A PROJECT REPORT ON

A KEY STUDY ON DIVIDEND

POLICIES AT RELIANCE
INDUSTRIES LIMITED
SUBMITTED TO

ALL INDIA MANAGEMENT ASSOCIATION

CENTRE FOR MANAGEMENT EDUCATION
MANAGEMENT HOUSE, 14 INSTITUTIONAL AREAS, LODHI ROAD,
NEW DEHLI-110003

JUNE 2016

By
G. SAHITHI REDDY
REGISTRATION NO: B11420693
Guided By
Mr. SRINIVAS MUTHINENI
SENIOR FACULTY
BADRUKA INSTITUTE OF MANAGEMENT
STUDIES KACHIGUDA

For the partial fulfillment of

Post Graduate Diploma in Management (PGDM)
 DECLARATION
I signed hereby declare that to my knowledge and belief that the project titled A key
study on dividend policies at reliance industries limited presented solely by me and
the study was conducted in the twin cities.

The work done and empirical findings in this report are based on the data collected and
have not been submitted to any other university or board for the award of any other
degree or diploma.
 ACKNOWLEDGEMENT

I am thankful to Mr. Srinivas Muthineni (Senior Faculty, BIMS) for giving his valuable
guidance to do this work without his effect this would not be possible.

Finally I want to thank my parents and my friends for their continuous support in
accomplishment of this project.

Name of the Student

G SAHITHI
TABLE OF CONTENTS

Chapter Page No.

1. Executive Summary..1
1.1 Introduction
2. Research Methodology.16
2.1 Primary Objective(s)
2.2 Problem definition
2.3 Approach to the Problem
2.4 Sample Design
2.5 Limitations
2.6 Company Profile
3. Critical Review..51
4. Data.67
4.1 Secondary Data
5. Dividend Theories..68
6. Findings & Analysis...75
7. Bibliography97
 (1) EXECUTIVE SUMMARY
When a company makes a profit, it has to decide what to
do with this money. Companies have three uses for its cash.
To fund workin g capital
To finance investments in the company, where management have
identified and developed opportunities that have returns greater
than the return on working capital
Distribute it to shareholders.

This research is intended to empiricall y Analyze the Dividend Policies of

companies.

Thisreport answers various questions like:

How and Why Do Companies Pay Dividends?
What should be the Companys dividend policy?
How Do Firms View Dividend Policy?
What factors should be considered when a company decides on its
dividend policy?
What are the alternatives that a company has other than paying
dividends?

Before we begin describing the various policies that companies use to

determine how much to pay, let's look at different arguments for and
against dividends policies.

First, some financial anal ysts feel that the

consideration of as dividend policy is irrelevant because investors have
the abilit y to create homemade dividends. This is don e by adjusting a
personal portfolio to reflect the investor's own preferences.

The second argument suggests that little to no dividend

payout is more favorable for investors. Supporters of this policy point out
that taxation on a dividend is higher than on capital gain.

The argument against dividends is based on the belief

that a firm who reinvests funds (rather than pays it out as a dividend) will
increase the value of the firm as a whole and consequentl y increase the
market value of the stock.

According to the proponents of the no -dividend policy,

a company's alternatives to paying out excess cash as dividends are the
following: undertaking more projects, repurchasing the compan y's own
shares, acquiring new companies and profitable assets, and reinvesting in
financial assets.

1
 In opposition to these two arguments is the idea that a
high dividend payout is more important for investors because the
principle behind the attractiven ess of a company's abilit y to pay
high dividends is that it provides certaint y about the company's
financial well being. Dividends are also attractive for investors
looking to secure current income.

Now, should the company decide to follow either the

high or low dividend method, it would use one of three main approaches:

Residual
Stabilit y
Hybrid of the above two.

So, we can say that, there are many reasons for paying dividends and
there are many reasons for not paying any dividends. As a result,
`dividend policy' is controversial .

2
 INTRODUCTION

When a company makes a profit, it has to decide what to do with this

money. Companies have three uses for its cash.
To fund working capital
To finance investments in the company, where management have
identified and developed opportunities that have returns greater
than the return on working capital
Distribute it to shareholders as dividend.

There is, thus, a t ype of inverse relationship between retained earnings

and cash dividends. Larger retentions, lesser dividends and smaller
retentions, larger dividends . Thus, the alternative uses of the net
earnings:-dividends and retained earnings - are competitive and
conflicting.

The term "dividend" usuall y refers to a cash distribution of earnings. If it

comes from other sources, it is called "liquidating dividend". It mainl y
has the following t ypes:
Regular: Regular dividends are those the company expects to
maintain, paid quarterl y (sometimes monthl y, semiannuall y or
annuall y).
Extra: Those that may n ot be repeated.
Special: Those that are unlikel y to be repeated.
Stock Dividend: Paid in shares of stocks. Similar to stock splits,
both increase the number of shares outstanding and reduce the stock
price.

The procedure for paying dividends is as foll ows:

Declaration Date: Date at which the company announces it will pay a

dividend.

Holder-of-Record Date: Date at which the list of shareholders who will

receive the dividend is made.

Ex-Dividend Date: The convention is that the right to the dividend

remains with the stock until two business days before the holder -of-record
date. Whoever buys the stock on or after the ex -dividend date does not
receive the dividend.

3
How Do Firms View Dividend Policy?

One firm's policy might be to pay out 40% of earn ings as dividends
whereas another company might have a target of 50%. This suggests that
dividends change with earnings. Empiricall y, dividends are slow to adjust
to changes in earnings. It has been observed that more "conservative"
companies are generall y slower to adjust to the target payout if earnings
increased.

Given the objective of financial management of maxi mizing present

values, the firm should be guided by the consideration as to which
alternative use is consistent with the goal of wealth maximi zation. i.e.,
the firm would be well advised to use the net profits for payi ng dividends
to the share holders if the payment will lead to the maximization of
wealth of the owners. If not the firm should rather retain them to finance
investment programs. th e relationship between dividends and value of the
firm should, therefore, be the decision criterion.

There are however conflicting opinions regarding the impact of

dividends on the valuations of the firm. According to one school of
thought, dividends are irrelevant, so that the amount of the dividends paid
has no effect on the valuation of the firm.on the other hand certain
theories consider the dividend decision as relevant to the value of the firm
measured in terms of the market price of the shares.

Before discussing the 2 school of thoughts, let us first

understand why a company pays the dividend and in what form. In other
words, what are the factors which helps us in determining the dividend
policy of a company.

These Factors can be classified as follows:

(1) Dividend Payout (D/P) ratio:

A major aspect of the dividend policy of a firm is its dividend
payout (D/P) Ratio i.e., the % share of the net earnings distributed to the
shareholders as dividends. The D/P Ratio of a firm should be determined
with reference to two basic objectives: -

Maximizing the wealth of the firms owners and,

Providing sufficient funds to finance growth.

These objectives are not mutuall y exclusive, but interrelated. In

practice, shareholders have a clear cut preference for dividends because of
uncertaint y and imperfect capital markets. The payment of dividends can,
therefore, be expected to effect the price of a share; a low D/P Ratio may

4
cause a decline in share prices, while a high ratio may lead to a rise in the
market price of the share. Making a sufficient provision for financing
growth can be considered a secondary objective of dividend policy. The
firm must forecast its future needs for funds, and taking in to account the
external availabilit y if funds and certain market considerations, determine
both the amount of retained earnings needed and the amount of retained
earnings available after the minimum dividends have been paid. Thus,
dividend payments should not be viewed as a residual, but rather a
required outlay after which any remaining funds can be reinvested in the
firm.

(2) Stability of dividends:

The term dividend stabilit y refers to the co nsistency or to the lack
of variabilit y in the stream of dividends. In more precise terms, it means
that a certain minimum amount of dividend is paid out regularl y. The
stabilit y of dividends can take any of the following 3 forms:
(i) Constant dividends per share,
(ii) Constant / stable D/P Ratio, and
(iii) Constant dividends per share plus extra dividend.

Constant dividend per share:

According to this form of stable dividend policy, a company follows

a policy of paying a certain fixed amount per share as dividend.
For instance, on a share of face value of Rs. 10, a firm may pay a
fixed amount of, say Rs. 2.50 as dividend. This amount will be paid year
after year, irrespective of the level of earnings. In other words,
fluctuations in earnings would not effect the dividend payments. In fact,
when a company follows such a dividend policy, it will pay dividends to
its shareholders even if its suffering losses. A stable dividend policy in
terms of fixed amount of dividend per share does not, however, means
that the amount of dividend is fixed for all the time to come. The dividend
per share is increased over the years when the earnings of the firm
increase and it is expected that the new level of earnings can be
maintained.

5
 Fig: Stable Dividend Policy of Constant Rupee Dividends.

It can, thus, be seen that while the earnings may fluctuate f rom year
to year. The dividend per share is constant.

Constant payout Ratio:

With constant / payout ratio, a firm pays a constant % of net

earnings as dividend to the shareholders. In other words, a stable
Dividend payout Ratio implies that the percenta ge of earnings paid out
per year is constant. Accordingly, dividend would fluctuate
proportionatel y with earnings and are likel y to be highl y volatile in the
wake of wide fluctuations in the earnings of the company. As a result,
when the earning of a firm decline substantiall y or there is a loss in given
period, the dividends, according to the target payout ratio, would be low
or nil.

6
 Fig: Stable Dividend Policy under Target Payout Ratio

Stable Rupee Dividend Plus Extra dividend:

Under this policy th e firm usuall y pays a fixed dividend to the

shareholders and in years of marked prosperit y; additional or extra
dividend is paid over and above the regular dividend. As soon as, normal
conditions return, the firm cuts the extra dividend and pays the normal
dividend per share.

Reasons to prefer stable dividend policy:

Desire for current income by investors like retired person and

widows. They would place a positive utilit y on stable dividends.
Informational contents regarding the changes in the dividends that
will be paid by the firm in the near or far future.
Requirements of institutional investors like Life Insurance
Corporation of India and General Insurance Corporation of India
and Unit Trust of India (mutual funds). These companies have the
legal obli gation to invest its money in onl y those firms which have
a record of continuous and stable dividend.

Lintners model came in support of this stable dividend policy.

A Sticky Dividend Policy or the Lintner Model

In general, there exists a long -term target dividend

payout ratio which is high for mature firms with stable
earnings and low for young growth firms with unstable

7
 earnings, but this is not the focus of the dividend
policy.

At a certain point in the firms life cycle, it is time to

start payin g dividends, at this point firms set dividend
payments at a low level and then attempt to increase
them steadil y each year thereafter.

Dividend policy is not focused on the optimal level of

dividends or dividend payout ratios (targets) but on
changes to the existing level of dividends.

Management is reluctant to make significant changes in

the dividend paid. The focus is to avoid cutting
dividends and sending an unfavorable signal to the
market. Therefore, significant dividends increases onl y
occur when management is confident of being able to
maintain the increase in the future. Significant
dividend changes onl y follow shifts in long -run
sustainable earnings or dividends payments are
smoothed.

Bottom Line: What this means in practice is no dividen ds are paid until
management believes that positive free cash flow is likel y to continue on
a regular basis in the future. Initiall y, dividend levels are set extremel y
low or conservatively and then are graduall y raised each period. Dividend
cuts are a l ast resort.

Empirical evidence suggests:

1. Announcements of unexpected dividend increases are viewed

favorabl y by the market (positive abnormal returns over the 3 -
day announcement period);
2. That earnings increase significantl y after dividends are initiated;
3. Announcements of unexpected dividend decreases or dividend
omissions are viewed unfavorabl y by the market (negative
abnormal returns over the 3 -day announcement period).

(3) Legal, contractual and internal constraints and

restrictions
The legal factors stem from certain statutory requirements, the
contractual restrictions arise from certain loan covenants and the internal
constrains are the result of the firms liquidit y position.

8
Legal Requirements: Legal stipulations do not require a dividend
declaration but they specify the conditions under which dividend must be
paid. Such conditions pertain to
(i) Capital impairment,
(ii) Net profits and
(iii) Insolvency.

Capital Impairment Rules:

Legal enactments limit the amount of cash dividends that a
firm may pay. A fi rm can not pay dividends out of its paid up capital,
otherwise there would be a reduction in the capital adversel y affecting
the securit y of its lenders. The rationale of this rule lies in protecting
the claims of the preference shareholders and creditors on the firms
assets by providing sufficient equit y base since the creditors have
originall y relied upon such an equit y base while extending credit. An y
dividends that impair capital are illegal and the directors are
personall y held reliable for the amount of illegal dividend.

Insolvency:
A firm is said to be insolvent in two situations: first, when the
liabilities exceeds the assets and second, when it is unable to pay
its bills. If the firm is currentl y insolvent in either sense, it is
prohibited from p aying dividends. Similarl y a firm would not pa y
dividends, if such a payment leads to the insolvency of the firm of
either t ype

The important provisions of company law pertaining to dividends are

described below.

1. Companies can pay onl y cash dividend (wi th the exception of bonus
shares).
2. Dividend can be paid out of the profits earned during the financial
year after providing the depreciation and after transferring to
reserves such percentage of profits as prescribed by the law. The
Companies (transfer to reserve) Rules, 1975, provides that before
dividend declaration, a percentage of profits as specified below
should be transferred to the reserves of the company.

9
DIVIDEND PROPOSED AMOUNT TO BE TRANSFERRED
TO THE RESERVES

Exceeds 10% but not 12.5 %of Should not be less then 2.5% of
the paid up capital. the current profits.

Exceeds 12.5% but not 15%of Should not be less then 5% of

the paid up capital. the current profits.

Exceeds 15% but not 20%of the Should not be less then 7.5% of
paid up capital. the current profits.

Exceeds 20%. Should not be less then 10% of

the current profits.

3. Due to inadequacy or absence of profits in any year, dividend may

be paid out of accumulated profits of the previous years. In this
context, the following condition s, as stipulated by the companies
(Declaration of Dividend out of Reserves) Rules, 1975, have to be
satisfied.
(a) The rate of declared dividend should not exceed the average
of the rates at which the dividend was declared by the
company in 5 years immediatel y preceding that year or 10%
of its paid up capital whichever is less.
(b) The total amount to be drawn from the accumulated profits
earned in previous years and transferred to the reserves
should not exceed an amount equal to 1/10 t h of the sum of the
paid up capital and free reserves and the amount so drawn
should first be utilized to set off the losses incurred in the
financial year before any dividend in respect of preference or
equit y shares is declared.
(c) The balance of the reserves after such withdrawal should not
fall below 15% of its paid up capital.

