CHAPTER-I

INTRODUCTION
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INTRODUCTION
The term Dividend refers to that part of the profits of a company which is distributed amongst
its shareholders. It may therefore be defined as the return that a shareholder gets from the
company, out of its profits, on his share holdings. According to the Institute of harted
Accounts of India! dividend is a Distribution to shareholder out of profits or reserves available
for this purpose!
The Dividend policy has the effect of dividing its net earnings into two "arts# $etained
earnings and dividends. The retained earnings provide funds two finance the long-term growth. It
is the most significant source of financing a firm%s investment in practice. A firm, which intends
to pay dividends and also needs funds to finance its investment opportunities, will have to use
e&ternal sources of finance. Dividend policy of the firm. Thus has its effect on both the long-
term financing and the wealth of shareholders. The moderate view, which asserts that because of
the information value of dividends, some dividends should be paid as it may have favorable
affect on the value of the share.
The theory of empirical evidence about the dividend policy does not matter if we assume a
real world with perfect capital mar'ets and no ta&es. The second theory of dividend policy is that
there will definitely be low and high payout clients because of the differential personal ta&es.
The ma(ority of the holders of this view also show that balance, there will be preponderous low
payout clients because of low capital gain ta&es. The third view argues that there does e&ist an
optimum dividend policy. An optimum dividend policy is (ustified in terms of the information in
agency costs.
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Dividend policy decision is one of the three decisions of financial management because it affects
the financial structure, the flow of funds, corporate li*uidating and investors% attitudes. The
main aspect of dividend policy is to determine the amount of earning to be distributed the
shareholder and the amount to be retained in the firm. Divined policy involves the decision
to pay out earning versus retaining them for investment in the firm. The relationship
between dividend and the value of the share is not clear cut. The financial manager must
understand the various conflicting
factors which influence the dividend policy before deciding the allocation of its company%s
earnings into dividends and retain earnings.
The development of an economy requre! e"pan!on of reductve actvte!# $hch n turn !
the re!ult of the captal formaton# $hch ! the captal !toc% of the country& The
chan'e n the captal !toc% of the country ! %no$n a! nve!tment& (e!tment ! %ey
factor for captal formaton& Inve!tment promote! economc ro$th and Contr)ute! to
a naton*! $ealth& Inve!tor de!re to earn !ome return from the nve!tment# $thout
any return there ! no any nve!tment& Inve!tment $ll )loc%# f there ! no return& The
total e"pected return nclude t$o component! one ! captal 'an and other ! dvdend&
In the captal mar%et# all frm! operate n order to 'enerate earnn'!& +hareholder!
ma'e investment in e*uity capital with the e&pectation of ma'ing earning in the form of
dividend or capital gains. Thus, shareholders wealth can increase through either dividend or
capital gain. +nce the company earns a profit, it should decide on what to do with the profit.
It could be continued to retain the profit within the company, or it could pay out the profit to
the owners of the company in the form of dividend. Dividends are payment made to
stoc'holders from a firm%s earning in return to their investment. Dividend policy is to
determine the amount of earnings to be distributed to shareholders and the amount to be
retained or reinvestment in the
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O,-ECTI(E+ O. THE +TUD/
The basic ob(ective of this study is as follows#
To understand the importance of the dividend decision and their impact on the firm%s
capital budgeting decision.
To 'now the various dividend policies followed by the firm.
To distribute the earnings to shareholders, as they hold the proportion of the -hare.
To build an image in the capital mar'et so as to create favorable condition to
raise the fund at the needs.
To ma'e distribution easy and to account easily.To see the various dividend policies of the
IN.O+/+
To see the various dividend policies of the Dr $eddys.
To see the various dividend policies of the wipro.
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I0PORTANCE O. THE +TUD/
The dividend policy of a firm determines what proportion of earnings is paid to shareholders by
the way of dividends and what proportion is ploughed bac' in the firm for reinvestment
purposes. If a firm/s capital budgeting decision is independent of its dividend of its dividend
policy, a higher dividend payment will entail a greater dependence on e&ternal financing. +n the
other hand, if a firm% s capital budgeting decision is dependent on its dividend decision, a higher
payment will cause shrin'age of its capital budget and vice versa. In such a case the dividend
policy has a bearing on the capital budgeting decision.
Any firm, whether a profit ma'ing or non-profit organi0ation has to ta'e certain capital
budgeting decision. The importance and subse*uent indispensability of the capital budgeting
decision has led to the importance of the dividend decisions for the firms.
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NEED .OR THE +TUD/
The principal ob(ective of corporate financial management is to ma&imi0e the mar'et value of
the e*uity shares. 2ence the 'ey *uestion of interest to us in this study is, 3hat is the
relationship between dividend policy and mar'et price of e*uity shares4!
5ost of the discussion on dividend of dividend policy 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 *uestion and the most controversial and unresolved doubts about the
relevance of irrelevance of the dividend policy.
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0ETHODO1O2/
Data)a!e for the +tudy3
The sources of information are classified to two-primary data and secondary data.
The data collected by the researcher and agent 'nown to the researcher, especially to answer the
research *uestion, is 'nown as the primary data.
-tudies made by others for their own purposes represent secondary data to the researcher.
-econdary sources can usually be found more *uic'ly and cheaply than primary data especially
when national and international statistics are needed. -imilarly, 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 li'e the
indiainfoline.com, the web portals of the respective company and other related sites.
PERIOD O. THE +TUD/
The period of any research is the period which the data has been collected and analy0ed. The
period of this study has been limited to five financial years starting from )778 to)71,
1I0ITATION+3
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:very 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
mar'et value of the firm%s e*uity. +thers factors affecting the firm%s mar'et value
have been assumed to have remained unchanged.
b; The period of the study has been limited to only five years.
c; The method of sampling used is /(udgment 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.
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CHAPTER-II
INDU+TR/ PRO.I1E
4
CO0PAN/ PRO.I1E
Evoluton
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Indian -toc' 5ar'ets are one of the oldest in Asia. Its history dates bac' to nearly )77 years ago.
The earliest records of security dealings in India are meager and obscure. The :ast India
ompany was the dominant institution in those days and business in its loan securities used to be
transacted towards the close of the eighteenth century.
=y 1<,7>s business on corporate stoc's and shares in =an' and otton presses too' place in
=ombay. Though the trading list was broader in 1<,8, there were only half a do0en bro'ers
recogni0ed by ban's and merchants during 1<.7 and 1<17.
The 1<17>s witnessed a rapid development of commercial enterprise and bro'erage business
attracted many men into the field and by 1<67 the number of bro'ers increased into 67.
In 1<67-61 the American ivil 3ar bro'e out and cotton supply from ?nited -tates of :urope
was stopped@ thus, the >-hare 5ania> in India begun. The number of bro'ers increased to about
)77 to )17. 2owever, at the end of the American ivil 3ar, in 1<61, a disastrous slump began
Afor e&ample, =an' of =ombay -hare which had touched $s )<17 could only be sold at $s. <9;.
At the end of the American ivil 3ar, the bro'ers who thrived out of ivil 3ar in 1<9., found a
place in a street Anow appropriately called as Dalal -treet; where they would conveniently
assemble and transact business. In 1<<9, they formally established in =ombay, the BCative -hare
and -toc' =ro'ers> AssociationB Awhich is alternatively 'nown as B The -toc' :&change B;. In
1<81, the -toc' :&change ac*uired a premise in the same street and it was inaugurated in 1<88.
Thus, the -toc' :&change at =ombay was consolidated.
Other leadn' cte! n !toc% mar%et operaton!
Ahmadabad gained importance ne&t to =ombay with respect to cotton te&tile industry. After
1<<7, many mills originated from Ahmadabad and rapidly forged ahead. As new mills were
floated, the need for a -toc' :&change at Ahmadabad was reali0ed and in 1<8. the bro'ers
formed BThe Ahmadabad -hare and -toc' =ro'ers> AssociationB.
3hat the cotton te&tile industry was to =ombay and Ahmadabad, the (ute industry was to
alcutta. Also tea and coal industries were the other ma(or industrial groups in alcutta. After
the -hare 5ania in 1<61-61, in the 1<97>s there was a sharp boom in (ute shares, which was
followed by a boom in tea shares in the 1<<7>s and 1<87>s@ and a coal boom between 187. and
187<. +n Dune 187<, some leading bro'ers formed BThe alcutta -toc' :&change AssociationB.
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In the beginning of the twentieth century, the industrial revolution was on the way in India with
the -wadeshi 5ovement@ and with the inauguration of the Tata Iron and -teel ompany Eimited
in 1879, an important stage in industrial advancement under Indian enterprise was reached.
Indian cotton and (ute te&tiles, steel, sugar, paper and flour mills and all companies generally
en(oyed phenomenal prosperity, due to the First 3orld 3ar.
In 18)7, the then demure city of 5adras had the maiden thrill of a stoc' e&change functioning in
its midst, under the name and style of BThe 5adras -toc' :&changeB with 177 members.
2owever, when boom faded, the number of members stood reduced from 177 to ,, by 18),, and
so it went out of e&istence.
In 18,1, the stoc' mar'et activity improved, especially in -outh India where there was a rapid
increase in the number of te&tile mills and many plantation companies were floated. In 18,9, a
stoc' e&change was once again organi0ed in 5adras - 5adras -toc' :&change Association A"vt;
Eimited. AIn 1819 the name was changed to 5adras -toc' :&change Eimited;.
Eahore -toc' :&change was formed in 18,. and it had a brief life. It was merged with the
"un(ab -toc' :&change Eimited, which was incorporated in 18,6.
Indan +toc% E"chan'e! - An Um)rella 2ro$th
The -econd 3orld 3ar bro'e out in 18,8. It gave a sharp boom which was followed by a slump.
=ut, in 18.,, the situation changed radically, when India was fully mobili0ed as a supply base.
+n account of the restrictive controls on cotton, bullion, seeds and other commodities, those
dealing in them found in the stoc' mar'et as the only outlet for their activities. They were
an&ious to (oin the trade and their number was swelled by numerous others. 5any new
associations were constituted for the purpose and -toc' :&changes in all parts of the country
were floated.
The ?ttar "radesh -toc' :&change Eimited A18.7;, Cagpur -toc' :&change Eimited A18.7; and
2yderabad -toc' :&change Eimited A18..; were incorporated.
In Delhi two stoc' e&changes - Delhi -toc' and -hare =ro'ers> Association Eimited and the
Delhi -toc's and -hares :&change Eimited - were floated and later in Dune 18.9, amalgamated
into the Delhi -toc' :&chnage Association Eimited.
Po!t-ndependence +cenaro
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5ost of the e&changes suffered almost a total eclipse during depression. Eahore :&change was
closed during partition of the country and later migrated to Delhi and merged with Delhi -toc'
:&change.
=angalore -toc' :&change Eimited was registered in 1819 and recogni0ed in 186,.
5ost of the other e&changes languished till 1819 when they applied to the entral Government
for recognition under the -ecurities ontracts A$egulation; Act, 1816. +nly =ombay, alcutta,
5adras, Ahmadabad, Delhi, 2yderabad and Indore, the well established e&changes, were
recogni0ed under the Act. -ome of the members of the other Associations were re*uired to be
admitted by the recogni0ed stoc' e&changes on a concessional basis, but acting on the principle
of unitary control, all these pseudo stoc' e&changes were refused recognition by the Government
of India and they thereupon ceased to function.
