XYZ Company. At the end
of the quarter XYZ Company calculates its financial performance for the
quarter. The board of directors then reviews this information, including XYZ
Company's profit margin, and declares a $0.10 dividend per share for the
quarter. This means that shareholder is entitled to$0.10x 100 shares =$10

2. Interim Dividend

If Articles so permit, the directors may decide to pay dividend at any time
between the two Annual General Meeting before finalizing the accounts.

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It is generally declared and paid when company has earned heavy profits or
abnormal profits during the year and directors which to pay the profits to
shareholders.

Such payment of dividend in between the two Annual General meetings before
finalizing the accounts is called Interim Dividend.

No Interim Dividend can be declared or paid unless depreciation for the full
year (not proportionately) has been provided for. It is, thus,, an extra dividend
paid during the year requiring no need of approval of the Annual General
Meeting. It is paid in cash.

3. Special Dividend

A special dividend is a payment made by a company to its shareholders that the

company declares to be separate from the typical recurring dividend cycle, if
any, for the company.

Usually when a company raises its normal dividend, the investor expectation is
that this marks a sustained increase. In the case of a special dividend, however,
the company is signaling that this is a one-off payment.

Therefore, special dividends do not markedly affect valuation or yield

calculations. Typically, special dividends are distributed if a company has
exceptionally strong earnings that it wishes to distribute to shareholders or if it
is making changes to its financial structure, such as debt ratio.

TYPES OF DIVIDENDS ACCORDING TO PAYMENT PERIOD

1. Cash Dividends

Firms distribute as cash dividends a certain percentage of annual earnings in

payout rates. Four dates are crucial to accounting ordance for cash dividends as
follows:

The date of declaration: It is the date a resolution to pay cash dividends to

stockholders of record on a specific future date is approved by the board of
directors. At that date the firm incurs a liability prompting the recognition of a
short-term debtDividends Payable and the debit to either Retained Earnings
or Cash Dividend Declared.

The ex-dividend date: It is the date the stock stops selling with dividends
attached. The period between the date of declaration and the ex-dividend date is
used by the firm to update its stockholders ledger.

The date of record: It is the date at which the stockholders figuring in the
stockholders ledger are entitled to the cash dividend. No entry is required.

The date of payment: It is the date at which the firm distributes the dividend
checks and eliminates the dividend payable as a liability.

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2. Stock-Dividend

Companies, not having good cash position, generally pay dividend in the form
of shares by capitalizing the profits of current year and of past years.

Such shares are issued instead of paying dividend in cash and called 'Bonus
Shares'. Basically there is no change in the equity of shareholders. Certain
guidelines have been used by the company Law Board in respect of Bonus
Shares.

3. Property Dividends

Firms may elect to declare a property dividend that is payable in

nonmonetary assets rather than declaring a cash dividend.

Because a property dividend can be classified as a non-reciprocal nonmonetary

transfer to owners, the property distributed is restated at fair market value at
the date of declaration and a gain or loss is recognized.

4. Scrip Dividend

Scrip dividends are used when earnings justify a dividend, but the cash position
of the company is temporarily weak. So, shareholders are issued shares and
debentures of other companies. Such payment of dividend is called Scrip
Dividend.

5. Liquidating Dividend

A type of payment made by a corporation to its shareholders during its partial or

full liquidation. For the most part, such a distribution is made from the
company's capital base, and as a return of capital, is typically not taxable for
shareholders.

6. Bond Dividends

In rare instances, dividends are paid in the form of debentures or bounds or

notes for a long-term period. The effect of such dividend is the same as that of
paying dividend in scrips.

DIVIDEND POLICY
The dividend policy of a company refers to the views and policies of the management with
respect of distribution of dividends.
The dividend policy of a company should aim at shareholder wealth maximisation but it
also moves according to the sentiments of the market as well as to the prospects of the
company
It is concerned with financial policies regarding paying cash dividend in the present or
paying an increased dividend at a later stage.

Page 8 of 22

Page 9 of 22

TYPES OF DIVIDEND POLICY

1. Regular Dividend Policy

Payment of dividend at usual rate is termed as regular dividend. The investor

such as retired persons, widows, other economically weaker persons prefer to
get regular dividend.

The regular dividend can be maintained only by the company of long standing
and stable earnings. A company should establish the regular dividend at a lower
rate as compared to average earnings of the company.