4. Dividends can not be declared for the past years for which the
accounts have been closed.

Contractual requirements: Important restrictions on the payment of the

dividends may be accepted by a compa ny when obtaining external capital
either by a loan agreement, a debenture indenture, a preference share
agreement, or a lease contract. such restrictions may cause the firms to
restrict the payment of cash dividends until a certain level of earnings

10
have been achieved or limits the amount of dividend paid to a certain
amount or % of earnings. Since the payment of dividends involves a cash
outflow, firms are enforced to reinvest the retained earnings within the
firm. The restrictions of dividends may take 3 forms:
In the first place, the firms may be prohibited from paying
dividends in excess of a certain percentage, say, 12 %. Alternativel y, a
ceiling in terms of maximum amount of profits that may be used for
dividend payment may be laid down, say not mor e than 60% of the net
profits, or a given absolute amount of such profits can be paid as
dividend. Finall y dividends must be restricted by insisting upon a
minimum of earnings to be retained. Reinvestment leads to a lower debt /
equit y Ratio and, thus, enh ances the margin of cushion (safet y) for the
lenders.

Internal constraints: Such factors are unique to a firm and include

(i) Liquid assets,
(ii) Growth prospects,
(iii) Financial requirements,
(iv) Availabilit y of funds
(v) Earning stabilit y and
(vi) Control.

Liquid assets:
Once the payment of dividend is permissible on legal and
contractual grounds, the next step is to ascertain whether the firm has
sufficient cash to pay cash dividends. It may well be possible that firms
earnings are substantial, but the firm may be short of funds.
This situation is common for companies like
(a) Growing companies
(b) Companies which have to retire the past loans as their maturit y
year has come
(c) Companies whose preference shares are to be redeemed. Such
companies may not like to borrow at exorbitant rates because of
financial risk especiall y when their existing leverage ratio is
already very high. Moreover, the lenders may be reluctant to lend
the money for dividend payments since they produce no tangible or
operating benefits that will help the firm to repay the loans. Thus,
the firms abilit y to pay cash dividends is largel y restricted by the
level of its liquid assets.

Growth prospects:
Another set of factors which can influence the dividend policy
relates to the firms grow th prospects. The firm is required to make plans
for financing its expansion progra ms. In this context, the availabilit y of

11
external funds and its associated cost together with the need for
investment funds would have a significant bearing on the firms di vidend
policy.

Financial Requirements:
Financial requirements of a firm are directl y related to its
investment needs. The firm should formulate its dividend policy on the
basis of its foreseeable investment needs. If a firm has abundant
investment opportunities, it should prefer a low payout ratio, as it can
reinvest the earnings at the higher rates than the shareholder can.
Moreover, the retention of money provides the base upon which the firm
can borrow some additional funds. Therefore, it provides flex ibilit y in the
companies capital structure, that is, it makes room for unused debt
capacit y.

Availability of funds:
The dividend policy is also constrained by the availabilit y of funds
and the need for additional investment. In evaluating its financial
position, the firm should consider not onl y its abilit y to raise funds but
also the cost involved in it and promptness with which financing can be
obtained. In general, large, mature firms have greater access to new
sources for raising funds than firms wh ich are growing rapidl y. For this
reason alone, the availabilit y of external funds to the growing funds may
not be sufficient to finance a large number of acceptable investments
projects. Obviousl y such firms will have to depend on their retained
earnings so as to amount of maximum number of available profitable
projects. Therefore, large retentions are necessary for such firms.

Earnings stability:
The stabilit y of earnings have also a significant bearing on the
dividend decisions of a firm. Generall y, mo re stable the income stream,
the higher is the payout ratio. Such firms are more confident of
maintaining a higher payout ratio. public utilit y companies are classic
example of firms that have relativel y stable earnings pattern and high
dividend payout rat io.

Control:
Dividend policies may also be strongl y influenced by the
shareholders or the managements control objectives. That is to say,
sometimes the management employs dividend policy as an effective
instrument to maintain its position of command and control. The
management, in order to retain control of the company in its own hands,
may be reluctant to pay substantial dividends and would prefer a small
dividend payout ratio. This will particularl y hold good for the companies

12
which require funds to fi nance profitable investment opportunities when
an outside group is seeking to gain control of the firm. Added to this, if a
controlling group of shareholders either can not or does not wish to
purchase a new shares of equit y, under such circumstances, by t he issue of
additional shares to finance the investment opportunities, management
may loose its existing control.

(4) Owners considerations:

The dividend policy is also likel y to be effected by the owners
considerations of
(a) The tax status of the sha reholders,
(b) Their opportunities of investment, and
(c) The dilution of ownership.

It is well -nigh impossible to establish a policy that will maximize

each owners wealth. The firm must aim at a dividend policy which has a
beneficial effect on the we alth of a majorit y of the shareholders.

Taxes:
The dividend policy of a firm may be dictated by the income tax
status of its shareholders. If a firm has large percentage of owners who
are in the high tax brackets, its dividend policy should seek to have higher
retentions. Such a policy will provide its owners with income in the form
of capital gains as against dividends. Since capital gains are taxed at
lower rates then dividends, they are worth more, after taxes, to the
individuals in the high tax bracke ts. On the other hand, if a firm has
majorit y of low income shareholders who are in low tax brackets, they
would probabl y favor a higher payout of earnings because of the need for
current income and the greater certainity associated with receiving the
dividend now, instead of the less certain prospects of capital gains later.

Opportunities:
The firm should not retain funds if the rate of return earned by it
would be less then one which could have been earned by the investors
themselves from external inves tments of the funds. Such a policy would
obviousl y be detrimental to the interest shareholders. However, the firm
should evaluate the rate of return obtainable from external investments in
the firms belonging to the same risk class. If the evaluation shows that the
owners have better opportunities outside, the firm should opt for higher D
/ P Ratio. On the other hand, if the firms investment opportunities yield a
higher rate than that obtained from similar external investments, a low
D/P is suggested. Ther efore, in formulating a dividend policy, the
evaluations of the external opportunities of the owners is very significant.

13
Dilution of ownership:
The financial manager should recognize that a high D / P Ratio may
result in the dilution of both control and earnings for the existing equit y
holders. Dilution in earnings results because low retentions may
necessitates the issue of new equit y shares in the future, causing an
increase in the number of equit y shares outstanding and ultimatel y
lowering EPS and their price in the market. By retaining a high
percentage of its earnings, the firm can minimize the possibilit y of
dilution of earnings.

Although the ultimate dividend policy depends on numerous factors,

the avoidance of shareholders discontent is impo rtant. If the shareholder
becomes dissatisfied with the existing dividend policy, they may sell their
shares, increasing the possibilit y that control of the firm will be seized by
some outside groups. The takeover of a firm by an outsider is more
likel y when owners are dissatisfied with its dividend policy. It is the
financial managers responsibilit y to keep in touch with the owners
general attitude towards dividends.

(5) Capital market considerations:

Yet another set of factors that can strongly eff ect dividend policy is
the extent to which the firm has access to the capital markets. In case the
firm has an easy access to the capital market, either because it is
financiall y strong or large in size, it can follow a liberal dividend policy.
However, if a firm has limited access to the capital market, it is likel y to
adopt a low dividend payout ratio. Such firms are more likel y to rel y more
heavil y on retained earnings as a source of financing their investments.

(6) Inflation:
Finall y, inflation is another factor which effects the firms dividend
decisions. With rising prices, the funds generated from depreciation may
be inadequate to replace obsolete equipments. These firms have to rel y
upon retained earnings as a source of funds to make up the shor tfall. This
aspect becomes all the more important if the assets are to be replaced in
the near future. Consequentl y, their dividend payout tend to be low during
the period of inflation.

Now, should the company decide to follow either the high or low divi dend
method, it would use one of three main approaches:

Residual
Companies using the residual dividend policy choose to rel y on
internall y generated equit y to finance any new projects. As a re sult,

14
dividend payment can onl y come out of the residual or leftover equit y
after all project capital requirements are met. These company's usuall y
attempt to maintain balance in their debt/equit y ratios before making any
dividend distributions, which demonstrates that such a company decides
upon dividends onl y if there is enough money leftover after all operating
and expansion expenses are met.

Stability
The fluctuation of dividends c reated by the residual policy
significantl y contrasts the certaint y of the dividend stability policy The
fluctuation of dividends created by the residual policy significantl y
contrasts the certainty of the dividend stabilit y policy . With the stabilit y
policy, companies may choose a cyclical policy that sets dividends at a
fixed fraction of quarterl y earnings, or they may choose a stable polic y
whereby quarterl y dividends are set at a fraction of yearl y earnings. In
either case, the aim of the dividend stabi lit y policy is to reduce
uncertaint y for investors and to provide them with income.

Hybrid of the above two.

The final approach is a combination between the residual and stable
dividend policy. Using this approach, companies tend to view the
debt/equit y ratio as a long-term rather than a short -term goal. In today's
markets, this approach is commonl y used by companies that pay
dividends.

15
 (2) Research Methodology for Analysis of Trends
To anal yze the trends in dividend payment pattern, n umber of
companies paying dividend as percentage of total firms, average dividend
paid, dividend per share, payout ratio, and dividend yield are computed
for the period 1990 to 2001. Dividend per share (DPS) is calculated as
DPS(j,t) = Dividend(j,t)
EQCap(j,t)

Where, DPS(j,t) refers to dividend per share for company j

in year t; Dividend(j,t) refers to amount of dividend paid by
company j in year t; and EQCap(j,t) refers to paid -up equity
capital for firm j in year t. Equit y capital is e mployed instead of
the usual number of outstanding shares in the denominator as it
facilitates comparison of rupee dividend paid per share by removing
the impact of different face or par values.
Dividend payout ratio (PR) is computed as

PR(j,t) = Dividend(j,t)
PAT(j,t)

Where, PR(j,t) is dividend payout ratio , Dividend(j,t) refers to

amount of dividend paid by company j in year t; and PAT(j,t) refers to
net profit or profit after tax for firm j in year t.
Dividend Yield (DY) is computed as

DY(j,t) = DPS(j,t)
Price(j,t -1)
Where, DY(j,t) refers to dividend yield for firm j in year t,
DPS(j,t) refers to dividend per share for firm j in year t, and Pricej,t -1 is
closing price of previous year for firm j.
Further, the entire sample is categorized into payers and non -payers
to examine the trends in dividends across different subgroups.

Payers are those firms that have paid dividend in the current year,
where as non payers have not paid dividend in the current year.

Payers are further classified into regular payers, initiators and

current payers. Regular payers are those firms that have paid dividend
regularl y without ever skipping the payments. Initiators on the other hand
refers to those firms with a maiden dividend, where as current payers are
those firms who are neither regular payers nor initiators.

Non-payers are further categorized into never paid, former payers

and current non-payers. Never paid firms are those that have never paid
even a single dividend, where as fo rmer payers are those firms which at

16
some previous point had paid dividends. Current non -payers are those
firms which are recentl y listed and that they are neither former payers nor
are in the never paid category in any of the previous years.

(2.1) Primary Objectives:

How and Why Do Companies Pay Dividends?

What should be the Companys dividend policy?

How Do Firms View Dividend Policy?

What factors should be considered when a company decides on its

dividend policy?

What are the alternatives that a c ompany has other than paying
dividends?

Does losses leads to dividend reductions?

(2.2) Problem definition:

Management decision problem Marketing research problem

How and Why Do Companies How Do Firms View Dividend

Pay Dividends? Policy?
What should be the dividend What factors should be
policy of a firm? considered when a company
Does losses leads to divid end decides on its dividend policy?
reductions? what are the alternatives that a
company has, other than paying
dividends?

(2.3) Approach to the Problem:

While deciding the dividend policies what are the factors that company
should take care of?

17
 Do they have some special strategy? These were some of the
questions that struck me. I decide to get into this study to get answers to
these questions and see if I could learn something from there policies.

These problems can be studied by finding out the underl ying

dividend policies of different firms and what is the reason behind the
selection of such a policy.
I tried to keep m y study in con jugation with the financial theories that
were taught to me in the class. What you see inside is a theoretical and
comparative study.

Limitations:
Non-availabilit y of latest database of Dividend
Paying firms.
Scale of research is small.
The present stud y has considered onl y cash dividends
and not share repurchases. Share repurchases or
buyback has been permitted in the Indian context onl y
recentl y and this may well have influenced the
dividend behavior of Indian companies, as some firms
would have substituted share repurchases for cash
dividends
In the present study onl y final cash dividends are
considered and the stock dividends by firms are not
considered which may limit generalizations of the
findings
Further, the present study has not considered the
stock market reactions to dividend events and has not
examined at great depth the interrelations between
dividend and other corporate finance decisions

18
IMPORTANCE OF THE STUDY

The Dividend Analysis of a firm determines what proportion of earnings is paid

to shareholders by the way of dividends and what proportion is ploughed back in the firm

for reinvestment purposes. If a firms capital budgeting decision is independent of its

dividend of its dividend policy, a higher dividend payment will entail a greater

dependence on external financing. On the other hand, if a firm s capital budgeting

decision is dependent on its dividend decision, a higher payment will cause shrinkage of
its capital budget and vice versa. In such a case the Dividend Analysis has a bearing on

the capital budgeting decision.

Any firm, whether a profit making or non-profit organization has to take certain

capital budgeting decision. The importance and subsequent indispensability of the capital

budgeting decision has led to the importance of the dividend decisions for the firms.

1.1 NEED FOR THE STUDY:

The principal objective of corporate financial management is to maximize the market

value of the equity shares. Hence the key question of interest to us in this study is, What

is the relationship between Dividend Analysis and market price of equity shares?

Most of the discussion on dividend of Dividend Analysis and firm value assumes that the

investment decision of a firm is independent of its dividend decision. The need for this

study arise from the above raised question and the most controversial and unresolved

doubts about the relevance of irrelevance of the dividend policy.

1.2 OBJECTIVEs OF THE STUDY

19
The basic objective of this study is as follows:

1. To understand the importance of the dividend decision and their impact on the

firms capital budgeting decision.