Thus, during early si&ties there were eight recogni0ed stoc' e&changes in India Amentioned
above;. The number virtually remained unchanged, for nearly two decades. During eighties,
however, many stoc' e&changes were established# ochin -toc' :&change A18<7;, ?ttar "radesh
-toc' :&change Association Eimited Aat Hanpur, 18<);, and "une -toc' :&change Eimited
A18<);, Eudhiana -toc' :&change Association Eimited A18<,;, Gauhati -toc' :&change Eimited
A18<.;, Hanara -toc' :&change Eimited Aat 5angalore, 18<1;, 5agadh -toc' :&change
Association Aat "atna, 18<6;, Daipur -toc' :&change Eimited A18<8;, =hubaneswar -toc'
:&change Association Eimited A18<8;, -aurashtra Hutch -toc' :&change Eimited Aat $a('ot,
18<8;, Iadodara -toc' :&change Eimited Aat =aroda, 1887; and recently established e&changes -
oimbatore and 5eerut. Thus, at present, there are totally twenty one recogni0ed stoc'
e&changes in India e&cluding the +ver The ounter :&change of India Eimited A+T:I; and the
Cational -toc' :&change of India Eimited AC-:IE;.
The Table given below portrays the overall growth pattern of Indian stoc' mar'ets since
independence. It is *uite evident from the Table that Indian stoc' mar'ets have not only grown
(ust in number of e&changes, but also in number of listed companies and in capital of listed
companies. The remar'able growth after 18<1 can be clearly seen from the Table, and this was
due to the favouring government policies towards security mar'et industry.
Tradn' Pattern of the Indan +toc% 0ar%et
Trading in Indian stoc' e&changes are limited to listed securities of public limited companies.
They are broadly divided into two categories, namely, specified securities Aforward list; and non-
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specified securities Acash list;. :*uity shares of dividend paying, growth-oriented companies
with a paid-up capital of atleast $s.17 million and a mar'et capitali0ation of atleast $s.177
million and having more than )7,777 shareholders are, normally, put in the specified group and
the balance in non-specified group.
Two types of transactions can be carried out on the Indian stoc' e&changes# Aa; spot delivery
transactions Bfor delivery and payment within the time or on the date stipulated when entering
into the contract which shall not be more than 1. days following the date of the contractB # and
Ab; forward transactions Bdelivery and payment can be e&tended by further period of 1. days
each so that the overall period does not e&ceed 87 days from the date of the contractB. The latter
is permitted only in the case of specified shares. The bro'ers who carry over the outstandings
pay carry over charges Acantango or bac'wardation; which are usually determined by the rates of
interest prevailing.
A member bro'er in an Indian stoc' e&change can act as an agent, buy and sell securities for his
clients on a commission basis and also can act as a trader or dealer as a principal, buy and sell
securities on his own account and ris', in contrast with the practice prevailing on Cew Jor' and
Eondon -toc' :&changes, where a member can act as a (obber or a bro'er only.
The nature of trading on Indian -toc' :&changes are that of age old conventional style of face-
to-face trading with bids and offers being made by open outcry. 2owever, there is a great amount
of effort to moderni0e the Indian stoc' e&changes in the very recent times.
Over The Counter E"chan'e of Inda 5OTCEI6
The traditional trading mechanism prevailed in the Indian stoc' mar'ets gave way to many
functional inefficiencies, such as, absence of li*uidity, lac' of transparency, unduly long
settlement periods and benami transactions, which affected the small investors to a great e&tent.
To provide improved services to investors, the country>s first ringless, scripless, electronic stoc'
e&change - +T:I - was created in 188) by country>s premier financial institutions - ?nit Trust
of India, Industrial redit and Investment orporation of India, Industrial Development =an' of
India, -=I apital 5ar'ets, Industrial Finance orporation of India, General Insurance
orporation and its subsidiaries and an=an' Financial -ervices.
Trading at +T:I is done over the centres spread across the country. -ecurities traded on the
+T:I are classified into#
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Eisted -ecurities - The shares and debentures of the companies listed on the +T can be
bought or sold at any +T counter all over the country and they should not be listed
anywhere else
"ermitted -ecurities - ertain shares and debentures listed on other e&changes and units
of mutual funds are allowed to be traded
Initiated debentures - Any e*uity holding atleast one la'h debentures of a particular scrip
can offer them for trading on the +T.
+T has a uni*ue feature of trading compared to other traditional e&changes. That is, certificates
of listed securities and initiated debentures are not traded at +T. The original certificate will be
safely with the custodian. =ut, a counter receipt is generated out at the counter which substitutes
the share certificate and is used for all transactions.
In the case of permitted securities, the system is similar to a traditional stoc' e&change. The
difference is that the delivery and payment procedure will be completed within 1. days.
ompared to the traditional :&changes, +T :&change networ' has the following advantages#
+T:I has widely dispersed trading mechanism across the country which provides
greater li*uidity and lesser ris' of intermediary charges.
Greater transparency and accuracy of prices is obtained due to the screen-based scripless
trading.
-ince the e&act price of the transaction is shown on the computer screen, the investor gets
to 'now the e&act price at which sKhe is trading.
Faster settlement and transfer process compared to other e&changes.
In the case of an +T issue Anew issue;, the allotment procedure is completed in a month
and trading commences after a month of the issue closure, whereas it ta'es a longer
period for the same with respect to other e&changes.
Thus, with the superior trading mechanism coupled with information transparency investors are
gradually becoming aware of the manifold advantages of the +T:I.
Natonal +toc% E"chan'e 5N+E6
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3ith the liberali0ation of the Indian economy, it was found inevitable to lift the Indian stoc'
mar'et trading system on par with the international standards. +n the basis of the
recommendations of high powered "herwani ommittee, the Cational -toc' :&change was
incorporated in 188) by Industrial Development =an' of India, Industrial redit and Investment
orporation of India, Industrial Finance orporation of India, all Insurance orporations,
selected commercial ban's and others.
Trading at C-: can be classified under two broad categories#
Aa; 3holesale debt mar'et and
Ab; apital mar'et.
3holesale debt mar'et operations are similar to money mar'et operations - institutions and
corporate bodies enter into high value transactions in financial instruments such as government
securities, treasury bills, public sector unit bonds, commercial paper, certificate of deposit, etc.
There are two 'inds of players in C-:#
Aa; trading members and
Ab; participants.
$ecogni0ed members of C-: are called trading members who trade on behalf of themselves and
their clients. "articipants include trading members and large players li'e ban's who ta'e direct
settlement responsibility.
Trading at C-: ta'es place through a fully automated screen-based trading mechanism which
adopts the principle of an order-driven mar'et. Trading members can stay at their offices and
e&ecute the trading, since they are lin'ed through a communication networ'. The prices at which
the buyer and seller are willing to transact will appear on the screen. 3hen the prices match the
transaction will be completed and a confirmation slip will be printed at the office of the trading
member.
C-: has several advantages over the traditional trading e&changes. They are as follows#
C-: brings an integrated stoc' mar'et trading networ' across the nation.
Investors can trade at the same price from anywhere in the country since inter-mar'et
operations are streamlined coupled with the countrywide access to the securities.
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Delays in communication, late payments and the malpractice%s prevailing in the
traditional trading mechanism can be done away with greater operational efficiency and
informational transparency in the stoc' mar'et operations, with the support of total
computeri0ed networ'.
?nless stoc' mar'ets provide professionali0ed service, small investors and foreign investors will
not be interested in capital mar'et operations. And capital mar'et being one of the ma(or source
of long-term finance for industrial pro(ects, India cannot afford to damage the capital mar'et
path. In this regard C-: gains vital importance in the Indian capital mar'et system.
Pream)le
+ften, in the economic literature we find the terms /development% and /growth% are used
interchangeably. 2owever, there is a difference. :conomic growth refers to the sustained
increase in per capita or total income, while the term economic development implies sustained
structural change, including all the comple& effects of economic growth. In other words, growth
is associated with free enterprise, where as development re*uires some sort of control and
regulation of the forces affecting development. Thus, economic development is a process and
growth is a phenomenon.
:conomic planning is very critical for a nation, especially a developing country li'e India to ta'e
the country in the path of economic development to attain economic growth.
7hy Economc Plannn' for Inda8
+ne of the ma(or ob(ective of planning in India is to increase the rate of economic development,
implying that increasing the rate of capital formation by raising the levels of income, saving and
investment. 2owever, increasing the rate of capital formation in India is beset with a number of
difficulties. "eople are poverty ridden. Their capacity to save is e&tremely low due to low levels
of income and high propensity to consume. Therefor, the rate of investment is low which leads to
capital deficiency and low productivity. Eow productivity means low income and the vicious
circle continues. Thus, to brea' this vicious economic circle, planning is inevitable for India.
The mar'et mechanism wor's imperfectly in developing nations due to the ignorance and
unfamiliarity with it. Therefore, to improve and strengthen mar'et mechanism planning is very
vital. In India, a large portion of the economy is non-monitised@ the product, factors of
production, money and capital mar'ets is not organi0ed properly. Thus the prevailing price
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mechanism fails to bring about ad(ustments between aggregate demand and supply of goods and
services. Thus, to improve the economy, mar'et imperfections has to be removed@ available
resources has to be mobili0ed and utili0ed efficiently@ and structural rigidities has to be
overcome. These can be attained only through planning.
In India, capital is scarce@ and unemployment and disguised unemployment is prevalent. Thus,
where capital was being scarce and labour being abundant, providing useful employment
opportunities to an increasing labour force is a difficult e&ercise. +nly a centrali0ed planning
model can solve this macro problem of India.
Further, in a country li'e India where agricultural dependence is very high, one cannot ignore
this segment in the process of economic development. Therefore, an economic development
model has to consider a balanced approach to lin' both agriculture and industry and lead for a
paralleled growth. Cot to mention, both agriculture and industry cannot develop without
ade*uate infrastructural facilities which only the state can provide and this is possible only
through a well carved out planning strategy. The government%s role in providing infrastructure is
unavoidable due to the fact that the role of private sector in infrastructural development of India
is very minimal since these infrastructure pro(ects are considered as unprofitable by the private
sector.
Further, India is a clear case of income disparity. Thus, it is the duty of the state to reduce the
prevailing income ine*ualities. This is possible only through planning.
Plannn' H!tory of Inda
The development of planning in India began prior to the first Five Jear "lan of independent
India, long before independence even. The idea of central directions of resources to overcome
persistent poverty gradually, because one of the main policies advocated by nationalists early in
the century. The ongress "arty wor'ed out a program for economic advancement during the
18)7%s, and 18,7%s and by the 18,< they formed a Cational "lanning ommittee under the
chairmanship of future "rime 5inister Cehru. The ommittee had little time to do anything but
prepare programs and reports before the -econd 3orld 3ar which put an end to it. =ut it was
already more than an academic e&ercise remote from administration. "rovisional government had
been elected in 18,<, and the ongress "arty leaders held positions of responsibility. After the
war, the Interim government of the pre-independence years appointed an Advisory "lanning
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=oard. The =oard produced a number of somewhat disconnected "lans itself. =ut, more
important in the long run, it recommended the appointment of a "lanning ommission.
