Chapter 10

Dividend Policy

Practical Consideration in Paying Dividends

Financial Need of company. Shareholders Expectations. Closely / Widely Held Company. Constraints on Paying Dividends.

Legal Restrictions Liquidity Borrowing Capacity Access to the Capital Markets Restrictions in Loan Agreements

Stability of Dividends
Constant Dividend per Share or Dividend

Rate. Constant Payout. Constant Dividend per Share Plus Extra Dividend.

Significance of Stability of Dividends

Resolutions of investors uncertainty.

Investors desire for current income.

Institutional Investors Requirement. Raising Additional Finances.

Forms of Dividends
Cash Dividends

Total Assets and Total Net Worth of the Company is reduced. Bonus Shares (Stock Dividend) Distribution of shares free of cost to the existing shareholder. The declaration of bonus shares increase the Paid up share capital reduces the reserves and surplus (retained earnings). The Total Net Worth (Paid up share capital and Reserves & Surplus) is not affected by bonus shares.

Rs in Crore
Paid up Share Capital (1 cr. shares, Rs 10 par) Share Premium Reserves and Surplus Total Net Worth

Rs in Crore
Paid up Share Capital (1.10 cr. shares, Rs 10 par) Share Premium Reserves and Surplus

10 15 8 33

11 17 5 33
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Total Net Worth

Advantages of Dividends
TO SHAREHOLDERS
The receipt of bonus share by the shareholders is not taxable as

income while the dividend is. Normally indicated by shareholders as an indication of higher profitability. If company is following the policy of constant dividend, future dividend will increase. Psychological value.

TO COMPANY
Satisfy the desires of shareholders without using up the cash. Only means to pay dividend under financial difficulty and

contractual restrictions. Sometimes the intention of a company in issuing bonus shares is to reduce the market price of share and make it more attractive to investors.
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Conditions for the Issue of Bonus shares

A company is not allowed to declare bonus shares

unless partly paid-up shares have been converted into fully paid-up shares. A Company can declare bonus shares once in a year. The maximum bonus shares ratio is 1:1. However two criteria are to be satisfied within the limit of maximum ratio.

SHARE SPLIT
A Share Split is a method to increase the number of outstanding

shares through a proportional reduction in the par value of the share. A Share Split affects the par value and outstanding shares, the shareholders total funds remain unaltered.
Rs in Crore
Paid up Share Capital (1 cr. shares, Rs 10 par) Share Premium Reserves and Surplus

Share Split
Paid up Share Capital (2cr. shares, Rs 5 par) Share Premium Reserves and Surplus

Rs in Crore 10 15 8

10 15 8

Total Net Worth

33

Total Net Worth

33

Advantages
To make trading in shares attractive. To signal the possibility of higher profits in future. To give higher dividends to shareholders.
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Buyback of Shares
The buyback of shares is the repurchase of its own share by a

company.

Conditions:
A company buying back its shares will not issue fresh capital,

except bonus issue, for the next 12 months. The company will state the amount to be used for the buyback of shares and seek prior approval of shareholders. The buyback of shares can be affected only utilizing the free reserves. The company will not borrow funds to buyback shares. The shares bought under the buyback schemes will be extinguished and they cannot be reissued.

Buyback of Shares
Advantages:
Return of surplus cash to shareholders. Increase in share value. Consolidating control Protection against hostile takeovers.

Disadvantages:
Shareholders do not like buyback. Not an effective defense against takeover for companies that do

not have cash. Loss to remaining shareholders. Signal of low growth opportunities.

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