2. To know the various dividend policies followed by the firm.

3. To understand the theoretical backdrop of the various divided theories.

4. To compare the various theories of dividend with reference to their assumptions

and conclusions.
5. To know whether the dividend decisions have an impact on the market value of

the firms equity.

6. To see the various dividend policies of the India infoline

7. To derive the empirical evidence for the relevance theories of dividends

WALTERS MODEL AND GORDONS MODEL

1.3 HYPOTHESIS FOR THE STUDY:

A proposition is a statement about concepts that may be judged as true

Or false if it refers to observable phenomena. When a proposition is formulated for

empirical testing, we call it a hypothesis. Hypotheses have also been described as

statements in which we assign variables to cases. A case id defined in this sense as

the entity or the thing the hypothesis. Talks about The variable are the characteristic,

trait, or attribute that, in the hypothesis, are imputed to the case. In research, a

hypothesis serves several important functions. The most important is that it guides the

directions of the study. It defines facts that are relevant and those that are not: in

doing so, it suggests which form of research design is likely to be most important. A
final role of the hypothesis is to provide a framework for organizing the conclusions

of that result.
20
 In classical tests of significance two kinds of hypotheses are used. The null

hypothesis, which is a statement that theyre no difference, exists between the

parameter and the statistic being compared to it. A second or alternative hypothesis is

the logical opposite of the null hypothesis.

The null hypothesis in this study is as following:

The dividend decisions are relevant to the capital budgeting decisions of

the firms belonging to the cement industry and the in turn effect the market value of

the firms equity.

To prove this hypothesis we shall try to prove the two theories of relevance

of dividend-Walters model and Gordons model

The alternate hypothesis in this case shall be as follows:

The dividend decisions are irrelevant to capital budgeting decisions of the firm

belonging to the INDIA INFO LINE and they in turn have no effect on the market

value of the firm equity.

1.4 SAMPLE OF THE STUDY:

A sample is a part of the target population, carefully selected to represent that

population. When researchers undertake sampling studies, they are interested in

estimating one or more population values and/ or testing one or more statistical

hypothesis.

The sample of our study consists of the financial data of INDIA INFO LINE
Securities industries for the past five financial years.

21
1.6 DESIGN AND METHODOLOGY

1.6.1 Database for the Study:

The sources of information are classified to two-primary data and secondary data.

The data collected by the researcher and agent known to the researcher, especially to

answer the research question, is known as the primary data. Studies made by others for

their own purposes represent secondary data to the researcher.

Secondary sources can usually be found more quickly and cheaply than primary data

especially when national and international statistics are needed. Similarly, data about

distant places often can be collected more cheaply through secondary sources.

The data used for this study is mostly secondary data. The information regarding the

financial data of the past five years has been collected from the various website like the

indiainfoline.com, the web portals of the respective company and other related sites.

1.6.2 Period of the study

The period of any research is the period which the data has been collected and analyzed.

The period of this study has been limited to five financial years starting from 01-04-2002

to 31-03-2007

1.6.3 Sampling Design:

A variety of sampling techniques is available. The one selected depends on the

requirements of the project and its objectives. The various methods of sampling have
22
been classified basing on the representation probability or non probability and on

element selection-restricted.

The sampling technique selected for conducting this study is judgment sampling. This is

a restricted and non- probabilistic method of sampling; where the sample consisting of

one company has been selected on basis of the past dividend payment made by the

company.

1.6.4 Tools of Collecting Data :

There are various ways of collecting the data. Some of the most commonly used

ones are telephone interview, personal interview and, questionnaire administering. These

are basically the methods for collecting the primary data the data required for conducting

this study it has been collected from the various web portals as the data is basically

secondary in nature.

1.7 LIMITATIONS:
Every research conducted has certain limitations. These arise due to the method of

sampling used, the method of data collation used and the source of the data apart from

many other things. The limitations of this study are as follows:

The data collected is of secondary nature and hence it is difficult to ascertain the

reliability of the data.

a) The scope of the study has been limited to the impact of the dividend on

the market value of the firms equity. Others factors affecting the firms

market value have been assumed to have remained unchanged.

b) The period of the study has been limited to only five years.
23
c) The method of sampling used is judgment sampling hence the choice of

the sample has been left entirely to the choice of the researcher. This has

led to some amount bias being introduced into the research process.

24
 Company Profile

Introduction
The Reliance Industries India group is India's largest private sector conglomerate. The
Reliance Industries Limited was started by the legendary Late Dhirubhai H. Ambani.
After a humble start in the late 1970's as a textile company its success skyrocketed and
now covers almost all industry verticals.

Reliance Industries Limited (RIL) is an Indian conglomerate holding

company headquartered in Mumbai, Maharashtra, India. Reliance owns businesses across
India engaged in energy, petrochemicals, textiles, natural resources, retail and
telecommunications. Reliance is the most profitable company in India, the second-
largest publicly traded company in India by market capitalization and the second largest
company in India as measured by revenue after the government-controlled Indian Oil
Corporation. The company is ranked 114th on the Fortune Global 500 list of the world's
biggest corporations, as of 2014. RIL contributes approximately 20% of India's total
exports

Today, Reliance Industries generates revenues in excess of USD 22 billion and exports
products worth USD 7 billion to more than 100 countries. The Reliance Industries
Limited is a 'Fortune Global 500 company' and employs more than 25,000 professionals
across the world. Reliance enjoys leadership in polyester yarn & fiber produce and is
among the top 5 players in the world in major petrochemical products. Reliance
Industries Limited holds largest Oil & Gas exploration area in India and has achieved 74
% success rate in terms of discoveries.

Reliance Industries India has been a pioneer in the equity culture cult and is highly
respected for its corporate transparency, deep market penetration ability, innovations and
above all for its ability to generate 'products & services' for all sections of the society.

Its guardianship for India Inc. stupendous growth has been felicitated with no of awards
in areas like Quality, Energy Management, Health Safety & Environment, Exports and
Retail & Franchising. It also bagged 'Golden Peacock Award' for Corporate Management
in 2005-2006 and enjoys high corporate ranking in Fortune Global 500 Company.

The Reliance Industries India group is India's largest private sector conglomerate. The
Reliance Industries Limited was started by the legendary Late Dhirubhai H. Ambani.

25
After a humble start in the late 1970's as a textile company its success skyrocketed and
now covers almost all industry verticals. Today, Reliance Industries generates revenues
in excess of USD 22 billion and exports products worth USD 7 billion to more than 100
countries. The Reliance Industries Limited is a 'Fortune Global 500 company' and
employs more than 25,000 professionals across the world. Reliance enjoys leadership in
polyester yarn & fiber produce and is among the top 5 players in the world in major
petrochemical products. Reliance Industries Limited holds largest Oil & Gas exploration
area in India and has achieved 74 % success rate in terms of discoveries.

Reliance Industries India has been a pioneer in the equity culture cult and is highly
respected for its corporate transparency, deep market penetration ability, innovations and
above all for its ability to generate 'products & services' for all sections of the society. Its
guardianship for India Inc. stupendous growth has been felicitated with no of awards in
areas like Quality, Energy Management, Health Safety & Environment, Exports and
Retail & Franchising. It also bagged 'Golden Peacock Award' for Corporate Management
in 2005-2006 and enjoys high corporate ranking in Fortune Global 500 Company.

The Reliance Group, founded by Dhirubhai H. Ambani (1932-2002), is India's largest

private sector enterprise, with businesses in the energy and materials value chain. Group's
annual revenues are in excess of US$ 28 billion. The flagship company, Reliance
Industries Limited, is a Fortune Global 500 company and is the largest private sector
company in India.

Backward vertical integration has been the cornerstone of the evolution and growth of
Reliance. Starting with textiles in the late seventies, Reliance pursued a strategy of
backward vertical integration - in polyester, fiber intermediates, plastics, petrochemicals,
petroleum refining and oil and gas exploration and production - to be fully integrated
along the materials and energy value chain.

Reliance enjoys global leadership in its businesses, being the largest polyester yarn and
fiber producer in the world and among the top five to ten producers in the world in major

26
petrochemical products. Mukesh Ambani, chairman of Reliance Industries Ltd, Indias
largest private company, laid down a road map for business transformation and value
creation for the company at its 35th annual general meeting.

This has been a truly transformational year at Reliance Industries (RIL). The successful
commissioning of the KG-D6 oil and gas production fields and the safe start-up of the
world-class, complex refinery in the Special Economic Zone at Jamnagar catapults RIL
into the league of integrated energy companies globally. RIL is now among the ten
largest non-state owned refining companies and one of the largest deep water oil and gas
operators in the world. Through these path-breaking initiatives, RIL is set to radically
change Indias energy landscape. Gas production from KG-D6 will double Indias
indigenous production while the new refinery will make India a major supplier of green-
fuels to the world.

Over the years, our initiatives have enabled the enrichment of millions of lives in India.
We focused on improving efficiency, leveraging on the quality of our assets and
remaining nimble. This reflects the strength of our business model, robustness of our
systems and processes, farsighted planning, meticulous execution and above all, our
indomitable will to succeed. While staying focused on our long-term strategy, we have
remained committed to protecting our employees, ensuring their safety, supporting local
communities and safeguarding the environment. Looking forward, we see exciting
opportunities for growth in the energy sector.

At RIL, we have always invested aggressively into businesses of the future. Our recent
investments in the oil and gas and refining businesses have created a strong growth
platform. RIL is on its way to becoming a competitive, integrated, global energy
company.

27
Type Public

Traded as BSE: 500325,NSE: RELIANCE,LSE: RIGD

BSE SENSEX Constituent
CNX Nifty Constituent

Industry Conglomerate

Predecessor Reliance Commercial Corporation

Founded 1966

Founder Dhirubhai Ambani

Headquarters Mumbai, Maharashtra, India

Area served Worldwide

Key people Mukesh Ambani

(Chairman and MD)

Products Crude Oil, Natural

Gas,Petrochemicals, Petroleum,Polyester, Textiles, Retail,Telecom, Media

Revenue US$ 73.1 billion (2014)

28
Operating US$ 7.14 billion (2013)
income

Net income US$ 3.86 billion (2013

Total assets US$ 58.67 billion (2013)

Total equity US$ 31.66 billion (2013)

Number of 23,519 (2013)

employees

Website www.ril.com

29
History

1960 1980

The company was co-founded by Dhirubhai Ambani and his cousin Champaklal Damani
in 1960s as Reliance Commercial Corporation. In 1965, the partnership was ended and
Dhirubhai continued the polyester business of the firm. In 1966, Reliance Textiles
Industries Pvt Ltd was incorporated in Maharashtra. It established a synthetic fabrics mill
in the same year at Naroda inGujarat. In 1975, company expanded its business into
textiles, with "Vimal" becoming its major brand in later years. The company held
its Initial public offering (IPO) in 1977.The issue was over-subscribed by seven times. In
1979, a textiles company Sidhpur Mills was amalgamated with the company. In 1980, the
company expanded its polyster yarn business by setting up a Polyester Filament Yarn
Plant in Raigad, Maharashtra with financial and technical collaboration with E. I. du Pont
de Nemours & Co., USA.

1981 2000

In 1985, the name of the company was changed from Reliance Textiles Industries Ltd. to
Reliance Industries Ltd. During the years 1985 to 1992, the company expanded its
installed capacity for producing polyester yarn by over 145,000 tonnes per annum. The
Hazira petrochemical plant was commissioned in 199192. In 1993, Reliance turned to
the overseas capital markets for funds through a global depositary issue of Reliance
Petroleum. In 1996, it became the first private sector company in India to be rated by
international credit rating agencies. S&P rated BB+, stable outlook, constrained by the
sovereign ceiling. Moody's rated Baa3, Investment grade, constrained by the sovereign
ceiling. In the year 199596, the company entered the telecom industry through a joint
venture with NYNEX, USA and promoted Reliance Telecom Private Limited in India In
199899, RIL introduced packaged LPG in 15 kg cylinders under the brand name
30
Reliance Gas. During 19982000, the company completed setup of integrated
petrochemical complex at Jamnagar in Gujarat.

2001 present

In 2001, Reliance Industries Ltd. and Reliance Petroleum Ltd. became India's two largest
companies in terms of all major financial parameters. In 200102, Reliance Petroleum
was merged with Reliance Industries. In 2002, Reliance announced India's biggest gas
discovery (at the Krishna Godavari basin) in nearly three decades and one of the largest
gas discoveries in the world during 2002. The in-place volume of natural gas was in
excess of 7 trillion cubic feet, equivalent to about 1.2 billion barrels of crude oil. This
was the first ever discovery by an Indian private sector company. In 200203, RIL
purchased a majority stake in Indian Petrochemicals Corporation Ltd. (IPCL), India's
second largest petrochemicals company, from Government of India. IPCL was later
merged with RIL in 2008. In the years 2005 and 2006, the company reorganized its
business by demerging its investments in power generation and distribution, financial
services and telecommunication services into four separate entities. In 2006, Reliance
entered the organised retail market in India with the launch of its retail store format under
the brand name of 'Reliance Fresh'. By the end of 2008, Reliance retail had close to 600
stores across 57 cities in India. In November 2009, Reliance Industries issued 1:1 bonus
shares to its shareholders. In 2010, Reliance entered Broadband services market with
acquisition of Infotel Broadband Services Limited, which was the only successful bidder
for pan-India fourth-generation (4G) spectrum auction held by Government of India. In
the same year, Reliance and BP announced a partnership in the oil and gas business. BP
took a 30 per cent stake in 23 oil and gas production sharing contracts that Reliance
operates in India, including the KG-D6 block for $7.2 billion. Reliance also formed a
joint venture with BP for sourcing and marketing of gas in India. In 2012, RIL set up
a joint venture with Russian Company Sibur for setting up a Butyl rubber plant
in Jamnagar, Gujarat. The plant is scheduled to be operational in
2015[28] Presently, Vivek Lall is the President and CEO of New Ventures in the
Chairmans Office at Reliance Industries Limited.

31
Vision and Mission

Vision

Help India to become a global leader in the domains where it operates. Enhance quality
of life across the entire socio- economic spectrum through sustainable measures, create
value for the nation.