The "lanning ommission did not start wor' properly until 1817. During the first three years of
independent India, the state and economy scarcely had a stable structure at all, while millions of
refugees crossed the newly established borders of India and "a'istan, and while e&-princely
states Aover 177 of them; were being merged into India or "a'istan. The "lanning ommission
as it now e&ists, was not set up until the new India had adopted its onstitution in Danuary 1817.
O)9ectve! of Indan Plannn'
The "lanning ommission was set up the following Directive principles #
To ma'e an assessment of the material, capital and human resources of the country,
including technical personnel, and investigate the possibilities of augmenting such of
these resources as are found to be deficient in relation to the nation%s re*uirement.
To formulate a plan for the most effective and balanced use of the country%s resources.
2aving determined the priorities, to define the stages in which the plan should be carried
out, and propose the allocation of resources for the completion of each stage.
To indicate the factors which are tending to retard economic development, and determine
the conditions which, in view of the current social and political situation, should be
established for the successful e&ecution of the "lan.
To determine the nature of the machinery this will be necessary for securing the
successful implementation of each stage of "lan in all its aspects.
To appraise from time to time the progress achieved in the e&ecution of each stage of the
"lan and recommend the ad(ustments of policy and measures that such appraisals may
show to be necessary.
To ma'e such interim or au&iliary recommendations as appear to it to be appropriate
either for facilitating the discharge of the duties assigned to it or on a consideration of the
prevailing economic conditions, current policies, measures and development programs@
or on an e&amination of such specific problems as may be referred to it for advice by
entral or -tate Governments.
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The long-term general ob(ectives of Indian "lanning are as follows#
Increasing Cational Income
$educing ine*ualities in the distribution of income and wealth
:limination of poverty
"roviding additional employment@ and
Alleviating bottlenec's in the areas of # agricultural production, manufacturing capacity
for producer%s goods and balance of payments.
:conomic growth, as the primary ob(ective has remained in focus in all Five Jear "lans.
Appro&imately, economic growth has been targeted at a rate of five per cent per annum. 2igh
priority to economic growth in Indian "lans loo's very much (ustified in view of long period of
stagnation during the =ritish rule
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CO0PAN/ PRO.I1E
INTRODUCTION TO INDIA,U11+
- )7 -
Indiabulls is India%s leading Financial and $eal :state ompany with a wide presence
throughout India. They ensure convenience and reliability in all their products and services.
Indiabulls has over 6.7 branches all over India. The customers of Indiabulls are more than
.,17,777 which covers from a wide range of financial services and products from securities,
derivatives trading, depositary services, research L advisory services, consumer secured L
unsecured credit, loan against shares and mortgage L housing finance. The company employs
around .777 $elationship managers who help the clients to satisfy their customi0ed financial
goals. Indiabulls entered the $eal :state business in the year )771 with its group of companies.
Earge scale pro(ects worth several hundred million dollars are evaluated by them.
Inda)ull! .nancal +ervce! 1td is listed on the Cational -toc' :&change AC-:;, =ombay
-toc' :&change A=-:; and Eu&embourg -toc' :&change. The mar%et captal:aton of
Indiabulls is around U+D ;<== mllon A)8
th
December, )776;. onsolidated net $orth of the
group is around U+D >== mllon. Indiabulls and its group companies have attracted ?-D 177
million of e*uity capital in Foreign Direct Investment AFDI; since 5arch )777. -ome of the
large shareholders of Indiabulls are the largest financial institutions of the world such as Fidelity
Funds, Goldman -achs, 5errill Eynch, 5organ -tanley and Farallon apital.
In middle of 1888, when e-commerce was (ust about starting in India, -ameer Gehlaut and his
close IIT Delhi friend $a(iv $attan got together and bought a defunct securities company with a
C-: membership and started offering bro'erage services . A Few months later, their friend
-aurabh 5ittal also (oined them. =y December 1888, the company embar'ed on its (ourney to
build one of the first online platforms in India for offering internet bro'erage services. In Danuary
)777, the , founders incorporated Indiabulls Financial -ervices and made it as the flagship
company.
In mid )777, Indiabulls Financial -ervices received venture capital funding from 5r E.C. 5ittal
L 5r 2arish Fabiani. In late )777, Indiabulls -ecurities, a subsidiary of Indiabulls Financial
-ervices started offering online bro'erage services and simultaneously opened physical offices
across India. =y )77,, Indiabulls securities had established a strong pan India presence and client
base through its offices and on the internet.
In -eptember )77., Indiabulls Financial -ervices went public with an I"+ at $s 18 a share. In
late )77., Indiabulls Financial -ervices started its financing business with consumer loans. In
5arch )771, Indiabulls "roperties "rivate Etd, a subsidiary of Indiabulls Financial -ervices,
- )1 -
participated in government auction of Dupiter 5ills, a defunct 11 acre te&tile mill owned by CT
in Eower "arel, 5umbai. Indiabulls "roperties private Etd won the mill in auction and that
purchase started Indiabulls real estate business. A few months later, Indiabulls $eal :state
company pvt ltd bought :lphinstone mill in Eower "arel, another te&tile mill auctioned by CT.
3ith real estate business gaining si0e, Indiabulls Financial -ervices demerged the real estate
business under Indiabulls $eal :state and each shareholder of Indiabulls Financial -ervices
received additional share of Indiabulls $eal :state through the demerger. -ubse*uently,
Indiabulls Financial -ervices also demerged Indiabulls -ecurities and each shareholder of
Indiabulls Financial -ervices also received a share of Indiabulls -ecurities.
In year )779, Indiabulls $eal :state incorporated a 177M subsidiary, Indiabulls "ower, to build
power plants and started wor' on building Cashi' L Amrawati thermal power plants. Indiabulls
"ower went public in -eptember )778.
Today, Indiabulls Group has a networth of $s 16,986 rore L has a strong presence in important
sectors li'e financial services, power L real estate through independently listed companies and
Indiabulls Group continues its (ourney of building businesses with strong cash flows.
0ANA2E0ENT TEA0
Inda)ull! 2roup
5r $a(iv $attan - Iice hairman
5r -aurabh 5ittal - Iice hairman
5r Gagan =anga - Group -po'esperson
5r Asho' Hac'er - Group "resident
5r -a'et =ahuguna - Group E+
- )) -
5r Asho' -harma - Group F+
5r A(it 5ittal - Group Director
5r Gurbans -ingh - Group Director
5r Te(inderpal -ingh 5iglani - Group I+
Inda)ull! .nancal +ervce! 1mted
5r Gagan =anga - :+
5r Ashwini Humar 2ooda - D5D
Inda)ull! Real E!tate 1mted
5r Iipul =ansal - :+
5r Carendra Gehlaut - Doint 5D
Inda)ull! Po$er 1mted
5r $an(it Gupta - :+
5r 5urali -ubramanian - ++
Inda)ull! +ecurte! 1mted
5r Divyesh -hah N :+
Inda)ull! !upport! 0oney lfe .oundaton n Empo$ern' Inve!tor!
5oneylife Foundation! in collaboration with Indiabulls, recently organi0ed an /Investor,
:mpower Jourself% seminar, which was held at the lush Town L ountry lub at Cew Gurgaon,
in the Cational apital $egion AC$;, on -aturday, 9th 5ay )711. This was the first occasion
for 5oneylife Foundation to venture into other territories outside 5aharashtra. Indiabulls played
a ma(or role in helping this event happen successfully.
The event witnessed over ,77 attendees not only from Gurgaon but also from other parts of
Cational apital $egion AC$;, Delhi, Allahabad, Eudhiana, handigarh L other cities from
- ), -
northern region of India. The venue was fully pac'ed with eager L curious investors. 5oneylife
Foundation! e&pressed its gratitude towards helpful team of Indiabulls led by 5r. Gagan =anga,
:+ - Indiabulls Financial -ervices Etd, for ma'ing this event such a huge success.
The event started with introductory remar's L guidance by 5r. Gagan =anga, :+ - Indiabulls
Financial -ervices Etd. 5r. Ieeresh 5ali', onsulting :ditor, 5oneylife, Delhi gave a brief
introduction about 5oneylife Foundation.Then audience was guided by -ucheta Dalal, Trustee -
5oneylife Foundation and 5anaging :ditor- 5oneylife, on 2ow to be -afe with your money L
Debashis =asu, Trustee - 5oneylife Foundation and :ditor- 5oneylife about 2ow to be smart
with your investments. 5r. -achin houdhary, Director L =usiness 2ead - Indiabulls 2ousing
Finance Etd, tal'ed about Do>s and Don%ts of 2ousing 5ortgages. 5s. -ucheta Dalal also
e&plained the importance L procedure of 3ills L Cominations.
This event helped people in understanding how to become an aware and empowered investor.
The attendees included both finically literate L new investors. They posted number of intelligent
*uestions which were ade*uately answered by all the spea'ers. :mpowering today%s investors by
creating awareness and guiding them in ta'ing wise decisions when it comes to money or
investments was the main ob(ective of /Investor, :mpower Jourself% seminar. During the "anel
Discussion with the panel members -ucheta Dalal, Debashis =asu L -achin houdhary, *uite a
few interesting L informative issues regarding Investments were discussed. 5r. 5onu $atra,
Cational -ales 5anager - Indiabulls housing Finance Etd gave Iote of Than's.
This event received many re*uest and suggestions from audience about continuing with such
events all over India so that citi0ens of India will be more empowered investors L ultimately
nation will benefit from it. There were some re*uests from audience to telecast further events
live on television L internet so that those who are unable to attend the event will also get the
guidance. The 'nowledge shared about the investments during the event was well appreciated by
all.
5oneylife Foundation has been instrumental in promoting financial literacy L pro-customer
advocacy in India. 5oneylife Foundation has been organi0ing such events at the 5oneylife
Hnowledge entre in 5umbai, and also in various cities across 5aharashtra. The Foundation
has completed 11 months of spreading financial literacy L has hosted around .8 spea'ers and 61
events. urrently, more than 1,777 people are members of the Foundation.
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After the seminar, Indiabulls received feedbac's from some attendees congratulating Indiabulls%
team about the success of seminar. 5any of the attendees mentioned that they are loo'ing
forward to such seminars in future.
Indiabulls has been participating in such orporate -ocial Activities with many other socially
aware groups and trusts L Indiabulls is committed to continue in doing so in future.
THE HU,
The 2ub at +ne Indiabulls entre at Eower "arel is an intelligently designed business centre in
5umbai
In the past few years serviced office industry has been maturing in India and today is a
mainstream occupancy option for businesses of all si0es. 3hether a start-up, -5: or a multi-
national, companies are now opting for viable alternative to leasing or the outright purchase of
commercial wor'space.
Thus managed business centers have emerged as an innovative solution to these wor'space
re*uirements. The 2ub at +ne Indiabulls entre at Eower "arel is one such intelligently
designed business centre in 5umbai that offers )1,777s*ft of fully e*uipped, serviced
wor'space not only suitable for large corporations but also for small businesses and lean team set
ups due to the option of small customi0ed spaces.
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The real advantage of The 2ub is not (ust that it is more cost effective but also it offers best
possible wor'ing environment by offering conveniences such as advanced security, pantry and
maintenance services including IT and utility bills for electricity, water L 2IA.
3hat%s more, those moving into The 2ub serviced offices en(oy the added benefit of cutting
edge IT and telecom infrastructure, reception and secretarial support, hi-tech meeting rooms and
video conferencing suites as well as business lounge, food courts and state of the art fitness
centre.