2. Stable Dividend Policy

The stability of dividend means consistency in the stream of dividend

payments. It means payment of certain minimum amount of dividend regularly .
A stable dividend policy may be established in any of the following three forms:

Constant Dividend Per Share: Some companies follow a policy of paying

fixed dividend per share irrespective of the level of earning year after year.
Such firm creates reserves i.e dividend equalization reserves to enable them to
pay the fixed dividend even in the year when the earnings are not sufficient or
when there are losses. The policy of constant dividend per share is more
suitable to concerns whose earnings are stable over a no: of years.

Constant Pay Out Ratio It means payment of fixed percentage of net earnings
as dividend every year. The amount of dividend in such policy fluctuates in
direct proportion to the earnings of the company. The policy of constant payout
is preferred by the firm because it is related to their ability to pay dividends.

Stable Rupee Dividend Plus Extra Dividend Some companies follow a policy
of paying constant low dividend per share plus extra dividend in the years of
high profits such policy is more suitable to the firm having fluctuating earnings
from year to year.

3. Irregular Dividend Policy

This policy is followed when there is uncertainty of earnings, unsuccessful

business operations, lack of liquid resources, fear of adverse affects of regular
dividend on the financial standing of the company.

4. No Dividend Policy

A company may follow a policy of paying no dividends presently because of its

unfavorable working capital position or on account of requirements of funds for
future expansions and growth.

Page 10 of 22

FACTORS AFFECTING DIVIDEND POLICY

Theoretically, over the past number of years, it has been believed by the academicians that
the dividend decision is influenced by number of factors. Some of the factors that affect the
dividend decision of a firm are listed as follows:

1. Legal Provisions

Indian Companies Act, 1956 has given the guidelines regarding legal provisions
as to dividends. Such guidelines are required to be followed by the companies
whenever the dividend policy is to be formulated. As per the guidelines, a
company is required to transfer a certain percentage of profits to reserves in
case the dividend to be paid is more than 10 percent.

Further, a company is also required to pay dividend only in cash but only with
the exception of bonus shares.

2. Magnitude of Earnings

Another important aspect of dividend policy is the extent of companys

earnings. It serves as the introductory point for framing the dividend policy.
This is so because a company can pay dividends either from the current years
profit or the past years profit. So, if the profits of a company increase, it will
directly influence the dividend declaration as the latter may also increase. Thus,
the dividend is directly linked with the availability of the earnings with the
company.

3. Desire of Shareholders:

The decision to declare the dividends is taken by Board of Directors but they
are also required to consider the desire of the shareholders, which depend on the
latters economic condition.

The shareholders, who are economically weak, prefer regular dividend policy
while the rich shareholders may prefer capital gains as compared to dividends.

However, it is very difficult for the board to reconcile the conflicting interests
of different shareholders yet the dividend policy has to be framed keeping in
view the interest of all the interested parties.

4. Nature of Industry

The nature of industry in which a company is operating, influences the dividend

decision.

Like the industries with stable demand throughout the year are in a position to
have stable earnings, thus, should have the stable dividend policy and viceversa.

5. Age of the Company

Page 11 of 22

A companys age also determine the quantum of profits to be declared as

dividends.

A new company should restrict itself to lower dividend payment due to saving
funds for the expansion and growth as compared to the already existing
companies who can pay more dividends.

As firms mature, they experience a contraction in their growth which results in

a decline in their capital expenditures. Consequently, these firms have more free
cash flow to pay as dividends. Similarly,

More mature firms are more likely to pay dividends. In contrast, younger firms
need to build up reserves to finance the future growth opportunities, thus,
making them to retain the earnings.

6. Taxation Policy

The tax policy of a country also influences the dividend policy of a company.
The rate of tax directly influences the amount of profits available to the
company for declaring dividends.

7. Control Factor

Yet another factor determining dividend policy is the threat to loose control. If a
company declares high rate of dividend, then there is the possibility that a
company may face liquidity crunch for which it has to issue new shares,
resulting in dilution of control. Keeping this threat in view, a company may go
for lower level of dividend payments and more ploughing back of profits in
order to avoid any such threat.

8. Liquidity Position

A companys liquidity position also determines the level of dividend. If a

company does not have sufficient cash resources to make dividend payment,
then it may go for issue of bonus shares.

9. Future Requirements:

A company while faming dividend policy should also consider its future plans.
If it foresees some profitable investment opportunities in near future then it may
go for lower dividend and vice-versa.

10.Agency Costs

In this stratum, dividends are paid out to stockholders in order to prevent

managers from building unnecessary empires to be used in their own interest.