Mission

Foster rural prosperity and ensure energy security of the nation through enhanced
operational efficiencies. Use sustainability to drive product development and lead in good
governance practices. Grow through innovation and Create value for all stakeholders.

Products and Brands

Our expertise lies in developing products and markets from 'concept to fruition' and
beyond. Our constant focus on innovation has helped us to emerge as a trendsetter in
various markets and be known worldwide for our unbeatable range of products. Our
operations span from the exploration and production of oil and gas to the manufacture of
petroleum products, polyester products, polyester intermediates, plastics, polymer
intermediates, chemicals, synthetic textiles and fabrics.

32
Petro-Chemical Brands

Refining Brands

33
Corporate Social Responsibility

Creating shared prosperity, sustainably

We contribute to the well being of people by introducing sustainable measures and

providing assistance to institutions and welfare organisations. Our activities are spread
across India and reach well beyond our business locations, impacting the lives of
marginalised communities. Our initiatives have reached millions over the years and
nearly 1, 50,000 people benefit from our continuing programmes every month.

Sustainable Development

We have always considered sustainable development the cornerstone of our business

strategy. We seek to achieve sustainable and profitable growth, creating thriving eco-
systems around all our businesses. Our strategy includes fostering close and continuous
interaction with the people and communities around our manufacturing divisions,
bringing qualitative changes in their lives and supporting the underprivileged.

Community Infrastructure and development

A large number of initiatives are focused on developing community infrastructure and

protecting the environment. Reliance has developed infrastructure for water conservation
and constructed community halls, schools, and health centers in various locations.

Some of Reliance's initiatives to promote environment protection include investing in

renewable energy sources, promoting green plantations and spreading environmental
awareness.

Environment Protection Drives

Environment impact assessment and quantitative risk analysis are central to all new
projects. We
have converted acres of land into major green zone

34
Reliance Foundation

Reliance has always made sustainable development the cornerstone of its business
strategy to achieve sustainable and profitable growth, creating in its wake thriving eco-
systems around all its businesses. To provide impetus to various philanthropic initiatives
of RIL, Reliance Foundation (RF) was set up in 2010 as an expression of its vision
towards sustainable growth in India.

India is a nation of a billion dreams, a billion aspirations and above all great
opportunities. To turn these dreams into reality, especially for the vulnerable sections of
the society, Reliance Foundation has taken the path of inclusive development to address
their basic needs. Reliance Foundation has cumulatively touched the lives of 4 million
people in over 5000 villages and various urban locations.

Operations

The company's petrochemicals, refining, and oil and gas-related operations form the core
of its business; other divisions of the company include cloth, retail business,
telecommunications and special economic zone (SEZ) development. In 201213, it
earned 76% of its revenue from Refining, 19% from Petrochemicals, 2% from Oil & Gas
and 3% from other segments.

In July 2012, RIL informed that it was going to invest US$1 billion over the next few
years in its new aerospace division which will design, develop, manufacture, equipment

35
and components, including airframe, engine, radars, avionics and accessories for military
and civilian aircraft, helicopters, unmanned airborne vehicles and aerostats.

Major subsidiaries and associates

On 31 March 2013, the company had 123 subsidiary companies and 10 associate companies.

Reliance Retail is the retail business wing of the Reliance Industries. In March 2013,
it had 1466 stores in India. It is the largest retailer in India. Many brands
like Reliance Fresh, Reliance Footprint, Reliance Time Out, Reliance Digital,
Reliance Wellness, Reliance Trends, Reliance AutoZone, Reliance Super, Reliance
Mart, Reliance is tore, Reliance Home Kitchens, Reliance Market (Cash n Carry) and
Reliance Jewel come under the Reliance Retail brand. Its annual revenue for the
financial year 201213 was 108 billion (US$1.7 billion) with an EBITDA of 780
million (US$12 million).
Reliance Life Sciences works around medical, plant and
industrial biotechnology opportunities. It specializes in manufacturing, branding, and
marketing Reliance Industries' products in bio-pharmaceuticals, pharmaceuticals,
clinical research services, regenerative medicine, molecular medicine, novel
therapeutics, biofuels, plant biotechnology, and industrial biotechnology sectors of
the medical business industry.
Reliance Institute of Life Sciences (RILS), established by Dhirubhai Ambani
Foundation, is an institution offering higher education in various fields of life
sciences and related technologies.
Reliance Logistics is a single-window company selling transportation, distribution,
warehousing, logistics, and supply chain-related products, supported by in-house
telematics and telemetry solutions. Reliance Logistics is an asset based company with
its own fleet and infrastructure. It provides logistics services to Reliance group
companies and outsiders. Merged content from Reliance Logistics to here.
Reliance Clinical Research Services (RCRS), a contract research
organisation (CRO) and wholly owned subsidiary of Reliance Life Sciences,
specialises in the clinical research services industry. Its clients are primarily
pharmaceutical, biotechnology and medical device companies.

36
 Reliance Solar, the solar energy subsidiary of Reliance, was established to produce
and retail solar energy systems primarily to remote and rural areas. It offers a range
of products based on solar energy: solar lanterns, home lighting systems, street
lighting systems, water purification systems, refrigeration systems and solar air
conditioners.
Relicord is a cord blood banking service owned by Reliance Life Sciences. It was
established in 2002. It has been inspected and accredited by AABB, and also has
been accorded a license by Food and Drug Administration (FDA), Government of
India.
Reliance Jio Infocomm Limited (RJIL) previously known as Infotel Broadband, is
a broadband service provider which gained 4G licences for operating across
India. Now it is wholly owned by RIL for 48 billion (US$760 million). Sandip Das,
former CEO of Maxis Malaysia, is the current group president of Reliance Jio
Infocomm.
Reliance Industrial Infrastructure Limited (RIIL) is an associate company of
RIL. RIL holds 45.43% of total shares of RIIL. It was incorporated in September
1988 as Chembur Patalganga Pipelines Limited, with the main objective being to
build and operate cross-country pipelines for transporting petroleum products. The
company's name was subsequently changed to CPPL Limited in September 1992, and
thereafter to its present name, Reliance Industrial Infrastructure Limited, in March
1994. RIIL is mainly engaged in the business of setting up and operating industrial
infrastructure. The company is also engaged in related activities involving leasing
and providing services connected with computer software and data processing. The
company set up a 200-millimetre diameter twin pipeline system that connects the
Bharat Petroleum refinery at Mahul, Maharashtra, to Reliance's petrochemical
complex at Patalganga, Maharashtra. The pipeline carries petroleum products
including naphtha and kerosene. It has commissioned facilities like the supervisory
control and data acquisition system and the cathodic protection system, a jackwell at
River Tapi, and a raw water pipeline system atHazira. The infrastructure company
constructed a 71,000 kilo-litre petrochemical product storage and distribution
terminal at the Jawaharlal Nehru Port Trust (JNPT) Area in Maharashtra.

37
The Reliance Group, founded by Dhirubhai H. Ambani (1932-2002), is India's largest
private sector enterprise, with businesses in the energy and materials value chain. Group's
annual revenues are in excess of US$ 28 billion. The flagship company, Reliance
Industries Limited, is a Fortune Global 500 company and is the largest private sector
company in India.

Backward vertical integration has been the cornerstone of the evolution and growth of
Reliance. Starting with textiles in the late seventies, Reliance pursued a strategy of
backward vertical integration - in polyester, fibre intermediates, plastics, petrochemicals,
petroleum refining and oil and gas exploration and production - to be fully integrated
along the materials and energy value chain.

Reliance enjoys global leadership in its businesses, being the largest polyester yarn and
fibre producer in the world and among the top five to ten producers in the world in major
petrochemical products.

38
 Group Profile
Major Subsidiaries -
Reliance Petroleum Limited

Reliance Netherlands BV (including Trevira)

Reliance Retail Limited

Ranger Farms Private Limited

Retail Concepts and Services Private Limited

Reliance Retail Insurance Broking Limited

Reliance Dairy Foods Limited

Reliance Retail Finance Limited

Reliance Jamnagar Infrastructure Limited

Reliance Haryana SEZ Limited

Reliance Industrial Investment & Holdings Limited

Reliance Ventures Limited

Reliance Strategic Investments Limited

Reliance Exploration & Production - DMCC

Reliance Industries (Middle East) DMCC

Reliance Global Management Services (P) Limited

Major Associates -
Indian Petrochemicals Corporation Limited

Reliance Industrial Infrastructure Limited

Mukesh Ambani, chairman of Reliance Industries Ltd, Indias largest private

company, laid down a road map for business transformation and value creation for the
company at its 35th annual general meeting.

This has been a truly transformational year at Reliance Industries (RIL). The successful
commissioning of the KG-D6 oil and gas production fields and the safe start-up of the
world-class, complex refinery in the Special Economic Zone at Jamnagar catapults RIL

39
into the league of integrated energy companies globally. RIL is now among the ten
largest non-state owned refining companies and one of the largest deep water oil and gas
operators in the world.

Through these path-breaking initiatives, RIL is set to radically change Indias energy
landscape. Gas production from KG-D6 will double Indias indigenous production while
the new refinery will make India a major supplier of green-fuels to the world.

Over the years, our initiatives have enabled the enrichment of millions of lives in India.
We focused on improving efficiency, leveraging on the quality of our assets and
remaining nimble. This reflects the strength of our business model, robustness of our
systems and processes, farsighted planning, meticulous execution and above all, our
indomitable will to succeed.

While staying focused on our long-term strategy, we have remained committed to

protecting our employees, ensuring their safety, supporting local communities and
safeguarding the environment. Looking forward, we see exciting opportunities for growth
in the energy sector.

At RIL, we have always invested aggressively into businesses of the future. Our recent
investments in the oil and gas and refining businesses have created a strong growth
platform. RIL is on its way to becoming a competitive, integrated, global energy
company.

40
 Awards and honors
Shri Mukesh Ambani was awarded the Defense India Excellence Award 2007.

The Award is a salute to those who have made the country proud.

Shri Mukesh Ambani was conferred the Leadership Award for Global Vision

by the United States India Business Council.

Shri Mukesh Ambani was elected to be a member of the Honorary Fellows of

The Institution of Chemical Engineers, UK.

Dr. R. A. Mashelkar received 'Foreign Fellow' from Australian Academy of

Technological Sciences and Engineering (ATSE) in 2008.

RIL continues to be featured, for the fifth consecutive year, in the Fortune
Global 500 list of 'World's largest corporations'; ranking for 2009 is as
follows:
o Ranked 264th in terms of sales
o Ranked 117th in terms of profits

RIL won the Golden Peacock Global Award for Excellence in Corporate

Governance for the year 2008.

Jamnagar Manufacturing Division bagged the 'Refinery of the Year Award for

2008', for second successive year from 'Petroleum Federation of India'.

Shri Mukesh Ambani received the American India Foundation's (AIF), USA,

'The 2008 Annual Spring Gala Award' in 2008.

Shri Mukesh Ambani was conferred the Leadership Award for Global Vision

by the United States India Business Council.

41
Basic Accounting Terminologies

Introduction
Every human being consciously engages himself in some meaningful activity.

Although the measure of success may vary in each case one has to be careful and

cautious at every stage in his life. Bookkeeping and accountancy is a science, which has

attracted the attention all such human activities. Accounting enables a person to assess

the risk appropriate steps.

Account an account denotes a summarized record of transactions pertaining to one

person, one kind of asset, or one class of income, or one class of income or loss.

Assets properties of every description owned by a person will be called assets for

example land and building, plant and machinery, cash balance, bank balance etc.

Bad debts which are irrecoverable and written off from debtors A/C as a loss are

termed as bad debts.

Casting means the totaling of the books of account casting has to be done of the ledger

accounts and also of a journal.

Creditor a creditor is a person to whom we owe something. He is the person to whom we

have to pay.

Capital the dictionary meaning of the term capital is wealth capital is the total account

invested in business the capital of a business is the claim of the owner to the business is

the claim of the owner to the business.

42
Debtor is person who owes something he is the person who has to pay to other person.

Drawing is the total amount withdrawn by a trader from his business for meeting

personal expenses. Trader becomes a debtor of business by the amount withdrawn by him

from business for private purpose.

Discount it is an allowance or a concession allowed by the receiver of benefit to the

giver of benefit. It is normally allowed to the customers, debtors, and retailers etc. the

discount may be classified in two ways.

1) Cash discount.

2) Trade discount.

Cash discount it is discount allowed to customer as an inducement to make payment

immediately. Cash discount is closely related to cash receipt and cash payment. When

cash is received, discount is allowed is a loss to a business while cash discount received

is a gain to him.

Trade discount it is an allowance made by a wholesaler to a retailer in order to enable

the retailer to sell the articles at list prices and earn a reasonable margin of profit. The

amount of trade discount is deducted from the invoice; therefore, it has no connection as

to the receipt and payment of cash. Hence, trade discount does not appear in the books of

accounts.

Entry the term entry refers to the recording of a transaction in the books of account. It is

the primary record of a transaction in the books called journal or any other subsidiary

journal.

Expenses the effort made by business to obtain the revenues are termed as expenses. It

is the amount spent on manufacturing and selling of goods and services.

43
Folio it means the page number of the book of original entry or of the ledger by writing

folio i.e. page number, one can easily find out on what page the original entry is made

and on what page the entry is made in the main book.

Goods commodities in which a trader deals are called as goods.

Insolvent a person is said to be insolvent when his liabilities are more than asset

Insolvency when the liabilities of a firm are greater than its assets, it is referred to as

insolvency indicating the liabilities of a business to meet all its liabilities. Such a business

firm is said insolvent.

Journal is the book 0f accounts in which business transaction are first recorded. It is a

book of prime entry or first entry.

Liabilities debts owed by a person are called liabilities. Liabilities represent the total

amount to creditors. Debts arise because, goods may be purchased out but payment may

not be made at the time of purchasing the goods. Therefore the total amount payable to

creditors will be the liabilities.

Narration it is a brief explanation or description on to a journal entry it is given on the

line just below the journal entry within the brackets.

Posting transaction entered in the original books of entry are also to be recorded in the

ledger on the basis of the entry made in the original book is called posting.

Purchases the goods bought for resale or manufacture and resale are called purchases.

