Thesis proposal on

DIVIDEND POLICY AND ITS IMPACT ON

SHARE PRICE
OF
LISTED HYDROPOWER COMPANIES IN NEPAL
(With reference to CHCL, BPCL and AHPC)

Submitted By
Niroj basukala
Roll No.: 175
Reg. No: 7-2-408-80-2005

A thesis proposal submitted to

Office of the dean

Faculty of management
Tribhuvan University

In partial fulfillment of requirements for the course on

Research Methodology

For the degree of

Master of Business Administration
Kathmandu

August, 2014

ABBREVIATIONS

HDI

Human Development Index

GDP

Gross Domestic Product

FY

Fiscal Year

NEPSE

Nepal Stock Exchange Limited.

B.S.

Bikram Sambat

Co.

Company

KW

Kilo Watt

MW

Mega Watt

No.

Number

UNDP

United Nation Development Project

NEC

Nepal Electricity Corporation

CHCL

Chilime Hydro Power Company Limited

BPCL

Butwal Power Company Limited

AHCP

Arun Valley Hydropower Development Company Limited

TABLE OF CONTENTS

List of Abbreviations
CHAPTER I: INTRODUCTION

Page No.

1.1 Background of the study

1.2 Problem of the statement

1.3 Objective of the study

1.4 Significances of the study

1.5 Limitations of the study

CHAPTER II: METHODOLOGY

2.1 Introduction

2.2 Research Design

2.3 Population and Sample of Data

2.4 Data Collection Procedures

2.5 Data Analysis Tools

10

Bibliography

CHAPTER I
INTRODUCTION
1.1 Background of the study
Nepal is landlocked country located at south Asia, which lies between two large countries China
and India. It has an area of 147,181 square kilometer and population is approximately 27 million
as per the census report 2011. Nepal is worlds 93 rd largest country land mass. It is located in
Himalayas and border to the north by the Peoples Republic of China and to the south, east and
west by Republic of India.
Nepal is one of the poorest countries in the world. According to UNDPs Human Development
Index (HDI) 2013, 44% of the population is still under the poverty line. Nepal GNP is very low.
Agriculture is the main sector for employment and contributes 37% of GDP. The economic
growth rate is only 3.6% in FY 2069/70 as per central bureau of statistic Nepal. Political
instability, frequent strike, road blocks, unfavorable weather, shortage in supply of petroleum
products and block outs constrained the economic growth of the country. The performance of
both agriculture and non-agriculture sector growth remained below expectation.
Economic development is an essential for integrated development of any nation. Nepal's huge
potential in hydropower is still untapped. Though Nepal has not yet been able to tap even one
percent of its potential electricity capacity and 60 percent of Nepal's population is still deprived
of electricity, it is fascinating to note that Nepal's start in 1911 in the hydropower generation
almost dates back to a century. As a cheap, renewable source of energy with negligible
environmental impacts, hydropower has an important role to play in Nepal's future energy
supply. Accordingly, micro-hydro system is becoming increasingly popular as an energy source
in rural Nepal. Use of environmentally friendly technologies and implementation of sound legal
and institutional issues are critical to improve the reach of the population to hydropower. To
make the Plan targets in the power sector a reality, directing more resources to the power projects
focusing on rural population remains the pre-requisite. The major strategies of the power sector
have been appropriately identified as promoting private sector participation in power generation
and distribution, integrating rural electrification with rural economic development programs, and
strengthening power infrastructure. The immense role of the power sector in contributing to the
generation of broad-based, sustainable and high level of economic growth as well as improving
the relative competitiveness of the economy both on a regional and global basis makes it
imperative that the programs and activities on power sector development as visualized in the
plans and policies be given the utmost urgency, priority and focus. Hydropower projects have a