Cot to forget among various factors that can affect a business and its success and growth, is the
address or the location of the office especially those of newly established enterprises. The 2ub
within a world class contemporary business comple& located between Cariman "oint and =andra
Hurla omple& and in close pro&imity to =andra 3orli -ea Ein' is undeniably in the finest
commercial location in 5umbai%s upcoming central business district- Eower "arel.
?ndeniably, The 2ub is a new age business centre that provides a very attractive proposition to
businesses of all si0es to help their own business grow and prosper.
Inda)ull! C+R Intatve - Dru' Acce!! Pro'ram for cancer patent! n
partner!hp $th Novart!
As part of our deep commitment to social causes, Indiabulls has ta'en up this noble pro(ect
named Covartis +ncology Access! in partnership with Covartis Amanufacturer of drugs; L 5a&
foundation ACG+;. 3e as the financial partner are helping them assess actual income of patient
L family L based on assessed income@ recommend the drugs donation slab as per approved
guidelines L -+".
Novart! are the developers L ma'ers of Glivec AImatinib; - a medication for the treatment of
"hO chronic myeloid leu'emia A5E; in chronic phase, accelerated phase and blast crisis for
both pediatric and adult patients. This drug is also indicated for adult patients with ad(uvant,
unresectable andKor metastatic c-'it K cd-119 gastrointestinal stromal tumors AGI-T;. Tasigna
Anilotinib; a drug recently launched by Covartis is used as medication for the treatment of "hO
chronic myeloid leu'emia A5E; in chronic phase, accelerated phase and blast crisis for only
adult patients.
NOA pro'ram3
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The C+A program is a drug access program for to help patients who have been prescribed
Glivec and Tasigna but cannot afford to pay for the entire treatment cost. This program is run by
Novart! along with its partner Phy!can!- enrolls patient under this program after diagnosis,
The 0A? .oundaton- independent CG+ N Assist patient throughout the program in
completing formalities L procurement of medicines, Inda)ull! .nancal +ervce! -
independent body for financial evaluation of patient, collection L safe'eeping the submitted
documents with confidentiality and C4. outlet! N Independent pharmacist, dispenses drugs to
patients L manage drug inventory.
Inda)ull! .nancal +ervce!3 As a C+A partner we are performing tas' of the local credit
evaluation agency which wor's as an independent and unbiased body for the financial analysis
and assessment of the patient and family members% earning capacity to afford medical e&penses
on critical disease. The analysis bases on income levels assessment by way of financial
evaluation ,field verification, living standard, personal discussion with patientK care ta'er L
guidelines as per standard operating procedure A-+"; which is prepared by Covartis based on the
32+ guidelines for drug donation programs using =usiness for -ocial $esponsibility%s A=-$;
cost of living inde&, a well-established international guide often used as eligibility criteria for
determining access to drug assistance programs. =ased on the family composite Income a
suitable donation decision is given.
Contract)lty
Indiabulls has designated a dedicated Help-1ne Num)er3 =;; @=ABC>;= that will receive
patient calls during office hours A8#77 a.m. to 6.77 p.m.; so it may handle in-bound calls in
response only to *ueries regarding the submission of re*uirements for the C+A. For any medical
or clinical *ueries, Indiabulls Financial -ervices refer patients to their treating physician.
,u!ne!!e!
Inda)ull! 2roup is one of the country>s leading business houses with business interests in
"ower, Financial -ervices, $eal :state and Infrastructure . Indiabulls Group companies are listed
in Indian and overseas financial mar'ets. The Cet worth of the Group is $s 16,986 rore and the
total planned capital e&penditure of the Group by )71,-1. is $s ,1,777 rore.
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Inda)ull! Po$er is currently developing Thermal "ower "ro(ects with an aggregate capacity of
1.77 53. The first unit is e&pected to go on stream in 5ay )71). The net worth of Indiabulls
"ower is $s ,,819 rore. The company has a total capital e&penditure of $s )9,177 rore. The
company has been assigned >===> rating.
Inda)ull! .nancal +ervce! is one of India%s leading non-ban'ing finance companies
providing 2ome Eoans, ommercial Iehicle Eoans and -ecured -5: Eoans. The company has
a net worth of $s .,6<7 crore with an asset boo' of over $s 1<,177 rore. The company has
disbursed loans over $s .1,777 rore to over ,,77,777 customers till date. Amongst its financial
services and ban'ing peers, Indiabulls Financial -ervices ran's amongst the top few companies
both in terms of net worth and capital ade*uacy. Indiabulls Financial -ervices has been assigned
/AAO% rating and has presence in over 87 cities and towns with a total branch networ' of 1.7
branches.
Inda)ull! Real E!tate
is among India>s top $eal :state companies with development pro(ects spread across residential
comple&es, integrated townships, commercial office comple&es, hotels, malls, -pecial :conomic
Pones A-:Ps; and infrastructure development. Indiabulls $eal :state partnered with Farallon
apital 5anagement EE of ?-A to bring the first FDI into real estate in the country. The
company has a networth of $s 9,81, rore and has purchased prime land, mostly in the metros
and other Tier 1 cities worth $s .,777 rore in government auctions alone. Indiabulls $eal
:state is currently developing 19 million s*ft into premium *uality, high-end commercial,
residential and retail spaces. The company has been assigned >AO> rating.
Inda)ull! +ecurte! is one of India>s leading capital mar'ets companies providing securities
bro'ing and advisory services. Indiabulls -ecurities also provides depository services, e*uity
research services and I"+ distribution to its clients and offers commodities trading through a
separate company. These services are provided both through on-line and off-line distribution
channels. Indiabulls -ecurities is a pioneer of on-line securities trading in India. Indiabulls
-ecurities% in-house trading platform is one of the fastest and most efficient trading platforms in
the country. Indiabulls -ecurities has been assigned the highest rating =Q-1 by $I-IE.
Inda)ull! foundaton
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India has witnessed an economic transformation over the past two decades, translating into
higher incomes, better educational opportunities, improved infrastructure, a dynamic private
sector, and leadership in the global community. 3e have much to be proud of.
=ut we also recogni0e that we have a long way to go. +ver 977 million people live under R) a
day. Eearning levels in schools remain abysmally low, most of our rural population do not have
access to basic health care, regular electricity, clean water, and sanitation. India has some of the
world%s worst statistics on basic development indicators such as malnutrition, infant mortality,
and gender discrimination.
As a society, we are at the confluence of accelerated economic progress and e&treme deprivation,
all in the same country, at the same time.
A! corporate ct:en!# $e at Inda)ull! are con!cou! of the opportunte! and the
re!pon!)lty that th! confluence pre!ent!&
Investments to increase income levels of our poorest people will e&pand business opportunities
manifold. Investments to improve education, health and s'ills training will improve the
efficiency of the economy. "rotecting our environment will actually lower our costs of doing
business. "roviding our youth with gainful employment and a chance to improve their lives will
ensure societal and political stability- setting a strong foundation for economic sustainability. All
of these investments will help create an inclusive society, ensuring a sustainable return to our
shareholders.
The Indiabulls Group is 'een to help in building an inclusive and prosperous society and we are
beginning our efforts in this direction through Indiabulls Foundation.
+ne of the first initiatives of the Foundation is to support the development of rural districts. +ur
aim is to support development across multiple domains in a district based approach. -ome of the
areas where we want to help are in economic development and s'ills training, access to drin'ing
water, school education, public health, agriculture and support to the local government.
ommercial Iehicle Eoans
Indiabulls ommercial Iehicle Eoans offers commercial auto loans to a variety of business
owners. 3e are a preferred financer with first time buyers as well as fleet operators providing
commercial vehicle loans with simple documentation and *uic' results.
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The ommercial Iehicle Finance provided by us helps the small and medium operators to
ac*uire vehicles with minimum hassle and documentation. 3e provide customi0ed financing
options to suit your needs.
+ur strength lies in the *uic' completion of transactions, long association with transporters and
the intimate 'nowledge of the mar'et and its nuances.
+ur finance schemes are easy to understand with no hidden costs.
7e a!!ure you a quc%# tran!parent and ha!!le-free deal&
1. "roduct +ffering
Finance for new commercial vehicles
Finance for used vehicles
Tractor Eoans
). "roposed Finance
Tyre Funding
Accidental Funding
:ngine Funding
Ta'e over loans
Top up loan on e&isting loan with us
,. Features of Eoan +ffering
Eoan for up to 11 years old vehicles.
The best loan offering in the mar'et N up to 81M for used vehicles L 177M for new
commercial vehicle chassis
5a& tenure of upto .< months for used vehicles 67 months for new commercial vehicle
chassis
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5a& tenure of upto .< months for used vehicles 67 months for new commercial vehicle
chassis
ustomi0ed loan to suit your needs
Door -tep -ervices
:asy Documentation
Quic' L 2assle free services
Attractive $ate of Interest
Co intermediary or Direct 5ar'eting Agent for loan processing
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+enor (ce Pre!dent
Re'onal 0ana'er
,ranch 0ana'er
+enor +ale! 0ana'er
+upport +y!tem +ale! .uncton
R0D+R0
AR0
1ocal Complance
Offcer
,ac% Offce
E"ecutve
Dealer
Or'an:aton +tructure- ,oard of Drector!3
- ,) -
Indiabulls Securities
Trading Products
Ca!h Account Intraday Account 0ar'n Tradn'
Tradn' Product! of Inda)ull! +ecurte!
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Indiabulls -ecurities provide three products for trading. They are
ash Account
Intraday Account
5argin Trading A5antra;
Ca!h Account# It provides the client to buy . times of cash balance in his trading account.
Intraday Product3 It provides the client to buy < times of his cash balance in the trading
account.
0antra Account3 Also called as margin trading, is a special account to buy on leverage for a
longer duration
Inda)ull! .nancal +ervce! 1td
Indiabulls Financial -ervices Etd. was incorporated in the year )771.The Auditors of Indiabulls
Financial -ervices Etd. are Deloitte, 2as'ins L -ells. The main activity of this company is in
relation to securities and stoc' bro'erage. It was also responsible for setting up one of India%s
first trading platforms.
The subsidiaries of Indiabulls Financial -ervices Etd. include#
Indiabulls apital -ervices Etd.
Indiabulls ommodities "vt. Etd.
Indiabulls redit -ervices Etd.
Indiabulls Finance o. "vt. Etd
Indiabulls 2ousing Finance Etd.
Indiabulls Insurance Advisors "vt. Etd.
Indiabulls $esources Etd.
Indiabulls -ecurities Etd.
The ,an%er! of Inda)ull! .nancal +ervce! 1td& are a! follo$!3
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A=C-Amro =an'
Andhra =an'
=an' of 5aharashtra
=an' of $a(asthan Etd.
anara =an'
enturion =an' of "un(ab Etd.
itiban'
orporation =an'
Dena =an'
2DF =an' Etd
2-= Etd.
III =an' Etd.
ID=I Etd
Industrial =an' Etd.
ICG Iysya =an' Etd
Harnata'a =an'
"un(ab Cational =an'
-tate =an' +f India
-yndicate =an'
?nion =an' +f India
?TI =an' Etd.
Jes =an' Etd.