Purchases may be classified as

1) Cash purchase

2) Credit purchase

44
Revenue it represent the accomplishment of the enterprise until the company has been

successful in selling its products, no revenue is realized. Revenue is the amount that adds

to the capital.

Sales the goods sold by a business for cash or on credit are called sales. The sales may

be classified as;

1) Cash sales

2) Credit sales

Solvent a person is said to be solvent when his assets are equal to or more than his

liabilities.

Stock goods unsold lying with a business on any given date is called as stocks.

Transactions a transaction are an exchange of money or moneys worth between two

parties. It is dealing between two parties. It is dealing between two or more persons.

The transactions are classified on the basis of exchange of goods and service they may

be.

1) Barter transactions.

2) Monetary transactions.

Monetary transactions are classified in the two types.

1) Cash transactions.

2) Credit transactions.

Book keeping is defined as the process of analyzing, classifying and recording

transaction in a systematic manner to provide the information about the financial affairs

of the business concerns.

45
Accounting is a wider concept, which includes book keeping accounting, is involved

not only maintaining records, but also balancing of accounts, interrupting the balances,

preparation of summaries, drawing conclusions from the summaries knowing the results

of financial transactions etc.

Classification of accounts.

Accounts are classified in to four types

1) Personal accounts.

2) Real accounts.

3) Nominal accounts.

Personal accounts DEBIT THE RECIVER AND CREDIT THE GIVER

Real accounts DEBIT WHAT COMES IN AND CREDIT WHAT GOES OUT

Nominal accounts DEBIT EXPENSES AND LOSSES AND CREDIT GAINS OR

INCOMES.

Journal is derived from the French word jour which means a day journal is the book

of original entry or primary entry. It is a book of daily record first of all the business

transactions are recorded in the journal and subsequently they are posted in the ledger.

Ledger a group of accounts is known as ledger a ledger is the principle book of

account a journal is meant for passing the entries of business transaction. A ledger is a

bound book. It contains many pages, which are called folios. These pages are

consecutively numbered. For each account a separate page is kept. Every ledger has an

index. It is generally an alphabetic index one page is allotted for each alphabet. All the

46
accounts commencing with that particular alphabet are indicated on that particular page

only. The page number on which the particular account appears is shown in the index.

Ledger posting

After the transaction has been analyzed into its debit and credit elements in a journal,

each such debit and credit elements must be transferred in a journal accounts. The

process of transfer of entries from journal to ledger account is called ledger posting.

Trial balance

After posting the transaction to respective ledger accounts they are balanced and then a

trial balance is drawn. A trial balance is a statement, which shows the list of accounts

showing debit balances and list of accounts showing credit balance. If double entry

principles are strictly followed the total of the entire debit balances must agree with the

total of all the credit balance.

Trade discount

The amount of trade discount is deducted from the bill itself. Therefore, a trade discount

does not appear in the books of accounts. If a trade discount is given in the transaction,

the amount of such a trade discount is deducted from the gross value of purchase and

only the net value (arrived at after allowing a trade discount) is recorded in the purchase

books.

Debit note

47
A debit note is sent to the supplier when the goods purchased from him are returned. A

debit note is a statement sent by the buyer to the supplier stating the full details of the

good returned. It is sent along with the goods. It intimates the supplier that his account

has been debited by the value of the good returned to him.

Credit note

A credit note is sent to the customers when we receive goods returned from them. It gives

the full details of the good returned by the customer. Credit notes are generally is printed

in red ink. Transaction is recorded in this book on the basis of credit notes.

Trial balance

The dictionary for accountants written is a list or abstract of the balance or of total

debits and total credits of the accounts in a ledger, the purpose being to determine the

equality of posted debits and credits and to establish a basic summary for financial

statements.

Subsidiary books (sub division of journal)

If all the business transaction were recorded in one and the same journal, the journal

would be bulky and cumbersome. It would be very difficult to make clerks to work on the

same journal at one and the same time. Instead of recording all the transaction in on and

the same journal, they are recorded in separate journals meant for the purpose.

Therefore, in order to meet the requirements of modern business, the original

journal is divided into the following
Purchase book

Sales book

48
 Purchase return book

Sales return book

Cash book

Bills receivable book.

Bills payable book.

Journal proper.

Final accounts

The final accounts are prepared to find out the profit or loss and to know the financial

position of the business. These account consist of

The trading account

The profit and loss account

Balance sheet

Trading account

A trading account is prepared to find out the gross profit or gross loss in the

business done during the year. The gross profit is the difference between the cost of

goods sold and the sale proceed without any deduction of indirect expenses. Hence, in

the trading account it is necessary to include all items of expenses directly affecting

the cost of goods sold. The cost of goods sold includes the purchase price of the good

sold plus buying and bringing expenses and the expenses of conversion of raw

material into saleable finished goods.

49
Profit and loss account

Profit and loss account is another summary account, which is prepared after

preparation of trading account. Trading account does not disclose the net income or

loss. There are other expenses in order to ascertain the profit or not loss.

Balance sheet

A balance sheet is a statement of the financial position of a business on a given date.

It is a snapshot of the financial condition of the business. The balance sheet is not

account; it is only a statement showing asset and liabilities of the business. It is

important to note that the balance sheet always balances. The total value of the assets

is always equal to the capital and liabilities.

We can define balance sheet as a statement of financial position of any economics

unit as at a given moment of time, its assets, at cost, depreciated cost or another

indicated value, its liabilities and its ownership equities

50
 (3) Critical Review

1. Literature Review

Article Number: 1

Author Name : I .M. PandeyRamesh

Title : Dividend behaviour of Indian companies under monetary policy

restrictions
Year : 2007

Volume No : 33

Abstract

Purpose
The dividend payout behaviour of firms is a wellstudied subject in finance. In recent
times, the influence of macroeconomic factors and understanding their implications for
corporate financial decisions has assumed significant importance. The objective of this
paper is to study the dividend payout behavior of firms in India under monetary policy
restrictions. Monetary policy restrictions are expected to affect the availability and cost of
external fund relative to internal funds. The hypothesis is that during monetary policy
restrictions the dividend payout policy changes and payouts reduce
Design/methodology/approach
The Linter framework is extended to examine the impact of these restrictions on the
dividend payout. Balanced panel data of 571 firms for years are used, from 1989 to 1997
together with, the GMM estimator, which is the most suitable methodology in a dynamic
setting.
Findings
The results show that Indian firms have lower target ratios and higher adjustment factors.

51
The finding suggests that the restricted monetary policies have a significant influence on
the dividend payout behaviour of Indian firms; they cause about a 5 6 per cent reduction
in the payout ratios.
Research limitations/implications
The findings of this paper suggest that macro economic policies do have an impact on
corporate financing decisions. The future research should examine the impact of various
other macroeconomic policies and its components on the corporate financing decisions of
firms.
Practical implications
The significance of the macroeconomic policy variables suggests that monetary policy
restrictions do have an impact on the cost of raising funds, and the information
asymmetry between lenders and borrowers increases, which forces companies to reduce
their dividend payout.
Originality/value
To one's knowledge this is the first study providing evidence of the restricted monetary
policy constraining the dividend payout policies of firms in India.

52
Article Number: 2

Author Name : A.Ajanthan

Title : The Relationship between Dividend Payout and Firm Profitability

Year : 2013

Volume No :3

Abstract:

Several theories have been documented on the relevance and irrelevance of dividend
policy. Many authors continue to come up with different findings from their studies on
the relevance of dividend policy. The main thrust of this study is to find out the
relationship between dividend payout and firm profitability among listed hotels and
restaurant companies in the Colombo Stock Exchange (CSE). Regression and correlation
analysis were carried out to establish the relationship between dividend payout and firm
profitability. The findings indicated that dividend payout was a crucial factor affecting
firm performance (R = 0.725 & R2 = 0.526). Their relationship was also strong and
positive. This therefore showed that dividend policy was relevant. It can be concluded,
based on the findings of this research that dividend policy is relevant and that managers
should pay attention and devote adequate time in designing a dividend policy that will
enhance firm profitability and therefore shareholder value.

53
Article Number: 3

Author Name : Anupama Mehta

Title : An Empirical Analysis of Determinants of Dividend Policy

Year : 2008

Volume No :6

Abstract:

Dividend decision is one of the most important decisions and well researched areas of
Financial Management but still very little research has been conducted in the GCC,
particularly in the UAE. This paper adds to the existing body of knowledge by
empirically chalking out the important factors which affects the dividend payout
decisions of UAE firms. This paper investigates the determinants of dividend payout for
all firms in the areas of real estate, energy sector, construction sector, telecommunications
sector, health care and industrial sectors (except bank and investment concerns)listed on
the Abu Dhabi Stock exchange for a period of 5 years from 2005-2009. This study
analyses a range of determinants of dividend policy: Profitability, Risk, Liquidity, Size
and Leverage of the firm the correlation and the multiple regression techniques have been
applied to find out the most significant variables used by the UAE firms in making the
dividend decisions. The study provides evidence that profitability and size are the most
important considerations of dividend payout decisions by UAE firms.

54
Article Number: 4

Author Name : C.-F. Lee et al.

Title : Investment, Dividend, Financing, and Production Policies

Year : 2010

Volume No :4

Abstract:

The purpose of this chapter is to discuss the interaction between investment, financing,
and dividends policy of the firm. A brief introduction of the policy framework of finance
is provided in and it discusses the interaction between investment and dividends policy. It
also discusses the interaction between dividends and financing policy. It discusses the
implications of financing and investment interactions for capital budgeting. It explains
the implications of different policies on the beta coefficients.

55
Article Number: 5

Author Name : Husam-Aldin Nizar Al-Malkawi

Title : Determinants of Corporate Dividend Policy in Jordan

Year : 2007

Volume No : 23

Abstract:

This paper examines the determinants of corporate dividend policy in Jordan. The study
uses a firm level panel data set of all publicly traded firms on the Amman Stock
Exchange between 1989 and 2000. The study develops eight research hypotheses, which
are used to represent the main theories of corporate dividends. A general-to-specific
modeling approach is used to choose between the competing hypotheses. The study
examines the determinants of the amount of dividends using Tobit specifications. The
results suggest that the proportion of stocks held by insiders and state ownership
significantly affects the amount of dividends paid. Size, age, and profitability of the firm
seem to be determinant factors of corporate dividend policy in Jordan. The findings
provide strong support for the agency costs hypothesis and are broadly consistent with
the pecking order hypothesis. The results provide no support for the signaling hypothesis.

56
2. Theoretical Review
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.

Dividend analysis is one of the most controversial topics and researched areas of
corporate finance. But still the Dividend Puzzle: whether the dividend payout policy
affects the value of the firm? What are the factors which affect the determination of the
dividend analysis seems unsolved. Many implausible reasons are given for why dividend
analysis might be important and many of the claims made about the dividend policy are
economically illogical. Even so, in the real world of corporate finance, determining the
most appropriate way of analyzing dividend is considered a most important issue. In fact,
the dividend issue is quite challenging. The important elements are not difficult to
identify but the interactions between those elements are complex and no easy answer
exists. (Ross 2009).

57
Forms of Payment

Cash dividends are the most common form of payment and are paid out in
currency, usually via electronic funds transfer or a printed paper check. Such
dividends are a form of investment income and are usually taxable to the recipient
in the year they are paid. This is the most common method of sharing corporate
profits with the shareholders of the company. For each share owned, a declared
amount of money is distributed. Thus, if a person owns 100 shares and the cash
dividend is 50 pence per share, the holder of the stock will be paid GBP 50.
Dividends paid are not classified as an expense, but rather a deduction of retained
earnings. A dividend paid does not show up on an income statement but does
appear on the balance sheet.

Stock or scrip dividends are those paid out in the form of additional stock shares
of the issuing corporation, or another corporation (such as its subsidiary
corporation). They are usually issued in proportion to shares owned (for example,
for every 100 shares of stock owned, a 5% stock dividend will yield 5 extra
shares). Nothing tangible will be gained if the stock is split because the total
number of shares increases, lowering the price of each share, without changing
the market capitalization, or total value, of the shares held.

Stock dividend distributions are issues of new shares made to limited partners
by a partnership in the form of additional shares. Nothing is split; these shares
increase the market capitalization and total value of the company at the same time
reducing the original cost basis per share. Stock dividends are not includable in
the gross income of the shareholder for US income tax purposes. Because the
shares are issued for proceeds equal to the pre-existing market price of the shares;
there is no negative dilution in the amount recoverable.

Property dividends or dividends in specie (Latin for "in kind") are those paid out
in the form of assets from the issuing corporation or another corporation, such as
a subsidiary corporation. They are relatively rare and most frequently are

58
 securities of other companies owned by the issuer, however they can take other
forms, such as products and services.

Interim dividends are dividend payments made before a company's Annual

General Meeting (AGM) and final financial statements. This declared dividend
usually accompanies the company's interim financial statements.

Other dividends can be used in structured finance. Financial assets with a known
market value can be distributed as dividends; warrants are sometimes distributed
in this way. For large companies with subsidiaries, dividends can take the form of
shares in a subsidiary company. A common technique for "spinning off" a
company from its parent is to distribute shares in the new company to the old
company's shareholders. The new shares can then be traded independently.

Reliability of dividends

Two metrics are commonly used to examine a firm's dividend policy.

Payout ratio is calculated by dividing the company's dividend by the earnings per
share. A payout ratio greater than 1 means the company is paying out more in
dividends for the year than it earned.

Dividend cover is calculated by dividing the company's cash flow from

operations by the dividend. This ratio is apparently popular with analysts
of income trusts in Canada. Dividends are payments made by a corporation to its
shareholder members. It is the portion of corporate profits paid out to
stockholders.

How Do Firms View Dividend Policy?

One firm's policy might be to pay out 40% of earnings as dividends whereas another
company might have a target of 50%. This suggests that dividends change with earnings.
Empirically, dividends are slow to adjust to changes in earnings. It has been observed that
more "conservative" companies are generally slower to adjust to the target payout if
earnings increased.

59
Given the objective of financial management of maximizing present values, the firm
should be guided by the consideration as to which alternative use is consistent with the
goal of wealth maximization. i.e., the firm would be well advised to use the net profits for
paying dividends to the share holders if the payment will lead to the maximization of
wealth of the owners. If not the firm should rather retain them to finance investment
programs. the relationship between dividends and value of the firm should, therefore, be
the decision criterion.