number of benefits. The prominent among them are that these projects have low energy
production cost considering the long effective lifetime of the plants along with the low operation
and maintenance cost, greater efficiency than of all the major types of plants using nonrenewable and renewable energy resources, almost complete absence of greenhouse gas
emission, possibility of multi-purpose water use and water management such as irrigation and
regulation of river flows both during flood season and low flow periods, independence of
fluctuating fuel prices and supply disruptions, efficient output regulation, rapid response capacity
to variable energy demand, reliable, proven mature technology with known positive and negative
influences, a renewable energy source, save consumption of fossil fuel, or firewood which
constitute classic energy sources that contribute to the greenhouse effects or atmospheric
pollution as the hydropower plants make use of artificial fall of the river, the hydraulic
conveyance circuit that can be integrated in other components for multiple purposes such as
irrigation, water supply systems, fisheries, water-tourism, etc. The most important benefit is that
hydropower plants produce electricity without consuming power.
DEVELOPMENT OF HYDROPOWER
In the modern days, it was only in 1882 that the first hydropower plant was built in Wisconsin,
USA. This plant made use of a fast flowing river as its source. Some years later, dams were
constructed to create artificial water storage area at the most convenient locations. These dams
also controlled the water flow rate to the power station turbines. In Nepal, the first hydropower
plant was established at Pharping (500-KW) in 1911, 29 years after the world's first plant was
established, during Prime Minister Chandra Shamsher Rana's time to meet the energy
requirements of the members of the ruling class. Though, some 60 percent of Nepal's population
remains deprived of electricity, while the capital city continues to thirst for drinking water and
suffers from regular load-shedding even at the present. Nepal is rich in hydro-resources, with one
of the highest per capita hydropower potentials in the world. The estimated theoretical power
potential is approximately 83,000 MW. However, the economically feasible potential has been
evaluated at approximately 43,000 MW. After the establishment of the first hydropower plant
(500 KW) in 1911, the second hydropower plant (640 KW) was established at Sundarijal in
1936. Similarly the Morang Hydropower Company, established in 1939, built 677 KW Sikarbas
Hydroplant at Chisang Khola in 1942 though this Plant was destroyed by landslide in the 1960s.
The development of hydropower was institutionalized after the initiation of the development
planning process. The First Five-year Plan (1956-61) targeted to add 20 MW of hydropower.
However, the target was unmet. During the Second Three-year Plan (1962-65), some progress
was achieved. Till 1962, the Electricity Department of HMG was responsible for the generation,
transmission and distribution of electricity. In 1962, Nepal Electricity Corporation (NEC) was
established and was given the responsibility of transmission and distribution of the electricity.
The Electricity Department was responsible for the task of electricity generation. After a long
gap since the establishment of the Chisang Hydroplant, the hydropower generation capacity of
the country expanded with the construction of the Panauti Hydroplant (2400 KW) in 1965 and

the Trishuli Hydroplant (2100 KW) in 1967. A series of hydropower projects then followed. The
Eastern Electricity Corporation was established in 1974. In 1977, Small Hydropower
Development Board was established. Institutional restructuring took place again in 1985, when
the merging of the Electricity Department, Nepal Electricity Corporation and all the development
boards (except the Marshyangdi Hydropower Development Board) resulted in the creation of
Nepal Electricity Authority (NEA). Since this arrangement, the NEA has been responsible for the
generation, transmission and distribution of electricity.
Economic development is a challenging task in Nepal not just due to lack of resources but it is
due to lack of proper utilization of the available resources in efficient manner. This problem
needs to be researched and requires proper planning and strategy development. Every
development program needs capital however; capital could not be collected easily. Due to the
scarcity of capital, it becomes necessary to collect the fund scattered among different individuals
and groups. Capital collection and its mobilization is essential condition for the uplifting of the
nation.
Nepal stock exchange Ltd. is only and one stock exchange of Nepal. The companies listed under
Nepal stock exchange Ltd.(NEPSE) are known as listed companies. NEPSE has categories the
total listed companies into seven group viz. Banking, Hotels, Development Bank, Hydropower,
Finance, Insurance and others. There are 239 listed companies in NEPSE as on 11-02-2014.
The numbers of listed hydropower companies are 5 as on 11-02-2014. They are Arun Valley
Hydropower Development Company Limited(AHCP), Butwal Power Co. Ltd.(BPCL) Chilime
Hydro power Co.(CHCL), National Hydro Power Co. and Sanima Mai Hydropower Ltd.. The
total listed equity shares of hydropower companies are 55,075,622 and amounts is 5,507,562,200
Dividends are payments made to stockholders from a firm's earnings, whether those earnings
were generated in the current period or in previous periods. The development of an economy
requires expansion of productive activities, which in turn is the result of the capital formation,
which is the capital stock of the country. The change in capital stock of the country is known as
investment. Investment is key factor for capital formation. Investment promotes economic
growth and contributes to a nations wealth. Investor desire to earn some return from the
investment, without any return there is no any investment. Investment will block if there is no
any return. The total expected return include two components one is capital gain and other is
dividend.
At the end of each year, every publicly traded company has to decide whether to return cash
to its stockholders and, if so, how much in the form of dividends. The owner of a private
company has to make a similar decision about how much cash he or she plans to withdraw
from the business and how much to reinvest. This is the dividend decision, and we begin
this chapter by providing some background on three aspects of dividend policy. One is a
purely procedural question about how dividends are set and paid out to stockholders. The
second is an examination of widely used measures of how much a firm pays in the

dividends. The third is an empirical examination of some patterns that firms follow in
dividend policy.