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CHAPTER-III
RE(IE7 O. 1ITERATURE
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DI(IDEND DECI+ION+- THEORITICA1 .RA0E 7ORE+
DI(IDEND PRACTICE+ AND 0ODE1+ A CONCEPTUA1 .RA0E 7ORE3
Dividend refers to that portion of a firm%s net earnings, which are paid out to the shareholders.
+ur focus here is on dividends paid to the ordinary shareholders because holders of preference
shares are entitled to a stipulated rate of dividend. 5oreover, the discussion is relevant to widely
held public limited companies, as the dividend issue does not pose a ma(or problem for closely
held private limited companies, since dividends are destroyed out of the profits, the alternative to
the payment of dividends is the retention of earning profits. The retained earning constitutes an
accessible important source and financing the investment re*uirements of firms. There is, thus a
type of inverse relationship between retained earnings and cash dividends# larger retentions,
lesser dividends smaller retentions, larger dividends. Thus, the alternative uses of the not
earnings-dividends and retained earnings are competitive and conflicting.
A ma(or decision of financial management is the dividend decision in the sense that the
firm has to choose between distributing the profits to the shareholders and plugging them bac'
into the business. The choice would obviously hinge on the effect of the decision on the
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ma&imi0ations of shareholders wealth. Given the ob(ective of financial management of
ma&imi0ing present values, the firm should be guided by the considerations as to which
alternative use is consistent with the goal of wealth ma&imi0ation. That is, the firm would be
well advised to use the net profits for paying dividends to the shareholders if that payment will
lead to the ma&imi0ation of wealth of the owners. If not, the firm should rather retain theme to
finance investment programmers. 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
valuation of a firm. According to one school of thought, dividends are irrelevant so that the
amount of dividends paid has no effect on the, valuation of a firm.
+n the other hand, certain theories consider the dividend decision as relevant to the value
of the firm measured in terms f the mar'et price of the shares.
The purpose of thus report is, therefore, to present a critical analysis of some important
theories representing these two schools of thought with a view to illustrating the relationship
between dividend policy and the valuation of a firm. The theories, which support the relevance
hypothesis, are e&amined in the report.
Overve$ of Dvdend Dec!on
Dvdend dec!on refers to the policy that the management formulates in regard to earnings for
distribution as dividends among shareholders.
Dvdend dec!on determines the division of earnings between payments to shareholders and
retained earnings
The Dvdend Dec!on, in corporate finance, is a decision made by the directors of a company
about the amount and timing of any cash payments made to the company>s stoc'holders. The
Dvdend Dec!on is an important part of the present day corporate world. The Dvdend
dec!on is an important one for the firm as it may influence its capital structure and stoc' price.
In addition, the Dvdend dec!on may determine the amount of ta&ation that stoc'holders pay.
.actor! nfluencn' Dvdend Dec!on!
There are certain issues that are ta'en into account by the directors while ma'ing the dvdend
dec!on!3
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Free ash Flow
-ignaling of Information
lients of Dividends
.ree Ca!h .lo$ Theory
The free cash flow theory is one of the prime factors of consideration when a dvdend dec!on
is ta'en. As per this theory the companies provide the shareholders with the money that is left
after investing in all the pro(ects that have a positive net present value.
+'naln' of Informaton
It has been observed that the increase of the worth of stoc's in the share mar'et is directly
proportional to the dividend information that is available in the mar'et about the company.
3henever a company announces that it would provide more dividends to its shareholders, the
price of the shares increases.
Clent! of Dvdend!
3hile ta'ing dvdend dec!on! the directors have to be aware of the needs of the various types
of shareholders as a particular type of distribution of shares may not be suitable for a certain
group of shareholders.
It has been seen that the companies have been ma'ing decent profits and also reduced their
e&penditure by providing dividends to only a particular group of shareholders. .or more
nformaton plea!e refer to the follo$n' ln%!3
.orm! of Dvdend
+crp Dvdend- An unusual type of dividend involving the distribution of promissory
notes that calls for some type of payment at a future date.
,ond Dvdend- A type of liability dividend paid in the dividend payer>s bonds.
Property Dvdend- A stoc'holder dividend paid in a form other than cash, scrip, or the
firm>s own stoc'.
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Ca!h Dvdend- A dividend paid in cash to a company>s shareholders , normally out of
the its current earnings or accumulated profits
De)enture Dvdend
Optonal Dvdend- Dividend which the shareholder can choose to ta'e as either cash or
stoc'.
+'nfcance of dvdend dec!on
The firm has to balance between the growth of the company and the distribution to the
shareholders
It has a critical influence on the value of the firm
It has to also to stri'e a balance between the long term financing decisionA company
distributing dividend in the absence of any investment opportunity; and the wealth
ma&imi0ation
The mar'et price gets affected if dividends paid are less.
$etained earnings helps the firm to concentrate on the growth, e&pansion and
moderni0ation of the firm
To sum up, it to a large e&tent affects the financial structure, flow of funds, corporate
li*uidity, stoc' prices, and growth of the company and investor>s satisfaction.
.actor! nfluencn' the dvdend dec!on
Ei*uidity of funds
-tability of earnings
Financing policy of the firm
Dividend policy of competitive firms
"ast dividend rates
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Debt obligation
Ability to borrow
Growth needs of the company
"rofit rates
Eegal re*uirements
"olicy of control
orporate ta&ation policy
Ta& position of shareholders
:ffect of trade policy
Attitude of the investor group
Re!dual dvdend polcy
is used by companies, which finance new pro(ects through e*uity that is internally generated. In
this policy, the dividend payments are made from the e*uity that remains after all the pro(ect
capital needs are met. This e*uity is also 'nown as residual e*uity. It is advisable that those
companies, which follow the polcy of re!dual dvdend, should maintain a balanced
debtKe*uity ratio. If a certain amount of money is left after all forms of business e&penses then
the corporate houses distribute that money among its shareholders as dividends.
The companies that follow a residual dividend policy pay dividends only if other satisfactory
opportunities and sources of investment of funds are not available. The main advantage of a
re!dual dvdend polcy is that it reduces to the issues of new stoc's and flotation costs. The
drawbac' of this policy mainly lies in the facts that such a policy does not have any specific
target clients. 5oreover, it involves the ris' of variable dividends. This policy helps to set a
target payout.
=efore opting for the polcy of re!dual dvdend, the earnings that need to be retained to bac'
up the capital budget have to be calculated. Then, the earnings that are left can be paid out in the
form of dividends to the shareholders. Thus, the issue of new e*uities gets considerably reduced
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and this in turn leads to reduction in signaling and flotation costs. The amount payable as
dividend fluctuates heavily if this policy is practiced. 3hen the total value of productive
investments is in e&cess of the total value of retained earnings and sustainable debt, the
companies feel the urge to e&ploit the opportunities thus created to postpone a few investment
schemes.
Calculaton of Re!dual dvdend polcy3
Eet>s suppose that a company named = has recently earned R1,777 and has a strict policy to
maintain a debtKe*uity ratio of 7.1 Aone part debt to every two parts of e*uity;. Cow, suppose this
company has a pro(ect with a capital re*uirement of R877. In order to maintain the debtKe*uity
ratio of 7.1, = would have to pay for one-third of this pro(ect by using debt AR,77; and two-
thirds AR677; by using e*uity. In other words, the company would have to borrow R,77 and use
R677 of its e*uity to maintain the 7.1 ratio, leaving a residual amount of R.77 AR1,777 - R677; for
dividends. +n the other hand, if the pro(ect had a capital re*uirement of R1,177, the debt
re*uirement would be R177 and the e*uity re*uirement would be R1,777, leaving 0ero AR1,777 -
R1,777; for dividends. If any pro(ect re*uired an e*uity portion that was greater than the
company>s available levels, the company would issue new stoc'
Ar'ument! a'an!t Dvdend!
First, some financial analysts feel that the consideration of a dividend policy is irrelevant because
investors have the ability to create BhomemadeB dividends. These analysts claim that this income
is achieved by individuals ad(usting their personal portfolios to reflect their own preferences. For
e&ample, investors loo'ing for a steady stream of income are more li'ely to invest in bonds Ain
which interest payments don>t change;, rather than a dividend-paying stoc' Ain which value can
fluctuate;. =ecause their interest payments won>t change, those who own bonds don>t care about
a particular company>s dvdend polcy.
The second argument claims that little to no dividend payout is more favorable for investors.
-upporters of this policy point out that ta&ation on a dividend are higher than on a capital gain.
The argument against dividends is based on the belief that a firm that reinvests funds Arather than
- .) -
paying them out as dividends; will increase the value of the firm as a whole and conse*uently
increase the mar'et value of the stoc'. According to the proponents of the no dvdend polcy, a
company>s alternatives to paying out e&cess cash as dividends are the following# underta'ing
more pro(ects, repurchasing the company>s own shares, ac*uiring new companies and profitable
assets, and reinvesting in financial assets
Ar'ument! for Dvdend!
In opposition to these two arguments is the idea that a high dvdend payout is important for
investors because dividends provide certainty about the company>s financial well-being@
dividends are also attractive for investors loo'ing to secure current income. In addition, there are
many e&amples of how the decrease and increase of a dividend distribution can affect the price
of a security. ompanies that have a long-standing history of stable dvdend payout! would be
negatively affected by lowering or omitting dividend distributions@ these companies would be
positively affected by increasing dividend payouts or ma'ing additional payouts of the same
dividends. Furthermore, companies without a dividend history are generally viewed favorably
when they declare new dividends.
The re!dual dvdend polcy is more suitable for the government concerns because they mainly
aim for creation of value and ma&imi0ation of wealth and therefore they have to ma'e use of
every value added investment opportunity that comes on their way. A little change in the basic
postulates of the policy usually occurs when it is applied to the government sector because it
ta'es into its purview the government>s li'ing for dividends rather than capital gains.
The dvdend d!count model is used for the purpose of e*uity valuation. There are different
types of dividend discount model and all these models are very useful. The usefulness of the
DD5 Adividend discount model; depends on the application of the same.
A sensitivity analysis of the dividend discount model is very necessary because the model itself
is highly sensitive towards the presumptions regarding the growth and discount rates.
The investor can be benefited by the sensitivity analysis because this particular analysis can
- ., -
provide an idea about how various presumptions can create different values. The dividend
discount model compels the investor to thin' about different situations regarding the mar'et
price of the stoc'.
The dividend discount model is used by huge number of professionals because the model is able
to illustrate the difference between reality and theories through different e&amples. =ut at the
same time it should also be remembered that there are some important factors li'e the realistic
transition phases and some others, which are missing from the DD5.
The DD5 needs various data to bring out the value of an e*uity. D"-A1;, which represents the
amount of e&pected dividend, is very important for DD5. The growth rate in dividend is also an
important factor in the use of dividend discount model. Another important data is >Hs>. >Hs>
represents the e&pected rate of return and this can be estimated through the following formula#
$is'-free rate O Amar'et ris' premium;S =eta
There are several types of dividend discount model. Following are the two most preferred types
of DD5#
+ta)le 0odel3 According to this model, value of stoc' is e*ual to D"-A1; K Hs - g. This
model is appropriate for the firms with long term steady growth. These types of firms
pretend to grow simultaneously with the long term nominal development rate of the
economy.
T$o-+ta'e 0odel3 This particular model tries to bring out the difference between the
theory and the reality. It simply pretends that the company would go through several
good and bad periods. According to this model, the company that is going through a
high-growth period is bound to face a decline in the growth rate. After that downfall the
company is e&pected to e&perience a stable growth phase.