In addition, dividends reduce the size of internally generated funds available to

managers, forcing them to go to the capital market to obtain external funds
(Easterbrook, 198414).

Page 12 of 22

Firms with a larger percentage of outside equity holdings are subject to higher
agency costs. The more widely spread is the ownership structure, the more
acute the free rider problem and the greater the need for outside monitoring.
Hence, these firms should pay more dividends to control the impact of
widespread ownership.

11.Business Risk

Business risk is a potential factor that may affect dividend policy. High levels of
business risk make the relationship between current and expected future
profitability less certain.

Consequently, it is expected that firms with higher levels of business risk will
have lower dividend payments. Many researchers argued that the uncertainty of
a firms earnings may lead it to pay lower dividends because volatile earnings
materially increase the risk of default. In addition, field studies using survey data
(e.g., Lintner, 195616) reported compelling evidence that risk can affect
dividend policy. In these surveys, managers explicitly cited risk as a factor that
influences their dividend choice.

BONUS SHARES

Bonus shares are those shares which are actually free shares of stock given to
the current shareholders, based upon the number of shares that
a shareholder owns.

These bonus shares are issued to the existing shareholders by converting free
reserves or share premium account to equity capital.

A company also issue bonus shares if they dont have much cash reserves to
meet the payment of dividend in cash, thats why some companies issue bonus
shares.

DIVIDEND POLICY OF RELIANCE INDUSTRIES LIMITED

The firm's dividend decision has in the last ten to fifteen years received considerable
attention from financial analysts and academics.
Divergent views have been expressed and it is understood that the controversy has not been
resolved.

Page 13 of 22

Announcement

DividendType

Dividend%

21/04/14

Final

95

16/04/13

Final

90

20/04/12

Final

85

21/04/11

Final

80

26/04/10

Final

70

07/10/09

Final

130

21/04/08

Final

130

02/03/07

Interim

110

27/04/06

Final

100

27/04/05
Final
75
DIVDEND TREND OF RELIANCE INDUSTRIES LIMITED
From last 4 years, the sale of RIL has increased by huge amounts and the profit of the
company is also increasing in huge amounts and dividend paid by RIL is also increasing
year by year.

Page 14 of 22

As the trend is given there, 100% of the face value had been declared as dividend in
2005-06 (previous to this, in 2004-05 that was 75% i.e. Rs. 7.5/.share) and then RIL
declared more dividends in the further years, like 110%, 130% for two years.

This shows the companys strong prospects for their future profits as they are
declaring more dividends year by year. It also provides a sense of benchmark for the
dividends to the shareholders of Reliance Industries.

Reliance Industries declared just 70 % of their profits as dividends for the year
2009-10, which is almost half of the previous dividend of 2008-09, that was 130%.
Companys declaration was not according to the markets sentiments but still the
share price of RIL did not have any downside on its share prices that maybe due to
their good profits which gave an indication of further investment by the company as
they retained 93 % for their reserves.

Table 1: Dividend declared by Reliance Industries Limited in the past 9

years

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BONUS SHARES ISSUED BY RELIANCE INDUSTRIES

LIMITED

Reliance issued Bonus Shares at the ratio 1:1 in October,2009

Company had announced this bonus on 17th of November and the record date was
set to 27th of November, 2009, this announcement has been made after 12 years as
the last bonus was issued in October 1997.

Generally, companies issue Bonus Shares if they do not have enough cash reserves
with them to meet the dividend payment with cash and that is why the companies
pay dividend in cash.

However, this was not the case with Reliance Industries Limited since, they
declared bonus shares along with the payment of dividend i.e. 130% in cash which
clearly shows they have a lot of cash reserves.

On the date of issue of bonus shares the market price of RIL shares got a dip by
approximately half to its prices, as it is clearly shown in the graph. This mechanism
automatically makes no effect of bonus share issue to the market capitalization or
the wealth of the shareholders in terms of increasing numbers of shares because the
price got reduced and the value of their holdings still are the same.

Figure 2 : The share prices of RIL almost reduced to half of its prices

Page 16 of 22

RELIANCE INDUSTRIES LIMITED IN COMPARISON TO ITS

COMPETITORS
There are two major competitors for Reliance Industries Limited
1. Indian Oil Corporation Limited
2. Bharat Petroleum Corporation Limited

Indian Oil Corporation Limited

Year
2013
14
2012
13
2011
12
2010
11

Year
2013
14
2012
13
2011
12
2010
11

IOCDeclared
Dividend(%)

IOCDeclared
Dividend
(Rs.inCr.)