There are however conflicting opinions regarding the impact of dividends on the
valuations of the firm. According to one school of thought, dividends are irrelevant, so
that the amount of the dividends paid has no effect on the valuation of the firm. on the
other hand certain theories consider the dividend decision as relevant to the value of the
firm measured in terms of the market price of the shares.
Before discussing the 2 school of thoughts, let us first understand why a company pays
the dividend and in what form. In other words, what are the factors which help us in
determining the dividend policy of a company?

These Factors can be classified as follows:

Dividend Payout (D/P) ratio

A major aspect of the dividend policy of a firm is its dividend payout (D/P) Ratio i.e.,
the % share of the net earnings distributed to the shareholders as dividends. The D/P
Ratio of a firm should be determined with reference to two basic objectives

Maximizing the wealth of the firms owners and,

Providing sufficient funds to finance growth.

These objectives are not mutually exclusive, but interrelated. In practice,

shareholders have a clear cut preference for dividends because of uncertainty and
imperfect capital markets. The payment of dividends can, therefore, be expected to affect
the price of a share; a low D/P Ratio may cause a decline in share prices, while a high

60
ratio may lead to a rise in the market price of the share. Making a sufficient provision for
financing growth can be considered a secondary objective of dividend policy. The firm
must forecast its future needs for funds, and taking in to account the external availability
if funds and certain market considerations, determine both the amount of retained
earnings needed and the amount of retained earnings available after the minimum
dividends have been paid. Thus, dividend payments should not be viewed as a residual,
but rather a required outlay after which any remaining funds can be reinvested in the
firm.

Stability of dividends:

The term dividend stability refers to the consistency or to the lack of variability in the
stream of dividends in more precise terms; it means that a certain minimum amount of
dividend is paid out regularly. The stability of dividends can take any of the following 3
forms:
Constant dividends per share,
Constant / stable D/P Ratio, and
Constant dividends per share plus extra dividend

Constant dividend per share:

According to this form of stable dividend policy, a company follows a policy of paying a
certain fixed amount per share as dividend.
For instance, on a share of face value of Rs. 10, a firm may pay a fixed amount of, say
Rs. 2.50 as dividend. This amount will be paid year after year, irrespective of the level of
earnings. In other words, fluctuations in earnings would not affect the dividend payments.
In fact, when a company follows such a dividend policy, it will pay dividends to its
shareholders even if its suffering losses. A stable dividend policy in terms of fixed
amount of dividend per share does not, however, means that the amount of dividend is

61
fixed for all the time to come. The dividend per share is increased over the years when
the earnings of the firm increase and it is expected that the new level of earnings can be
maintained.

Fig: Stable Dividend Policy of Constant Rupee Dividends.

It can, thus, be seen that while the earnings may fluctuate from year to year. The dividend
per share is constant.

Constant payout Ratio:

With constant / payout ratio, a firm pays a constant % of net earnings as dividend to the
shareholders. In other words, a stable Dividend payout Ratio implies that the percentage
of earnings paid out per year is constant. Accordingly, dividend would fluctuate
proportionately with earnings and are likely to be highly volatile in the wake of wide
fluctuations in the earnings of the company. As a result, when the earning of a firm
decline substantially or there is a loss in given period, the dividends, according to the
target payout ratio, would be low or nil.

62
 Fig: Stable Dividend Policy under Target Payout Ratio

Stable Rupee Dividend Plus Extra dividend:

Under this policy the firm usually pays a fixed dividend to the shareholders and in years
of marked prosperity; additional or extra dividend is paid over and above the regular
dividend. As soon as, normal conditions return, the firm cuts the extra dividend and pays
the normal dividend per share.

Reasons to prefer stable dividend policy:

Desire for current income by investors like retired person and widows. They
would place a positive utility on stable dividends.
Informational contents regarding the changes in the dividends that will be paid by
the firm in the near or far future.
Requirements of institutional investors like Life Insurance Corporation of India
and General Insurance Corporation of India and Unit Trust of India (mutual

63
 funds). These companies have the legal obligation to invest its money in only
those firms which have a record of continuous and stable dividend.

A Sticky Dividend Policy or the Linters Model

In general, there exists a long-term target dividend payout ratio which is high for
mature firms with stable earnings and low for young growth firms with unstable
earnings, but this is not the focus of the dividend policy.

At a certain point in the firms life cycle, it is time to start paying dividends; at this
point firms set dividend payments at a low level and then attempt to increase them
steadily each year thereafter.

Dividend policy is not focused on the optimal level of dividends or dividend

payout ratios (targets) but on changes to the existing level of dividends.

Management is reluctant to make significant changes in the dividend paid. The

focus is to avoid cutting dividends and sending an unfavorable signal to the
market. Therefore, significant dividends increases only occur when management
is confident of being able to maintain the increase in the future. Significant
dividend changes only follow shifts in long-run sustainable earnings or dividends
payments are smoothed.

Bottom Line

What this means in practice is no dividends are paid until management believes that
positive free cash flow is likely to continue on a regular basis in the future. Initially,
dividend levels are set extremely low or conservatively and then are gradually raised each
period. Dividend cuts are a last resort.

Empirical evidence suggests:

64
 Announcements of unexpected dividend increases are viewed favorably by the
market (positive abnormal returns over the 3-day announcement period);
That earnings increase significantly after dividends are initiated;
Announcements of unexpected dividend decreases or dividend omissions are viewed
unfavorably by the market (negative abnormal returns over the 3-day announcement
period).

Dividend dates

Any dividend that is declared must be approved by a company's board of directors before
it is paid. For public companies, there are four important dates to remember regarding
dividends. These are discussed in detail with examples at the Securities and Exchange
Commission site.

Declaration date is the day the Board of Directors announces its intention to pay
a dividend. On this day, a liability is created and the company records that
liability on its books; it now owes the money to the stockholders. On the
declaration date, the Board will also announce a date of record and a payment
date.

In-dividend date is the last day, which is one trading day before the ex-dividend
date, where the stock is said to be cum dividend ('with [including] dividend'). In
other words, existing holders of the stock and anyone who buys it on this day will
receive the dividend, whereas any holders selling the stock lose their right to the
dividend. After this date the stock becomes ex dividend.

Ex-dividend date (typically 2 trading days before the record date for U.S.
securities) is the day on which all shares bought and sold no longer come attached
with the right to be paid the most recently declared dividend. This is an important
date for any company that has many stockholders, including those that trade on
exchanges, as it makes reconciliation of who is to be paid the dividend easier.
Existing holders of the stock will receive the dividend even if they now sell the
stock, whereas anyone who now buys the stock will not receive the dividend. It is
relatively common for a stock's price to decrease on the ex-dividend date by an

65
 amount roughly equal to the dividend paid. This reflects the decrease in the
company's assets resulting from the declaration of the dividend. The company
does not take any explicit action to adjust its stock price; in an efficient market,
buyers and sellers will automatically price this in.

Book closure Date Whenever a company announces a dividend pay-out, it also

announces a date on which the company will ideally temporarily close its books
for fresh transfers of stock.

Record date Shareholders registered in the stockholders of record on or before

the date of record will receive the dividend. Shareholders who are not registered
as of this date will not receive the dividend. Registration in most countries is
essentially automatic for shares purchased before the ex-dividend date.

Payment date is the day when the dividend cherubs will actually be mailed to the
shareholders of a company or credited to brokerage accounts.

66
 (4) DATA

DATA COLLECTION:

Secondary sources: secondary sources of data collected from the following

Books
Journals
website

67
 (5) Dividend Theories

There are conflicting theories regarding the impact of dividend decisions on the value of
a firm. The conflicting decisions are divided into two schools or groups. they are

Relevance Theories

If the choice of the dividend policy affects the value of a firm, it is considered as relevant.
in that case a change in the dividend payout ratio will be changed followed by a change
in the market value of the firm. if the dividend is relevant, there must be an optimum
payout ratio. optimum payout ratio is the ratio which gives highest market value.

Walters model
Professor James E. Walter argues that the choice of dividend policies almost always
affects the value of the enterprise. His model shows clearly the importance of the
relationship between the firms internal rate of return (r) and its cost of capital (k) in
determining the dividend policy that will maximize the wealth of shareholders.

Walters model is based on the following assumptions:

The firm finances all investment through retained earnings; that is debt or new
equity is not issued;

The firms internal rate of return (r), and its cost of capital (k) are constant;

All earnings are either distributed as dividend or reinvested internally immediately.

Beginning earnings and dividends never change. The values of the earnings per
share (E), and the divided per share (D) may be changed in the model to determine
results, but any given values of E and D are assumed to remain constant forever in
determining a given value.

The firm has a very long or infinite life.

68
Walters formula to determine the market price per share (P) is as follows:

P = D/K +r (E-D)/K/K

The above equation clearly reveals that the market price per share is the sum of the
present value of two sources of income:
The present value of an infinite stream of constant dividends, (D/K) and

The present value of the infinite stream of stream gains.

[r (E-D)/K/K]

The above equation clearly reveals that the market price per share is the sum of the
present value of two sources of income:
The present value of an infinite stream of constant dividends, (D/K) and

The present value of the infinite stream of stream gains.

[r (E-D)/K/K]

Criticism:
Walters model is quite useful to show the effects of dividend policy on an all equity firm
under different assumptions about the rate of return. However, the simplified nature of
the model can lead to conclusions which are net true in general, though true for Walters
model. The criticisms on the model are as follows:

69
 Walters model of share valuation mixes dividend policy with investment policy of
the firm. The model assumes that the investment opportunities of the firm are
financed by retained earnings only and no external financing debt or equity is used
for the purpose when such a situation exist either the firms investment or its
dividend policy or both will be sub-optimum. The wealth of the owners will
maximize only when this optimum investment in made.

Walters model is based on the assumption that r is constant. In fact decreases as

more investment occurs. This reflects the assumption that the most profitable
investments are made first and then the poorer investments are made. The firm
should step at a point where r = k. This is clearly an erroneous policy and fall to
optimise the wealth of the owners.

A firms cost of capital or discount rate, K, does not remain constant; it changes
directly with the firms risk. Thus, the present value of the firms income moves
inversely with the cost of capital. By assuming that the discount rate, K is constant,
Walters model abstracts from the effect of risk on the value of the firm.

Gordons Model
One very popular model explicitly relating the market value of the firm to dividend
policy is developed by Myron Gordon.

Assumptions:

Gordons model is based on the following assumptions.

The firm is an all Equity firm

No external financing is available

70
 The internal rate of return (r) of the firm is constant.

The appropriate discount rate (K) of the firm remains constant.

The firm and its stream of earnings are perpetual

The corporate taxes do not exist.

The retention ratio (b), once decided upon, is constant. Thus, the growth rate (g) =
br is constant forever.

K > br = g if this condition is not fulfilled, we cannot get a meaningful value for
the share.

According to Gordons dividend capitalization model, the market value of a share (Pq) is
equal to the present value of an infinite stream of dividends to be received by the share.
Thus:

P0=E1 (1-b)/k-br

The above equation explicitly shows the relationship of current earnings (E,), dividend
policy, (b), internal profitability (r) and the all-equity firms cost of capital (k), in the
determination of the value of the share (P0).

71
Irrelevance theory

Modigliani and Miller (MM) Theory

According to Modigliani and Miller (M-M), dividend policy of a firm is irrelevant as it

does not affect the wealth of the shareholders. They argue that the value of the firm
depends on the firms earnings which result from its investment policy.

Thus, when investment decision of the firm is given, dividend decision the split of
earnings between dividends and retained earnings is of no significance in determining the
value of the firm. M Ms hypothesis of irrelevance is based on the following
assumptions.

The firm operates in perfect capital market

Taxes do not exist

The firm has a fixed investment policy

Risk of uncertainty does not exist. That is, investors are able to forecast future
prices and dividends with certainty and one discount rate is appropriate for all
securities and all time periods. Thus, r = K = Kt for all t.

Under M M assumptions, r will be equal to the discount rate and identical for all shares.
As a result, the price of each share must adjust so that the rate of return, which is
composed of the rate of dividends and capital gains, on every share will be equal to the
discount rate and be identical for all shares.

Thus, the rate of return for a share held for one year may be calculated as follows

r=D+ (p1-p0)/p0 = Dividends+ capital gains (on loss)/Purchase price

Where P^ is the market or purchase price per share at time 0, P, is the market price per
share at time 1 and D is dividend per share at time 1. As hypothesized by M M, r should
72
be equal for all shares. If it is not so, the low-return yielding shares will be sold by
investors who will purchase the high-return yielding shares.

This process will tend to reduce the price of the low-return shares and to increase the
prices of the high-return shares. This switching will continue until the differentials in
rates of return are eliminated. This discount rate will also be equal for all firms under the
M-M assumption since there are no risk differences.

From the above M-M fundamental principle we can derive their valuation model as
follows:

p0=d1+p1/1+r

The above equation of M M valuation allows for the issuance of new shares, unlike
Walters and Gordons models. Consequently, a firm can pay dividends and raise funds
to undertake the optimum investment policy. Thus, dividend and investment policies are
not confounded in M M model, like waiters and Gordons models.

Criticism:
Because of the unrealistic nature of the assumption, M-Ms hypothesis lacks practical
relevance in the real world situation. Thus, it is being criticized on the following grounds.

The assumption that taxes do not exist is far from reality.

M-M argue that the internal and external financing are equivalent. This cannot be
true if the costs of floating new issues exist.

According to M-Ms hypothesis the wealth of a shareholder will be same whether

the firm pays dividends or not. But, because of the transactions costs and
inconvenience associated with the sale of shares to realize capital gains,
shareholders prefer dividends to capital gains.

Even under the condition of certainty it is not correct to assume that the discount
rate (k) should be same whether firm uses the external or internal financing. If

73
 investors have desire to diversify their port folios, the discount rate for external
and internal financing will be different.

M-M argues that, even if the assumption of perfect certainty is dropped and
uncertainty is considered, dividend policy continues to be irrelevant. But according
to number of writers, dividends are relevant under conditions of uncertainty.