IRRE1E(ANCE O. DI(IDED+3
0I11ER 0ODE13 0ODI21IANI AND
- .. -
The cru& of the argument supporting the irrelevance of dividends to Ialuation is that the
dividend policy of a firm is a part of its financing decision. As a part of the financing decision,
the dividend policy of the firm is a residual decision and dividends are passive residuals
Cru" of the Ar'ument3
The cru& of the 55 position on the irrelevance of dividend is the arbitrage argument.
The arbitrage process, involves a swathing and balancing operation. In other words, arbitrage
refers to entering simultaneously y into two transactions here are the acts of paying out dividends
and raising e&ternal funds either through the sale of new shares or raising additional loans-to
finance investment programmes. Assume that a firm has some investment opportunity.
Given its investment decision, the firm has two alternatives# Ai; it can passiceretain is earnings to
finance the investment programmed@ Aii; or distribute the earnings to he shareholders as dividend
and raise an e*ual amount e&ternally through the sale of new sharesKbonds for the purpose. If the
firm selects the second alternative, arbitrage process is involved, in that payment of dividends is
associated with raising funds through other means of financing, the effect of dividend payment
on
-hareholders% wealth will be e&actly offset by the effect of raising additional share capital.
3hen dividends are paid to the shareholders, the mar'et price of the shares will decrease.
3hat the investors as a result of increased dividends gain will be neutrali0ed completely vie the
reduction in the terminal value of the shares. The mar'et price before and after the payment of
dividend would be identical. The investors according to 5odigliani and 5iller, would, therefore,
be indifferent between dividend and retention of earnings. -ince the shareholders are indifferent,
the wealth would not be affect by current and future dividend decisions of the firm. It would
depend entirely upon the e&pected future earnings of the firm.
There would be no difference to the validity of the mm premise, if e&ternal funds were raised
in the form of debt instead of e*uity capital. This is because of their indifference between debt
and e*uity witty retest to leverage. The cost of capital is independent of leverage and the cost of
debt is the same as the real cost of e*uity.
- .1 -
Those investors are indifferent between dividend and retained earnings imply that the
dividend decision is irrelevant. The arbitrage process also implies that the total mar'et value plus
current dividends of two firms, which are ali'e in all respects e&cept DK" ratio, will be identical.
The individual shareholder can retain and invest his own earnings as we@@ as the firm would.
3ith dividends being irrelevant, a firm%s cost of capital would be independent of its DK" ratio.

Finally, the arbitrage process will ensure that-under conditions of uncertainty also the dividend
policy would be irrelevant. 3hen two firms are similar in respect of business ris', prospective
future earnings and investment policies, the mar'et price of their shares must be the same. This,
mm argues, is wealth to less wealth. Differences in current and future dividend policies cannot
affect the mar'et value of the two firms as the present value of prospective dividends plus
terminal value is the same.
A Crtque3
5odigliani and 5iller argue that the dividend decision of the firm is irrelevant in the sense
that the vale the firm is independent of it. The cru& of their argument is that the investors are
indifferent between dividend and retention of earnings. This is mainly because of the balancing
natures internal financing Aretained earnings; and e&ternal financing Araising of funds e&ternally;
conse*uent upon distribution earnings to finance investment program%s. 3hether the mm
hypotheses provides a satisfactory framewor' for the theoretical relationship between dividend
decision and valuation will depend, in the ultimate analysis on whether e&ternal and internal
financing really balance each other. This in turn, depends upon the critical assumptions
stipulated by them. Their conclusions, it may be noted, under the restrictive assumptions, a
logically consistent and intuitively appealing. =ut these assumptions are unrealistic and
untenable in practice As a result, the conclusion that dividend payment and other methods of
financing e&actly offset each other and, hence, the irrelevance of dividends is not a practical
proposition% it is merely of theoretical relevance.
The validity of the 55 Approach is open to *uestion on two outts#Ai;
Imperfection of capital mar'et, and Aii; $esolution of uncertainty
- .6 -
5ar'et Imperfection# 5odigliani and 5iller assume that capital mar'ets
Are perfect. This implies that there are no ta&es@ flotation costs do not e&ist and there is absence
of transaction costs. These assumptions ate untenable in actual situations.
A& Ta" Effect3
An assumption of the mm hypothesis is that there are no ta&es. It implies that retention of
earnings Ainternal financing; and payment of dividends Ae&ternal financing; are, from the
viewpoint of law treatment, on an e*ual footing the investors would find both forms of financing
e*ually desirable. The ta& liability of the investors, broadly spea'ing, is of two types# Ai; ta& on
dividend income, and Aii7 capital gains. 3hile the first type of ta& is payable by the investors
when the firm pays dividends, the capital gains ta& is related to retention of earnings. From an
operational viewpoint, capital gains ta& is Ai; lower thebe the ta& or dividend income and Aii; it
becomes payable only sheen shares are actually sold, than is, it is a differed till the actual sale of
the shares. The types of ta&es, 55 position would imply otherwise. The different ta& treatment
of div dined and capital gains means that with the retention of earnings the shareholders. For
e&ample, a firm pays dividends to the shareholders out of the retained earnings@ to finance its
investment program%s it issues rights shares. The shareholders would have to pay ta& on the
dividend income at rates appropriate to their income brac'et. -ubse*uently, they would purchase
the shares of the firm. learly, than ta& could have been avoided if, instead of paying dividend,
the earnings were retained if, however the investors re*uired funds, they could sell a part of their
investments, in which case they will pay ta& Acapital gains; at a lower rate. There is a definite
advantage to the investors +wing to the ta& differential in dividend and capital gains ta& and ,
therefore, they can be e&pected to prefer retention of earnings.
,& .lotaton co!t!3
Another assumption of a perfect capital mar'et underlying the 55
2ypothesis is dividend irrelevance is the absence of flotation costs. The term /flotation cost%
refers to the cost involved in raising capital from the mar'et for instance, underwriting
commission, bro'erage and other e&penses. The presence of flotation costs affects the balancing
nature of internal Aretained earnings; and e&ternal Adividend payments; financing. The 55
position, it may be recalled, agues that given the investment decision of the firm, e&ternal funds
- .9 -
would have to be raised, e*ual to the amount of dividend, through the sale of new share to
finance the investment programmed. The two methods of financing are not perfect substitutes
because of flotation costs. The introduction of such costs implies that the net proceed from the
sale of new shares would be less than the face valid of the shares, depending upon their si0e.< it
means tat to be able to ma'e use of e&ternal funds, e*uivalent to the dividend payments, the
firms would have to sell shares for an amount in e&cess of retained earnings. In other words,
e&ternal financing through sale of shares would be costlier than internal financing via retained
earnings. The smaller the si0e of the issue, the greater is the percentage flotation cost. 8 To
illustrate suppose the cost of flotation is 17per cent and the retained earnings are $s.877, In case
dividends are paid, the firm will have to sell shares worth $s.177K- to raise funds are paid, the
firm will have to sell shares worth $s.1777K- to raise funds e*uivalent or the retained earnings.
That e&ternal financing is costlier is another way of saying that firms would prefer to retain
earnings rather tab pay dividends and then raise funds e&ternally.
C& tran!acton and nconvenence Co!t! 3
Jet another assumption, which is open to *uestion, is that there are no transaction costs
in the capital mar'et. Transaction costs refer to costs associated with the sale of securities by the
shareholder-investors. The no-transaction costs postulate implies that if dividends are not paid
Aor earnings are retained;, the investors desirous of current income to meet consumption needs
can sell a part of their holdings without incurring any cost, li'e bro'erage and so on. This is
obviously an unrealistic assumption. -ince the sale of securities involves cost, to get current
inome e*uivalent to the dividend, if paid, the investors would have to sell securities in e&cess of
the income that they will receive. Apat from the transaction cost, the sale of securities, as an
alternative to current income, is inconvenient to the investors. 5oreover, uncertainty is associate
with the sale of securities. For all these reasons an investor cannot be e&pected, as 55 assume,
to be indifferent between dividend and retained earnings. The investors interested in current
income would certainly prefer dividend payment to plugging bac' of profits by the firm.
- .< -
D& In!ttutonal Re!trcton! 3
The dividend alternative is also supported by legal restrictions as to the type of
ordinary shares in which certain investors can invest for instance, the Eife Insurance orporation
of India is permitted in terms of clauses IAa; to IAg; of section )9-A of the Insurance Act, 18,<, to
invest in only such e*uity shares on which a dividend of not less than . per cent including bonus
has been paid for 1 years out of 9 years immediately preceding. To be eligible for institutional
investment, the companies should pay dividends. These legal impediments therefore, favor
dividends to retention of earning. A variation of the legal re*uirement to pay dividends is to be
found in the case of the ?nit Trust of India A?TI;. The ?TI is re*uired in terms of the
stipulations governing its operation, to distribute at least 87 percent of its net income to unit
holder. It cannot invest more than 1 per cent of its inventible fund under the unit schemes 186.
and
1891, in the shares of new industrial underta'ings. The point is that the eligible
securities for investment by the ?TI are assumed to be those that are on the dividend payment
list.
To conclude the discussion of mar'et imperfections there are four factors, which
dilute the difference of investors between dividends and retained earnings. +f these, flotation
costs seem to favor retention of earnings on the other hand, the desire for current income and, the
related transaction and inconvenience costs, legal restrictions as applicable to the eligible
securities for institutional investment and ta& e&ample of dividend income imply a preference of
payment of dividends. In sum, therefore, mar'et importer implies that investors would li'e the
company to retain earnings to finance investment programs. The dividend policy is not
irrelevant.
Re!oluton of Uncertanty3
A part from the mar'et imperfection, the validity of the mm hypothesis, insofar as it
argues that dividends are irrelevant, is *uestionable under conditions of uncertainty. 55 hold, it
would be recalled, the at dividend policy is as irrelevant under conditions of uncertainty as, it is
when prefect certainty is assumed. The 55 hypothesis, however, not tenable as investors cannot
- .8 -
between dividend and retained earnings under conditions of uncertainty. This can be illustrated
with reference to four aspects# Ai; near vs. distant dividend@ Aii; informational content of
dividends@ Ain; preference for current income@ and Aiv; sale of stoc' at uncertain priceKunder
pricing.
Near (! D!tant Dvdend3
+ne aspect of the uncertainty situation is the payment of dividend now or at a later data. If the
earnings are used to pay dividends to the investors, they get immediate or neat dividend if
however, the net earnings are retained, and the shareholders would be entitled to receive a return
after some time in the form of an increase in the price of shares
Aapital gains; or bonus shares and so on. The dividends may, then, be referred to as /distant-or-
future% dividends. The cru& of the problem is# are investors indifferent between immediate and
future dividends. According to Gordon! investors are not indifferent@ rather, they would prefer
near dividend to distant dividend the when it would be payment of the investors cannot be
precisely forecast. The longer the distance in future dividend payment, the higher is the
uncertainty to the shareholders
The uncertainty increases the ris' of the investors. The payment of immediate dividend resolves
uncertainty. The argument that near dividend is preferred over the distant dividends involves the
bird-in-hand% argument. This argument is developed in some detail in the later part of this
report, since current dividends are less ris'y than futureKdistant dividends, shareholders would
favors dividends to retained earnings.