RILDeclared
Dividend(%)

RILDeclared
Dividend
(Rs.inCr.)

87

2,112

95

2,793

62

1,505

90

2,628

50

1,214

85

2,531

95

2,307

80

2,385

Table 2: Comparison of IOC declared dividends and RIL declared

dividends

RIL

IOC

21,984.00

7019.09

21,003.00

5005.17

20,040.00
20,286.30

3954.62
7445.48

Table 3: Comparison of Profit after tax earned by IOC and RIL

Page 17 of 22


2013
14
2012
13
2011
12
2010
11

RIL

IOC

32,319.02

24,279.52

32,286.63

24,279.52

32,710.59

24,279.52

32,733.74

24,279.52

Table 4: Comparison of Total Number of Shares issues by IOC and RIL

RIL

IOC
As

201314

68.02

28.91

201213

65.05

20.61

201112

61.26

16.29

201011

61.97

30.67

Table 5: Comparison of Earnings per Share for IOC and RIL

evident from the data provided in the above tables, Reliance Industries has a more stable
dividend policy since, it is constantly increasing whereas the trend for IOC has been a little
unstable where after declaring a dividend of 95% in the year 2010-11, they declared just
50% in the next year. It points towards an unstable policy.
The profit after tax earned by RIL has been significantly more than the IOC.
Reliance Industries has not only been creating wealth in form of dividends they have been
distributing but the shareholders are also getting a significant capital gain from the increase
in value of shares was has been remarkable and created much wealth for the shareholders.

Page 18 of 22

Bharat Petroleum Corporation Limited

Year

RIL

BPCL

2014

21,984

4,060.88

2013

21,003

2,642.92

2012

20,040

1,311.27

2011

20,286

1,546.68

Table 6: Comparison of Profit after Tax for BPCL and RIL

Year
2014
Year

RIL

2012
2013-14

95

68.02
RIL Declared
Dividend
65.05
(Rs. in Cr.)
61.26
2,793

2011
2012-13

90

61.97
2,628

2011-12

85

2,531

2013

2010-11

RIL Declared
Dividend (%)

BPCL
56.16 BPCL Declared
BPC Declared
Dividend (%)
Dividend
36.55
(Rs. in Cr.)
36.27
170
1,229.24
110 42.78

795.39

110

397.7

Table 7: Comparison of Earnings per Share for BPCL and RIL

80

2,385

140

506.16

From Table 8, we infer that BPCL has been anouncing more dividends for the shareholders
than RIL. However, the amount that is spent by RIL for dividends is much more than BPCL
since, the total number of shares that have been issued by RIL is much more than BPCL.
However, if Table 7 is taken into consideration, we see that the EPS (Earning per share) of
BPCL is significantly lower than the RIL, from which we conclude that RIL is more
profitable firm. This statement is confirmed from the data in Table 6.

CO-RELATION
Table 8: BPCL and RIL declared dividends for the past 3 years

Correlation is the process of establishing a relationship or connection between two or more

things. It is the interdependence of variable quantities. Its value varies from 1 to -1. 1

Page 19 of 22

meaning the correlation is perfectly positive, and -1 meaning it is perfectly negative.

Correlation is Positive when the values increase together, and Correlation is Negative when
one value decreases as the other increases. The formula for it is:

Correlation between Cash and Dividend

YEAR

CASH

DIVIDEND

2012

39,596

2,531

2013
2014

49,547
36,624

2,628
2,793

CORRELATION

0.362

Figure 3: Formula for Correlation

There is a negative co-relation between Cash and Dividend. This is due to the dividends
that were declared by the company in the last 2-3 years has been in the form of Cash. That
is why as the dividend increases, the cash decreases and vice-versa.

Table 9: Co-relation between Cash and Dividend of RIL

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Correlation between Profits and Dividends

Year

Profits

Dividend

2012

6,514

2,531

2013

7,609

2,628

2014

8,610

2,793

CORRELATION

0.985

Table 10: Co-relation between Profits and Dividend of RIL

With the increase in Profits , the Dividend declared by the company has also been
increasing and thus, there is a positive co-relation between Profits and Dividend of the firm.

Page 21 of 22

BIBILIOGRAPHY

www.moneycontrol.com

www.capitalline.com

www.wikipedia.com

www.google.co.in

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