74
 (6) Findings & Analysis

Walters Model

P = D +r/ ke (E-D)
Ke

Particulars 2010--11 2011-12 2012-13 2013-14 2014-15

Market price per
share 727.64 718.12 765.6 792.24 822.52

75
 Gordons Model

P= E (1-b)
Ke br

Particulars 2010--11 2011-12 2012-13 2013-14 2014-15

Market price per
share 768.26 825.4 873.39 922.23 971.52

76
 Dividend Payout Ratio

Dividend payout ratio = Dividend per share

Earnings per share

Particulars 2010-11 2011-12 2012-13 2013-14 2014-15

Dividend per share 8 8.5 9 9.5 10
Earnings per share 61.97 61.26 65.05 68.02 70.21
Dividend Payout Ratio 0.12909472 0.13875286 0.13835511 0.1396648 0.14242985

77
Trends in Dividends and Influence of Changes in Tax Regime

Average profit after tax (PAT) has increased from Rs. 4.68 crore in
1990 to Rs. 6.11 crore in 2000 and Rs. 9.36 crore in 2001. However, there
have been several fluctuations in average PAT reflecting the changes in
Indian econom y. In the earl y phases of economic reform, many firms had
to restructure as the econom y was opened up w and structural adjustments
were undertaken resulting in a reduction in PAT. The subsequent pick up
in the mid -90s has seen an increase in average PAT. The late 1990s,
which marked a significant decline in economic activit y, have had their
impact on PAT of firms.

Average Dividend Paid

Despite fluctuations in PAT, the average agg regate dividend
payments have steadil y increased from Rs. 0.99 crore in 1990 to Rs. 2.93
crore in 2000 and Rs. 4.19 crore in 2001. Further, compared to PAT the
dividend payments have exhibited a smooth trend impl ying that dividend
smoothening is occurring in the Indian context
.

78
Table
Trend in Dividends and PAT During 2007-2014
Year Number Average SD of Average SD of
of firms dividend(Rs. dividend(Rs. PAT(Rs. PAT(Rs.
Crore) Crore) Crore) Crore)

2007 4020 1.27 6.19 4.15 51.41

2008 5115 1.56 8.42 6.96 57.55
2009 5600 1.85 10.80 7.19 62.92
2010 5855 2.05 13.91 6.38 65.65
2011 5980 2.26 17.18 5.69 103.52
2012 6248 2.39 22.14 5.09 88.19
2013 6225 2.93 26.46 6.11 103.54
2014 4766 4.19 44.71 9.36 134.39
Common 871
firms

Number of firms paid di vidend during the study period have shown
an up trend till 2007 and have fallen subsequentl y, where as the
percentage of companies paying dividends has declined from 60.5 percent
in 2007 to 32.1 percent in 2014 . The fact that percentage of companies
paying dividends have declined whereas the average dividend paid has
increased implies that companies which have been paying dividend have
79
paid higher amounts in recent years. Total non -payers have steadil y
increased from 2007 to 2013 before declining slightl y in 2001. Firms,
which have never paid dividend, constituted a significant proportion
through out the sample period constituting more than 50% from 1991 to
2014 continuousl y. The number of firms, which at some previous time
paid dividend, have increased o vertime and reached almost 50% of non -
payers in 2014.

Table
Trend in Dividend Payments During 2007-2014

Year Paid Paid Not Paid Not Paid Total

Dividend(Number Dividend(% Dividend(Number Dividend(% Number
of Firms) of Firms) of Firms) of Firms) of
Firms
2007 2333 58.00 1687 42.00 4020
2008 2775 54.30 2340 45.70 5115
2009 2723 48.60 2877 51.40 5600
2010 2386 40.80 3469 59.20 5855
2011 2101 35.10 3879 64.90 5980
2012 2007 32.10 4241 67.90 6248
2013 1988 31.90 4237 68.10 6225
2014 1531 32.10 3235 67.90 4766

80
Figure

Total number of firms paying dividend has increased up to 1995 and

has registered sustained decline there after. Mirroring these trends firms,
which have paid dividends regularl y, peaked in 1995 and recorded
declines thereafter. Ini tiators have shown a steady decline from 19 91 and
have fallen to 5% in 2014 . Average dividend paid by payers has increased
steadil y from Rs. 1.69 crore in 1991 to Rs. 9.16 crore in 2013 and Rs.
13.05 crore in 2014. Regular payers are more in number and hav e paid
higher average dividend compared to that of current payers and initiators.
Current payers have paid higher dividend compared to initiators except in
the year 2001. The number of initiators have inc reased up to the year 2000
and have shown a decline thereafter, where as current payers have steadil y
increased in number up to 20 13.

A comparison of index and non -index firms shows that the former
group of companies on average has paid more dividend than the latter
group. Similarl y, it is observed that c ompanies, which constitute popular
market indices such as Sensex and Nift y paid more dividends compared to
companies in the broad market indices such as BSE 100, CNX Mid -Cap,
BSE 200, CNX 500, and BSE 500. These observations are on the expected
lines as hi gher dividend payment is one of the important criteria for
81
inclusion of stocks into indices. A study of number of companies, paying
dividend also reveals that a significantl y larger proportion of index firms
have paid dividend compared to non -index firms. 29 out of 30 Sensex
firms and 49 out of 50 Nift y firms have paid dividend in 2001, the
exception being Tata Engineering and Locomotive Company Ltd(TELCO).

Anal ysis of industry-wise average dividend paid shows that in the

earl y 1990s, firms in the diversi fied industry have paid more dividends
followed by mining firms and electricit y firms. However, by the end of
2013 and 2014 firms in the electricit y industry have paid more dividend
followed by mining and diversified companies. It has also been observed
that textile companies have continued to pay low amounts on an average
throughout the sample period where as firms in the financial services
industry have improved their average dividend payments over the sample
period. The recent high growth firms in the co mputer 12 hardware and
software segments, which are part of the machinery industry, have
generall y shown lower dividend payments.

In sum, the number of firms paying dividend during the study period have
shown an up trend till 1995 and have fallen subseque ntly. Further,
compared to PAT the dividend payments have exhibited a smooth trend
impl ying that dividend smoothening is occurring in the Indian context.
Regular payers are more in number and have paid higher average dividend
compared to that of current pa yers and initiators. Of the nonpayers,
former payers are growing in numbers. Index firms appear to pay higher
dividends compared to that of non -index firms. Further, smaller indices
appear to have higher average dividend compared to that of larger indices.
Industry trends indicate that firms in the electricit y, mining and
diversified industries have paid more dividend where as textile companies
have paid less dividends. Firms in the machinery industry which includes
computer hardware and software segments h ave shown lower dividends.

82
Average Dividend Paid During 2003-2014 Industry-wise (in Rs. Crore)
Industry 2007 2008 2009 2010 2011 2012 2013 2014 FIRMS

Chemicals and 1.08 1.38 1.57 1.69 1.92 1.68 2.41 2.46 1138
plastics
Diversified 6.14 7.72 10.13 10.99 12.86 17.17 22.76 29.55 184

Electricity 5.85 9.54 13.08 18.31 17.37 26.33 27.24 28.67 58

Financial 1.49 2.10 2.46 2.72 3.16 3.20 4.25 5.29 1097
Services
Food and 0.94 1.02 0.80 0.90 1.12 1.13 1.34 1.89 745
Beverages
Machinery 0.83 0.99 1.11 1.13 1.20 1.34 1.58 2.11 1065
Metal and 1.72 2.20 2.39 2.14 1.80 1.40 1.72 3.08 555
Metal Products
Mining 2.87 2.94 8.87 17.44 22.23 21.99 26.31 35.36 81
Misc. 0.73 0.70 0.75 0.57 0.35 0.56 0.58 1.05 324
manufacturing
Non-metallic 0.63 0.85 1.18 1.00 0.86 0.90 1.12 1.51 296
Mineral Pro
Other Services 1.01 1.07 1.18 1.23 1.34 1.34 1.42 4.07 1264
Textiles 0.72 0.86 0.82 0.58 0.48 0.48 0.56 0.56 750-
Transport 1.39 2.02 2.83 3.58 2.95 2.95 3.44 3.03 225
Equipment

Dividend Per Share

Average dividend per share (DPS) has increased from 14 paisa in
200 to 26 paisa in 20 13 and 15 paisa in 2014. An anal ysis of distribution
of firms shows that 39 percent have paid nil DPS in 2003 and the
percentage has increased to 67.7 in 2001. Percentage of firms in the
average class i.e., DPS in the range of Rs. 0 to Rs. 0.25 have declined
from a high of 45.9 in 2003 to 18.5 in 20 14. This implies that the
increased average DPS over the latter period has mainl y been due to a few
firms paying larger DPS. Firms in ch emicals and plastics industry have
steadil y improved their DPS from 14 paisa in 1990 to 27 paisa in 20 13
and 25 paisa in 2014. Where as textiles firms have shown a decline in
DPS from 13 paisa in 2003 to 6 paisa in 2014. Machinery firms have paid
a steady 12 to 14 paisa except for the years 1996 and 1997 when they paid
marginall y more. An anal ysis of index and non -index firms DPS shows
that index firms on an average paid more DPS than non -index firms.
Similarl y, narrow indices have high average DPS than bro ad indices.

83
Table
Average Dividend Per Share (DPS) During 2007-2014
(in Rs.)

Year Number Minimum Maximum Average Std.

of firms DPS DPS DPS Deviation
2007 3953 0 57.5 0.1582 1.2983
2008 5032 0 135.33 0.1803 2.3543
2009 5536 0 174.67 0.2158 3.3243
2010 5801 0 222 0.198 3.4834
2011 5911 0 350.33 0.2337 5.8833
2012 6176 0 249.75 0.2544 4.8938
2013 6167 0 266.38 0.2571 4.4156
2014 4734 0 61.5 0.1538 1.2899
Common 866
firms

Average Dividend Per Share (DPS) During 1990 -2001

84
 An anal ysis of recurrence of dividend per share group shows that
two firms have consistentl y paid dividend in the range of 25 to 50 paisa
per share for all the 12 years, where as 18 firms have paid up to 25 paisa.

An anal ysis of dividend reductions by firms shows t hat onl y five

companies namel y Mahindra Sintered Products Ltd, Otis Elevator Co.
(India), Bharat Electronics, Amritlal Chemaux, and Carborundum
Universal have consistentl y paid higher dividend per share out of a 330
firms that paid dividends in all years o f the sample period. 43 firms
registered a single instance of dividend per share reduction, where as 68
firms lowered twice, 82 firms lowered thrice etc. On the whole average
DPS has shown a steady growth except in the year 2001. Regular payers
have consistentl y paid more dividend per share compared to other payers,
where as initiators have always paid lower dividend per share. Anal ysis
also shows that only a few firms have consistentl y paid same levels of
dividend. Index firms on an average paid more DPS t han non-index firms.
Similarl y, narrow indices have high average DPS than broad indices.
Firms in chemicals and plastics industry have steadil y improved their
DPS, where as textiles firms have shown a decline in the study period.
Machinery firms have paid a steady DPS.

85
Distribution of Firms in terms of Dividend Per Share During 2007
2014
Percentage of Companies in the Year
DPS 2007 2008 2009 2010 2011 2012 2013
Rs. 0 44.9 50.8 58.9 64.5 67.5 67.8 67.7
Rs. 0-0.25 42.3 35.8 27.5 22.2 19.5 18.6 18.5

Rs. 0.25-0.50 10.6 10.4 9.8 8.7 7.6 7.4 7.8

Rs. 0.50-0.75 1.1 1.5 2.3 2.8 2.5 2.6 2.7

Rs. 0.75-1 0.4 0.6 0.6 0.6 1.1 1.2 1.3

Rs. 1-2 0.3 0.4 0.6 1 1.1 1.4 1.4

Rs. 2-5 0.2 0.2 0.1 0.2 0.3 0.6 0.4
> Rs. 5 0.1 0.2 0.2 0.2 0.3 0.4 0.5

86
Industry-wise Dividend Per Share (DPS) During 1990 -2001 (in Rs.)

Industry 2008 2009 2010 2011 2012 2013 2014 FIRMS

Chemicals 0.15 0.12 0.17 0.17 0.18 0.27 0.25 1138

and plastics
Diversified 0.19 0.21 0.22 0.21 0.22 0.27 0.21 184
Electricity 0.10 0.12 0.09 0.10 0.10 0.13 0.10 58
Financial 0.21 0.28 0.12 0.15 0.14 0.19 0.18 1097
Services
Food and 0.47 0.49 0.58 0.85 0.21 0.16 0.13 745
Beverages
Machinery 0.13 0.17 0.19 0.12 0.14 0.14 0.14 1065
Metal and 0.10 0.12 0.09 0.07 0.06 0.07 0.07 555
Metal
Products
Mining 0.06 0.07 0.08 0.13 0.10 0.11 0.09 81
Misc. 0.10 0.10 0.15 0.06 0.16 0.21 0.30 324
manufacturin
g
Non-metallic 0.09 0.10 0.08 0.08 0.07 0.09 0.09 296
Mineral Pro
Other 0.24 0.38 0.28 0.42 0.88 0.73 0.12 1264
Services
Textiles 0.09 0.08 0.06 0.06 0.05 0.07 0.06 750
Transport 0.13 0.15 0.18 0.16 0.15 0.21 0.17 225
Equipment

87
Dividend Payout Ratio
An anal ysis of average percentage dividend payout (PR) during
1990 2001 shows a volatile trend. Percentag e PR increased from 27.39
in 1990 to 32.95 in 1997 and then showed a declining trend till 2000
before reaching the peak average percentage PR of 40.53 in 2001.

Year No. of Avg.% SD 1%Trimmed !%trimmed

firms payout avg. payout no. of firms
2007 3770 25.88 38.06 23.84 3733
2008 4042 27.44 88.12 23.99 4002
2009 4258 32.95 139.85 23.91 4216
2010 4335 31.39 453.37 18.64 4292
2011 4503 22.82 120.19 16.98 4458
2012 4383 21.6 67.49 17.47 4340
2013 3387 40.53 1196.96 16.81 3354

An anal ysis of distri bution of firms by dividend payout percentage

shows that as high as 26 percent of firms in 1990 and 56.6 percent in 2001
have paid out nothing. However, more than 10 percent firms have paid
dividend in excess of 75 percent of their net profits. An anal ysis of
dividend payout recurrence shows that very few firms have maintained the
same payout for a longer period of time. For instance, only one firm
Hindustan Lever Limited has paid out a dividend in the range of 50 to
75% of its net profit for entire sam ple period. Similarl y another firm
Maharashtra Scooters Limited - maintained a dividend payout in the range
of 10 to 20% for 11 of the 12 -year sample period. Similarl y, Kinetic
Engineering Ltd., Lakshmi Machine Works Ltd., and Dalmia Cement
(Bharat) Ltd. have paid out in the range of 10 20% for 10 of the 12 -year
sample period.