& Informatonal Content of Dvdend!3
Another aspect of uncertainty, very closely related to the first Ai.e.
$esolution of uncertainty or the Nbird-in-hand% argument; is the informational content of
dividend argument. According to the latter argument, as the name suggests, the dividend
contains some information vital to the investors. The payment of dividend conveys to the
shareholders information relating to profitability of the firm.
The international content argument finds support in some empirical evidence. IT id contended
that changes in dividends convey more significant information than what earnings
announcements do. Further, the mar'et reacts to dividend changes-prices rise in response to a
significant increase in dividends and fall when there is a significant decrease or omission.
- 17 -
& Preference for Current Income3
The Third aspect of the uncertainty *uestion to dividends is based on the desire of investors for
current income to meet c consumption re*uirements. The 55 hypothesis of irrelevance of
dividends implies that in case dividends are not paid, investors who prefer current income can
sell a part of their holdings in the firm for the purpose. =ut, under uncertainty conditions, the two
alternatives are not on the same footing because Ai; selling a small fraction of holdings
periodically is inconvenient. that selling shares to obtain income, as an alterative to dividend,
involves uncertain price and inconvenience, implies that investors are li'ely to prefer current
dividend. The 55 proposition would, therefore, not be valid because investors are not
indifferent.
v& Under prcn'

finally the 55 hypothesis would also not be valid when conditions are assumed to be
uncertain because of the prices at which the firms can sell shares to raise funds to finance
investment program%s conse*uent upon the distribution of earnings to the shareholders The
irrelevance argument would valid provided the firm is able to sell shares to replace dividends at
the current price. -ince the shares would have to be offered to bedew investors, the firm can sell
the shares only at a price below the prevailing price.
RE1E(ANCE O. DI(IDEND+

In sharp contrast to the 55 position, there are some theories that consider dividend
decisions to be an active variable in determining the value of a firm. The dividend decision is,
therefore, relevant. 3e critically e&amine below two theories representing this notion#
i; 3AET:$%- 5+D:E
ii; G+$D+C%- 5+D:E
7A1TER*+ 0ODE1
"roposition 3alter%s models support the doctrine that dividends are relevant. The investment
policy of a firm cannot be separated from its dividends policy and both are, according to 3alter,
interlin'ed. The choice of an appropriate dividend policy affects the value of an enterprise.
- 11 -
The 'ey argument in support of the relevance proposition of 3alter%s model is the relationship
between the return on a firm%s investment or its internal rate of return Ar; and its cost of capital or
the re*uired rate of return AHe; The firm would have an optimum dividend policy, which will be
determined y the relationship of r and '. In other words, if the return on investments e&ceeds the
cost of capital, the firm should refrain the earnings, whereas it should distribute the earnings to
the shareholders in case the re*uired rate of return e&ceeds the e&pected retune on the firm%s
investments. The rationale is that if r T 'e, the firm is able to earn more than what the
shareholders could by reinvesting, if the earnings are paid to them. The implication of r U 'e is
that shareholders can earn a higher return by investing elsewhere.
3alter%s model, thus, relates the distribution of dividends Aretention of earning; to available
investment opportunities. If a firm has ade*uate profitable investment opportunities. It will be
able to earn more than what the investors e&pect so that rT'e. -uch firms may be called growth
firms. For growth firms, the optimum dividend policy would be given by a DK" ratio of 0ero.
That is to say the firm should plough bac' the entire earnings within the firm. The mar'et value
of the shares will be ma&imi0ed as a result. In contrast, if a firm does not have profitable
investment opportunities Awhen r U 'e,; the shareholders will be better off if earnings are paid
out to them so as to enable them to earn a higher return by using the funds elsewhere. In such a
case, the mar'et price of shares will be ma&imi0ed by the distribution of the entire earnings as
dividends. A DV" ratio of 177 would give an optimum dividends policy.
Finally, when rW ' Anormal firms;, it is a matter of indifference whether earnings are retained
or distributed. This is so because for all DK" ratios Aranging between 0ero and 177; the mar'et
price of shares will remain constant. For such firms, there is no optimum dividend policy ADK"
rario.;
A!!umpton!3
The critical assumptions of 3alter%s 5odel are as follow#
1. All financing is done through retained earnings# e&ternal sources of funds li'e
debt or new e*uity capital are not used.
). 3ith additional investments underta'en, the firm%s business
- 1) -
ris' does not change. It implies that r and ' are constant.
, There is no change in the 'ey variable, namely, beginning earnings per share, :.
And dividends per share, D. The values of D and : may be changed in the model to
determine results, but any given value of : and D are assumed to remain constant in
deternububg results, but any given value of : and D are assumed to remain constant
in determining a given value.
.. The firm has perpetual Aor very long; life.
1mtaton!3
The 3alter%s model, one of the earliest theoretical models, e&plains the relationship between
dividend policy and value of the firm under certain simplified assumptions. -ome of the
assumptions do not stand critical evaluation. IC the first place, the 3alter%s model assumes that
e&clusively retained earnings finance the firm%s investment@ no e&ternal financing is used. The
model would be only applicable to all- e*uity firms. -econdly, the model assumes that r is
constant. This is not a realistic assumption because when the firm ma'es increased investments, r
also changes. Finally as regards the assumption of constant ris' comple&ion of firm has a direct
bearing on it. =y assuming a constant He. 3alter%s model ignores the effect of ris' on the value
of the firm.
2PRDON*+ 0ODE1
Another theory, which contends that dividends are relevant, is Gordon%s model. This model,
which opines that dividend policy of a firm affects its value, is based on the following
assumptions#
A!!umpton!3
1. The firm is an all-e*uity firm. Co e&ternal financing is used and e&clusively retained
earnings finance investment program%s.
). r and 'e are constant.
,. The firm has perpetual life.
.. The retention ratio, once decided upon, is constant. Thus, the growth rate, AgWbr; is also
constant.
- 1, -
1. HcTbr.
Ar'ument!3
It can be seed from the assumption of Gordon%s model that they are similar to those of 3alter%s
model. As a result, Gordon%s model, li'e 3alter%s contends that dividend policy of the firm is
relevant and that investors put a positive premium on current incomesKdividends. The cru& of
Gordon%s arguments is a two-fold assumption# Ai; investors are ris' averse, and Aii; they put a
premium on a certain return and discountK penali0e uncertain returns.
As investors are rational, they want to avoid ris'. The term ris' refers to the possibility of not
getting a return on investment. The payment of current dividends ipso facto completely removes
any chance of ris'. If, however, the firm retains the earnings Ai.e. current dividends is uncertain,
both with respect to the amount as well as the timing. The rational investors can reasonably be
e&pected to prefer current dividend. In other words, they would discount future dividends that
are they would placeless importance on it as compared to current dividend. The investors
evaluate the retained earnings as a ris'y promise. In case the earnings are retained, therefore the
mar'et price of the shares would be adversely affected.
The above argument underlying Gordon%s model of dividend relevance is also described as a
bird-in-the-hand argument. That a bird in hand is better than two in the bush is based to the
logic that what is available at present is preferable to what may be available in the future. =asing
his model on this argument, Gordon argues that the futures are uncertain and the more distant the
future is, the more uncertain in it is li'ely to be. If, therefore, current dividends are withheld to
retain profits, whether the investors would at all receive them later is uncertain. Investors would
naturally li'e to avoid uncertainty. In fact, they would be inclined to pay a higher price for shares
on which current dividends are paid. onversely, they would discount the value of shares of a
firm, which "ostpones dividends. The discount rate would vary, as shown if figure with the
retention rate or level of retained earnings. The term retention ratio means the percentage of
earnings retained. It is the invers of DK" ratio. The omission of dividends, or payment of low
dividends, would lower the value of the shares.
- 1. -
Dvdend Captal:aton 0odel# According to Gordon, the mar'et valued of a share is
e*ual to the present value of future streams of dividends. A simplified version of Gordon%s
model can be symbolically 1< e&pressed as
: A 1-b ;
Hc-br
3here p W price of a share
:W :arnings per share
bW $etention ratio or percentage of earnings retained.

1-bWDK" ratio, i.e. percentage of earnings distributes as dividends
HcW apitali0ation rateKcost of capital
=rWgWGrowth rateW rate of return on investment of an all-e*uity firm
- 11 -
DI(IDEND PO1ICIE+3
In the light of the conflicting and contradictory viewpoints as also the available empirical
evidence, there appears to be a case for the proposition that dividend decisions are relevant in the
sense that investors prefer them over retained earnings and they have a bearing on the firm%s
ob(ective of ma&imi0ing the shareholder%s wealth.
.ACTOR+ DETER0INI2 THE DI(IDEND PO1ICIE+3
The factors determining the dividend policy of a firm may, for purpose of e&position, be
classified into# Aa; Dividend payout ADK"; ratio, Ab; -tability of dividends, Ac; Eegal, contractual
and internal constraints and restrictions, Ad; +wner%s considerations, Ae; apital mar'et
considerations, and Af; Inflation.
A& Dvdend Payout 5DDP6 Rato 3
A ma(or aspect of the dividend policy of a firm is its dividend payout ADK"; ratio, that
is, the percentage share of the net earnings distributed to the shareholders as dividends. The
relevance of the DK" ratio, as a determinant of the dividend policy of a firm, has been
e&amined at some length in the preceding chapter. It is briefly recapitulated here.
Dividend policy involves the decision to pay out earnings or to retain them for reinvestment in
the firm. The retained earnings constitute a source of financing. The payment of dividends result
in the reduction of cash adds, therefore, in a depletion of total assets. In order to maintain the
asset level, as well as finance investment opportunities, the firm must obtain funds from the issue
of additional e*uity or debt. If the firm is unable to raise e&ternal funds, its growth would be
affected. Thus, dividend imply outflow of cash and lower future growth. In other words, the
dividend policy of the firm affects both the shareholders% wealth and the long-term growth of the
firm. The optimum dividend policy should stri'e the balance between current dividends and
future growth which ma&imi0es the price of the firm%s shares. The DK" ratio of a firm should be
determined with reference to two basic ob(ectives-ma&imi0ing the wealth of the firm%s owners
and providing sufficient funds to finance growth. These ob(ectives are not mutually e&clusive,
but interrelate.
- 16 -
Given the ob(ective of wealth ma&imi0ation, the firm%s dividend policy ADK" ratio ; should be
one, which can ma&imi0e the wealth of its owners in the /long run%. In theory, it can be e&pected
that the shareholders ta'e into account the long-run effects of DK" ratio that is, if the firm is
paying low dividends and having high retentions, they recogni0e the element of growth in the
level of future earnings of the firm. 2owever, in practice, they have a clear-cut preference for
dividends because of uncertainty and imperfect capital mar'ets. The payment of dividends can
therefore, be e&pected to affect the price of shares# a low DK" ratio may cause a decline in share
prices, while a high ratio may lead to rise in the mar'et price of the shares.
5a'ing a sufficient provision for financing growth can be considered a secondary
ob(ective of dividend policy. 3ithout ade*uate funds to implement acceptable pro(ects, the
ob(ective of wealth ma&imi0ation cannot be achieved. The firm must forecast its future needs
for funds, and ta'ing into account the e&ternal availability of funds and certain mar'et
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 re*uired outlay after which any remaining funds can be reinvested in the
firm.
,& +ta)lty of Dvdend!3
The second ma(or aspect of the dividend policy of a firm is the stability of dividends.
The investors favors stable dividend as much as they favors the payment of dividends ADK"
ratio;.
The term dividend stability refers to the consistency or lac' 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 ta'e any of the following three forms# Ai;
constant dividend per share, Aii; constantKstable K" ratio, and Aiii; constant dividend per share
plus e&tra dividend.
& Con!tant dvdend per +hare3
According to this form of stable dividend policy, a company follows a policy of certain
fi&ed amount per share as dividend. For instance, on a share of face value of $s 17, firm may pay
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a fi&ed amount of, say $s )-17 as dividend. This amount would be paid year after year,
irrespective of ht level of earnings. oIn 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 the shareholder even when it suffers losses. A stable dividend policy in terms of
fi&ed amount of dividend per share does not, however, mean that the amount of dividend is fi&ed
for all times to come. The dividends per share are increased over the years when the earnings of
the firm increase and it is
:&pected that the new level of earnings can be maintained. +f course, if the increase to be
temporary, the annual dividend remains at the e&isting level.
It can, thus, be seen that while the earnings may fluctuate from year to year, the dividend
per share is constant N To be able to pursue such a policy, a firm whose earnings are not stable
would have to ma'e provisions in years when earnings are higher for payment of dividends in
lean years. -uch firms usually create a reserve for dividends e*uali0ation. The balance standing
in this fund is normally invested in such assets as can be readily converted into cash.
& Con!tant Payout Rato3
3ith constantKtarget payout ratio, a firm pays a constant percentage of net earnings as
dividend to the shareholders. In other words, a stable dividend payout ratio implies that the
percentage of earnings paid out each year is fi&ed. Accordingly, dividends would fluctuate
proportionately with earnings and are li'ely to be highly volatile in the wa'e of wide fluctuations
in the earnings of the company. As a result, when the earnings of a firm decline substantially or
there is a loss in a given period, the dividends, according to the target payout ratio, would be low
or nil. To illustrate, if affirm has a policy of 17 percent target payout ratios, its dividends will
range between $s 1and 0ero per share on the assumption that the earnings per share are $s 17
and 0ero respectively. The relationship between the earnings per share A:"-; and dividend per
share AD"-; under the policy of constant payout ratio.
& +ta)le Rupee Dvdend plu! E"tra Dvdend3
?nder this policy, a firm usually pays a fi&ed dividend to the shareholders and in years of
mar'ed prosperity@ additional or e&tra dividend is paid over and above the regular dividend. As
soon a normal conditions return, the firm cuts e&tra dividend and pays the normal dividend per
share. The policy of paying sporadic dividends may not find favor with them. The alternative to
- 1< -
the combination of a small regular dividend and an e&tra dividend is suitable for companies
whose earnings fluctuate widely. 3ith this method, a firm can regularly pay a fi&ed, though
small, amount of dividend so that there is no ris' of being able to pay dividend to the
shareholders. At the same time, the investors can participate in the prosperity of the firm. =y
calling the amount by which the dividends e&ceed the normal payments as e&tra. The firm, in
effect, cautions the investors-both e&istent as well as prospective- they should not consider it as a
permanent increase in dividends. It may, therefore, be noted that from the investor%s viewpoint,
the e&tra dividend is of a sporadic nature. 3hat the investors e&pect is that they should get an
assured fi&ed amount as dividends, which should gradually and consistently increase over the
years. The most commendable from of stable dividend policy is the constant dividend per share
policy. There are several reasons why investors why investors would prefer a stable dividend
policy. There ate several reasons why investors would prefer a stable dividend policy and pay a
higher price for a firm%s shares which observe stability in dividend payments.
De!re for Current Income3
A factor favoring a stable policy is the desire for current income by some investors. Investors
such as retired persons and windows, for e&ample, view dividends as a source of funds to meet
their current living e&penses. -uch e&penses are fairly constant from period to period. Therefore,
a fall in dividend will necessitate selling shares to obtain funds to meet current e&penses and,
conversed, reinvestment of some of the dividend income if dividends rise significantly. For one
thing, many of the income-conscious investors may not li'e to /dip into their principal% for
current consumption. 5oreover, either of the alternatives involves, inconvenience apart,
transaction costs in terms of bro'erage, and other e&penses. These costs are avoided if the
dividend stream is stable and predictable. +bviously, such a group of investors may ve willing to
pay a higher share price to avoid the inconvenience of erratic dividend. "ayments, which disrupt
their budgeting. They would place positive utility on stable dividends.
Informaton content
Another reason for pursing a stable dividend policy is that investor%s are thought to use
dividends and changes in dividends as a source of information about the firm%s profitability. If
investors 'now that the firm will change dividends only if the management foresees a permanent
earnings change, then the level of dividends informs investors about the compacts e&pected
earnings. Accordingly, the mar'et views the changes in the dividends of such a company as of a
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semi-permanent nature. A cut in dividend implies poor earnings e&pectation@ no change, implies
earnings stability@ and a dividend increase, signifies the managements optimism about earnings.
+n the other hand, a company that pursues an erratic dividend payout policy does not provide
any such information, thereby increasing the ris' associated with the shares. -tability of
dividends, where such dividends are based upon long-run earning power of the company, is,
therefore, a means of reducing share-ris'iness and conse*uently increasing share value to
investors.
Requrement! of In!ttutonal Inve!tor!3
A third factor encouraging stable dividend policy is the $e*uirement of institutional investors
li'e Eife Insurance orporation of India and General Insurance orporation of India Ainsurance
companies; and ?nit Trust of India Amutual funds; and so on, to invest in companies which have
a record of continuous and stable dividend. These financial institutions owing to the large si0e of
their inventible funds, reXresent a significant force in the financial mar'ets and their demand for
the company%s securities can have an financial mar'ets and their demand for the company%s
securities cha have an enhancing
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CHAPTER-I(
DATA ANA1/+I+ AND NTERPRETATION
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CO0PARI+ION O. DI(IDEND PER +HARE O. IN.O+/+
.INANCIA1 +ER(ICE+ 1TD
DIIID:CD DAT: $:+$D DAT: DIIID:CD M
17-Oct-13 18-Oct-13 400
30-May-13 1-Jun-13 540
18-Oct-12 19-Oct-12 300
24-May-12 26-May-12 200
24-May-12 26-May-12 440
INTERPRETATION3
The dividend per share of the Infosys for five years in these five years in )71) totally
reduced )77L,77
- 6) -

CO0PARI+ION O. EARNIN2 PER +HARE O. THE IN.O+/+ .OR
THE 1A+T .I(E /EAR+
/EAR EARNIN2 PER +HARE
Mar-13 158.82
Mar-12 147.56
Mar-11 112.25
Mar-10 100.26
Mar-09 101.73
INTERPRETATION3
The above graph represents 1 years :"- for the in )71, :"- reveals 11< .<,
consistently grown up
- 6, -
CO0PARI+ION O. DP+ O. THE IN.O+/+
INTERPRETATION3
The above graph represents 1 years :"- for the in )71, D"- reveals 11< .<,
consistently grown up
- 6. -
J:A$ D"-
5ar-1, .)
5ar-1) .9
5ar-11 67
5ar-17 )1
5ar-78 ),.1
.OR THE /EAR ENDIN2 0ARCH ;=C@# 7IPRO HA+
DEC1ARED AN EFUIT/ DI(IDEND O. @<=&==G
Announcement Date Effective Date
Dividend
Type Dividend (%)
13-01-14 22-01-14 Interim 150
1-04-13 2!-0"-13 #ina$ 250
15-01-13 23-01-13 Interim 100
25-04-12 2%-0"-12 #ina$ 200
2!-04-11 2-0"-11 #ina$ 200
1!-01-11 2!-01-11 Interim 100
23-04-10 15-0"-10 #ina$ 300
22-04-0 2-0"-0 #ina$ 200


INTERPRETATION3
The e*uity dividend of 3ipro has declare accordingly interim Lfinal since )778 the
company ,77 is the highest M for investor in )717.
- 61 -
DR& REDD/+ 1A,ORATORIE+ 1TD
Dividend Date $ecord Date Dividend M
1)-Dul-1, 16-Dul-1, ,77
)<-Dun-1) ,-Dul-1) )91
<-Cov-71 )6-Cov-71 177
9--ep-77 ))--ep-77 1
INTERPRETATION3
The e*uity dividend of 3ipro has declare accordingly interim Lfinal since )778 the
company ,77 is the highest M for investor
- 66 -
CHAPTER-(
.INDIN2+
+U22E+TION
CONC1U+ION+
- 69 -
.INDIN2+
Following are the findings from the dividend decision analysis of the -elected , organi0ations
:arning per share has improved from )711 to )71,
Dr $eddys Dividend rate is $ecorded Dividend ,77 M ,
- 6< -
+U22E+TION+
The following -uggestions are being provided to Investor.
1; Investors always prefer the dividend payment for apital appreciation.
2ence some amount of Dividend must be paid regularly. ?nless the "ayment will reduce
the net worth of the industry.
); The industry should improve the dividend per share.
,; The industry should follow stable dividend policy.
.; The industry should maintain high per share.
1; The industry must improve and maintain high ratio.
6; 3hen the industry gets the price earning highly, that industry will grow
9; In The industry Cet worth is very good. The industry has to maintain this type of Cet worth.

- 68 -
CONC1U+ION+
Different types of dividend are paid by the companies operating all over the
world. They may be in different forms and basis. The main reason of the
dividend payments to provide the benefit to the shareholders of the company
and to ma'e them they are the part of the company. In Hydera)ad# there ! a
practce of provdn' ether !toc% dvdend or ca!h dvdend )y the
compane! to ther !hareholder!& Re'ular payn' dvdend& ,en' an HAI
cla!! fnancal n!ttuton# the ma9orty compane! under the development
)an%!# fnancal n!ttuton! and n!urance compane! have not )een a)le
to pay dvdend to t! !hareholder!& +mlarly# from the C( calculaton
al!o $e !a$ that the compane! payn' the ca!h dvdend are not payn'
con!!tently& Under the emprcal te!tn' t ha! )een proved that e"-day
!toc% prce tend to fall )y !'nfcantly le!! than the dvdend& They
nterpret th! re!ult a! con!!tent $th a clentele effect $here nve!tor! n
h'h ta" )rac%et! !ho$ a preference for captal 'an! over dvdend! and
vce ver!a& Another !tudy e"amnn' the e"-dvdend day
- 97 -
,I,1O2RAPH/

1. handra, "rasanna# /Financial 5anagement-Theory and "ractice%, 1
th
:dition, )771,
Tata 5c Graw 2ill "ublisbing 2ouse.
). ooper Donald :, "amela - -chindler, <
th
:dition, )77,, 5c Graw 2ill "ublishing
2ouse.
,. Hhan 5 J, " (ain# /financial 5anagement-Te&t and problems@ ,
rd
:dition, 1888, Tata 5c
Graw 2ill "ublishing
2ouse.
.. "andy I 5# /Financial 5anagement@ <
th
:dition, )77,, Ii'as "ublishing 2ouse
"rivate Eimited.
1. Eawrence D. Gilma# "rinciple of managerial Finance, Addisa werly.
www.googlefinance.com
www.'ota'securities.com
www.finaancialreformsindia.com
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