88
Average % Payout During 2007-2014

An anal ysis of industry-wise DPO shows a declining trend across

all industries during the sample period. Diversified firms, whi ch have a
DPO in excess of 25 percent in 20 07, have less than 14 percent in 201 4.
Firms in metals and metal products industry have registered a high degree
fall in DPO from 22.84 percent in 20 03 to 8.74 percent in 201 4.

89
Distribution of Firms Payout Per centage During 20 08 2014

% of Firms
Dividend payout % 2008 2009 2010 2011 2012 2013 2014
0 26.7 33.3 45.4 52.8 57 55.8 56.6
0-10 6.6 5.5 3.1 3.1 3.4 3.8 3.8
10-20 15.6 13.6 7.9 7.6 6.7 6.6 7.6
20-30 16.7 13.7 10.9 9.8 8.2 8.9 7.9
30-40 12.5 10.8 8.5 7.5 6.9 6.7 6.9
40-50 8.7 7.3 6.4 5.4 5.2 5.4 4.8
50-75 8.6 8.6 9.1 7.8 6.7 6.5 7.1
75-100 3.4 5.4 5.2 3.2 3.9 4.2 3.2
100-200 0.9 1.4 2.1 1.6 1.3 1.5 1.5
>200 0.3 0.4 1.3 1 0.7 0.7 0.7
Firms 3770 4042 4258 4335 4503 4383 3387

Industry-wise Dividend Payout During 2009 2014 (in %)

Industry 2009 2010 2011 2012 2013 2014

Chemicals and 20.53 18.37 14.76 13.84 14.18 13.71

plastics
Diversified 21.61 23.27 19.34 17.41 17.52 13.59
Electricity 12.70 16.32 10.42 9.35 12.68 13.08
Financial Services 31.74 29.19 16.12 14.82 16.21 14.30
Food and 17.23 16.14 12.73 12.67 12.80 10.22
Beverages
Machinery 20.83 19.45 16.23 15.36 15.24 15.15
Metal and Metal 18.82 16.78 12.56 9.37 9.16 8.74
Products
Mining 16.58 14.65 11.50 9.87 11.98 11.76
Misc. 17.81 15.55 9.84 12.18 12.59 15.09
manufacturing
Non-metallic 13.87 13.62 10.78 9.66 8.93 11.29
Mineral Pro
Other Services 19.34 17.43 14.00 12.27 12.85 12.54
Textiles 17.30 13.84 11.29 7.99 9.04 8.02
Transport 19.69 22.46 20.96 18.74 20.18 17.29
Equipment

90
 Total payers have registered an increase in payout from 31.25% in
1991 to a peak of 43.02% in 1997 and finall y paid out 37.64% in 2001. Of
the payers, regular payers have consistentl y paid higher payout compared
to that of current payers. Further, i nitiators have shown higher
fluctuations in their payout compared to that of regular payers. In sum,
average percentage PR showed a more stable pattern up to 2009 and then
has shown a declining trend. Anal ysis of dividend payout recurrence
shows that very few firms have maintained the same payout for a longer
period of time. Industry-wise DPO shows a declining trend across all
industries during the sample period. Of the payers, regular payers have
consistentl y paid higher payout compared to that of current payers.
Further, initiators have shown higher fluctuations in their payout
compared to that of regular payers.

Dividend Yield
Average dividend yield for all companies during the period 1991 to
2001 has declined from 1.73% in 1991 to .55 in 1993 before fin all y
recovering to 1.61 in 1998 and again falling marginall y to 1.24% in 2001.
On the whole the dividend yield is range bound in the region of 0.5% to
1.73%. The reason for the fall in 1993 could be due to high increases in
market capitalizations of a numb er of stocks in the face or irregularities
in the stock market in 1992. Anal ysis of dividend yield by type of payer
shows that initiators have always paid higher levels of dividend yield
compared to that of current payers and regular payers. Similarl y curr ent
payers have paid higher dividend yield compared to that of regular payers.
Dividend yields of initiators have declined from 6% in 1991 to 1.51% in
1993 before recovering and reaching an all time high of 10% in 1998.
Compared to this current payers yiel ded about 5% in 1992 before falling
to 1.81 in 1993 and have subsequentl y recovered and reached all time high
of 8.12% in 2000. On the other hand regular payers started with a yield of
close to 5% but have fallen to a low of 1.5 in 1993 before reaching an all
time high of 7.76% in 2000.

On the whole dividend yield of aggregate payers shows a significant

increase from 1991 to 2001.

Average dividend yield has differed from industry to industry.

Diversified firms, followed by firms in electricit y, food and beverages
and textiles industries paid higher dividend yields in 1991 while financial
services and mining firms paid the lowest. By 2001 diversified firms and
electricit y continue to pay higher dividend yields where firms in transport
industry have improved their dividend yields by 2001. However, food and
beverages and textile firms recorded lowered their dividend yield by

91
2001, where as firms in financial services, and mining have improved
their dividend yields.

On the whole the dividend yield is range bound during the study
period. Anal ysis of dividend yield by t ype of payer shows that initiators
have always paid higher levels of dividend yield compared to that of
current payers and regular payers. Diversified firms and firms in the
electricit y industry have paid higher dividend yields during the study
period.

Summary of Analysis of Dividend Trends

The number of firms paying dividend during the study period has shown
an up trend till 1995 and has fallen subsequentl y. Average DPS on the
other hand has shown a steady growth except for year 2001. Average
percentage PR showed a more stable pattern up to 1997 and then has
shown a declining trend. Dividend yield measure is range bound.

Anal ysis also shows that onl y a few firms have consistently paid same
levels of dividend. Anal ysis of dividend payout recurrence shows that
very few firms have maintained the same payout for a longer period of
time. Of the payers, regular payers have consistentl y paid higher payout
as well as higher average dividend compared to that of current payers.
Initiators have always paid higher levels of dividend yield compared to
that of current payers and regular payers.

Further, narrower indices appear to have higher dividends compared to

that of broader indices. Industry trends indi cate that firms in the
electricit y, mining and diversified industries have paid higher dividends
where as textile companies have paid less dividends. Firms in the
machinery industry which includes computer hardware and software
segments have shown lower di vidends.

Changes in Tax Regime and Dividend Propensity

Anal ysis of influence of change in tax regime on dividend

propensit y shows that total dividend per share has come down from an
average of Rs. 0.84 to Rs. 0.71, where as average payout percentage has
increased from 33.33% to 51.05%. Mimicking the trends for total firms,
regular payers have registered lower DPS and higher payout percentage.
As opposed to these changes over sub -periods of 3 years before and after
the change in tax regime, one year chang es show that DPS has more or
less remained at the same level, where as payout percentage has come
down from 1997 to 1999.

92
In sum, it can be inferred from the present study that tax regime changes
have not reall y influenced the dividend behavior of Indian corporate firms
and that the tradeoff theory does not hold true in the Indian context.

Tax on dividend raised from 10% to 20% - Additional Rs10bn

burden on corporates:

The Finance Minister raised tax on dividend from currentl y 10% to 20% in
the year 2000-01. An India Info line analysis of dividend pay out of 863
listed companies has shown that there would be an additional Rs10bn
burden on the corporate sector. Total dividend pay out of 863 listed
companies for 1998 -99 is Rs101.6bn. This implies that the c orporate
sector paid Rs10.2bn (10% of the 101.6bn) as dividend tax in FY99.
Raising dividend tax from 10% to 20% would mean additional Rs10.2bn
tax. Companies whose dividend payout is more than Rs500mn (39
companies) accounts 65% of the total pay out of 86 3 companies.

An interesting point to note is that 6 out of the top 10 companies are PSUs
which anyway pay most of the dividend to the government.

Companies Total dividend Dividend Tax (10%) Dividend Tax (20%) Additional burden

ONGC 8,705.3 870.5 1,741.1 870.5

Gas Authority of India Ltd 5,919.6 592.0 1,183.9 592.0

Indian Oil Corporation Ltd 5,618.1 561.8 1,123.6 561.8

Hindustan Lever Ltd 4,830.5 483.0 966.1 483.0

Reliance Industries Ltd 4,144.1 414.4 828.8 414.4

ICICI Ltd 3,634.2 363.4 726.8 363.4

HPCL 2,760.7 276.1 552.1 276.1

MTNL 2,097.9 209.8 419.6 209.8

BPCL 2,081.3 208.1 416.3 208.1

Larsen & Toubro Ltd 1,796.2 179.6 359.2 179.6

TISCO 1,632.9 163.3 326.6 163.3

I T C Limited 1,498.3 149.8 299.7 149.8

Max India Ltd 1,292.9 129.3 258.6 129.3

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HDFC 1,123.8 112.4 224.8 112.4

Bajaj Auto Ltd 1,060.2 106.0 212.0 106.0

Castrol India Ltd 1,018.9 101.9 203.8 101.9

Tata Chemicals Ltd 1,002.6 100.3 200.5 100.3

Neyveli Lignite Corporation Ltd 997.2 99.7 199.4 99.7

Procter and Gamble India Ltd 960.8 96.1 192.2 96.1

Digital Equipment India Ltd 871.9 87.2 174.4 87.2

NACL 858.2 85.8 171.6 85.8

Tata Engineering & Locomotive 852.0 85.2 170.4 85.2

Videsh Sanchar Nigam Ltd 843.6 84.4 168.7 84.4

NFC 770.7 77.1 154.1 77.1

Oriental Bank Of Commerce Ltd 748.0 74.8 149.6 74.8

Bank Of India Ltd 709.3 70.9 141.9 70.9

Nestle Ltd 689.4 68.9 137.9 68.9

Bharat Heavy Electricals Ltd 679.2 67.9 135.8 67.9

GESC 638.4 63.8 127.7 63.8

Mahindra & Mahindra Ltd 631.1 63.1 126.2 63.1

Grasim Industries Ltd 626.5 62.7 125.3 62.7

Ranbaxy Laboratories Ltd 616.1 61.6 123.2 61.6

Tata Tea Ltd 593.7 59.4 118.7 59.4

Chambal Fertilizers 570.3 57.0 114.1 57.0

Gujarat Ambuja Cement Ltd 569.8 57.0 114.0 57.0

Punjab Tractors Ltd 562.0 56.2 112.4 56.2

Indo Gulf Corporation Ltd 512.1 51.2 102.4 51.2

Sterlite Industries India Ltd 503.1 50.3 100.6 50.3

Total (39 companies) 65,021 6,502.1 13,004.2 6,502.1

Total (863 companies) 101,630.1 10,163.0 20,326.0 10,163.0

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Summary and Conclusion

This study examines the dividend behavior of Indian corporate firms over
the period 1990 2001 and attempts to explain the observed behavior.

Trends indicate that the number of firms paying dividend during the
study period has shown an up trend till 1995 and has fallen subsequentl y.
Average DPS on the other hand has shown a steady growth except for year
2001. Average percentage PR showed a more stable pattern up to 1997 and
then has shown a declining trend.

Anal ysis also shows that onl y a few firms have consistently paid
same levels of dividend. Of the payers, regular payers have consistentl y
paid higher payout as well as higher average dividend compared to that of
current payers. Initiators have always paid higher levels of dividend yield
compared to that of other payers.

Further, smaller indices appear to have higher dividends compared

to that of larger indices. Industry trends indicate that firms in the
electricit y, mining and diversified industries have paid higher dividends
where as textile companies have paid less dividends.

Anal ysis of influence of tax regime changes shows that the tradeoff
theory does not hold true in the Indian context, as Indian corporate firms
on average do not appear to have increased dividend payments despite a
tilt in tax regime in favor of more dividends.

Anal ysis of characteristics of payers and non -payers shows that

dividend-paying companies are more profitable and large in size.
However, growth doesnt seem to deter Indian firms from paying higher
dividends. Further, firms appear to prefer the pecking order of f unds in
building their larger asset base.

An anal ysis of shows that average earnings of dividend omitting firms

have shown significant difference over the past 3 and next 3 years, where
as initiating firms have exhibited a contrasting trend.
An anal ysis o f other non-extreme dividend events such as dividend
reductions and non -reductions shows that current losses are an important
determinant of dividend reductions for firms with established track
record.

Further anal ysis also shows that dividend changes ar e impacted

more by contemporaneous and lagged earnings performance rather than by
future earnings performance.

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 The present study has considered onl y cash dividends and not share
repurchases. Share repurchases or buyback has been permitted in the
Indian context onl y recentl y and this may well have influenced the
dividend behavior of Indian companies, as some firms would have
substituted share repurchases for cash dividends. Similarl y, in the present
study onl y final cash dividends are considered and the sto ck dividends by
firms are not considered which may limit generalizations of the findings.
Further, the present study has not considered the stock market reactions to
dividend events and has not examined at great depth the interrelations
between dividend an d other corporate finance decisions.

Future scope:
Future studies may examine the market reaction to dividend
announcements, other possible determinants of dividend behavior such as
flotation costs, and the relationships between dividend decision and
financing and investment decisions.

96
 (7) Bibliography
Fundamentals of corporate finance by Ross WesterField Jordan,
6 t h edition, Tata McGraw Hills, New Delhi , pg no. 623-629

Corporate Finance by M.Y. Khan and P.K. Jain,2000 t h edition,

Tata McGraw Hills, New Delhi, pg no. 13.3 -13.25 and 14.1- 14.17.

Does Dividend Policy Matter? by Stern, J.M. and D.H. Chew

(eds.), Revolution in Corporate Finance, 2nd edition, Blackwell
Publishers Inc.

Dividend Decision: A Study of Managers Perceptions by Bhat

R. and I.M. Pande, Vol. 21, chapter 1 & 2.

Dividend Policies of SoEs in India An Analysis , Finance

India, Vol. X, by Mishra, C. and V. Narender (1996), pg no. 633 -
645.

97