1.2 Problem of the Statement

Dividend policy is an integral part of financial management decision of a business firm.
Dividend refers to the portion of a firms net earning which are paid out to the shareholders.
Whether dividends have an influential on the value of the firm is the most critical question
in dividend policy. If dividends are irrelevant, the firm should retain earnings for investment
opportunities. If there are not sufficient investment opportunities providing expected returns
in excess of the required return, the unused funds should be paid out as dividends.
Dividend is the most inspiring factor for the investment on shares of the company is thus
desirable from the stockholders point of view. In one hand the payment of dividend makes
the investors happy. But in the other hand the payment of dividend decrease the internal
financing required for making investment in golden future opportunities. This will hamper
the growth of the firm, which in turn the affects the value of the stock.
Earning is also trend as financing source of the firms. The firm retains the earning; its
impacts can be seen in many factors, such as decrease leverage ratio, expansion of the
activities and increase in profit in succeeding years. Whereas, if firm pays dividend, it may
need to raise capital through capital, that will affect on risk characteristics of the firm.
Therefore there are many dimensions to be considered on dividend theories, policies and
practices.
Shareholders make investment in equity capital with the expectation of making earnings.
Dividend is kind of earning that the shareholders expect from their investment. But the
dividend decision is still a fundamental as well as controversial area of managerial finance.
The affect of dividend on the market price of the stock is the subject matter of the study.

1.3 Objective of the study

The major objective of the study is to determine the trend and practices of the dividend
payment by the Hydropower companies of Nepal from the fiscal year 2009 to 2013,
however the specified objective are listed below;
To examine the impact of dividend policy on market price of stock of listed hydropower
companies of Nepal.
To explore the prevailing practice and effort made in dividend policy among the
companies.
To identify the regularity and uniformity of dividend paying financial institutions.

1.4 Significances Of The Study

The organizations selected for the study hold a strong position in contributing for the generation
of the hydro- electricity for the uplifting of the economy. Therefore, their financial position is the
matter of concern.
In the capital market the investor can earn return in two ways, one is dividend and another is
capital gain. The term dividend is defined as return from investment in equity shares. So,
dividend is important factor for investor while investing in equity shares. This study is helpful to
investor to take rationale decision like where to invest, how to invest, what portfolio made
should be made to obtain maximum profit from their investment. When a new company floats
share through capital market, large number of people gathers to apply for owners certificate. It
indicates people expectation on higher return of investment in shares. In Nepalese context, most
of investor is investing in stock without adequate knowledge of the company performance and
dividend policy.
This study is useful for the firms perspective too. They know the investor objectives from this
study. There are basically two types of objective, one is receiving dividend and another is
receiving capital gain. Knowing the objective of investor, they can develop their plan and
policies accordingly.
Basically, this study is conducted to help the investor, while investing in share capital. So that
they can make correct decision at right time about the influence of dividend in market price of
share and make investment.
1.5 Limitations Of The Study
The study is mainly concentrated on the dividend practice and its influence in
prospect of listed hydropower companies in Nepal.
The data being taken from secondary source, therefore authenticity of the data is
dependent on the accuracy of the information used.
The result and the interpretation are completely rigid and from the view point of
researcher.
Among the different aspect of dividend policy only cash dividend is taken for the
analysis.

CHAPTER II
RESEARCH METHODOLOGY

1.1 Introduction
This chapter deals about research methodology which is used for research purpose. Research is a
system enquiry for seeking facts and methodology is the method of doing research in well
manner. So, research methodology means the analysis of specific topic by using proper method.
"This process of investigation involves a series of well thought out activities of gathering,
recording, analyzing and interpreting the data with the purpose of finding answers to the
problem. Thus the entire process by which we attempt to solve problems is called research."
Wolff and Pant (2000:203)
It is significant to have appropriate choice of research methodology that helps to make this
research study meaningful and more scientific. Therefore, appropriate methodology has been
followed to meet the purpose objectives of the study. So, the methodologies of this research
include the research design, research question, period covered, selection of enterprises, types and
sources of data, data processing procedures, presentation of data and method of analysis.

1.2 Research Design

Research design is a plan, structure and strategy of investigation conceived to obtain possible
solution to the research problem in ones area of study.
The study will be based on historical data, which covers a period of five years from F.Y.
2065/2066 to 2069/2070 B.S. of selected companies. The analysis of the study will be based on
certain research design. Selection of appropriate research design is necessary to meet the study
objectives. The main objective of the study is to analyze capital structure of the selected
hydropower companies in Nepal. The study will emphasize on descriptive and analytical study of
collected data of Profit and Loss Account and Balance Sheet over the period of time, and it gives
suggestion of the capital structure. Moreover, this study will conclude with the measurable
suggestion to strengthen or improve the capital structure management in the position of the
selected companies.

Since this study is undertaken to examine & evaluate the dividend policy and its impact on share
price of listed hydropower companies of Nepal. The study is based on descriptive and analytical
study in order to achieve the objective of the study. Descriptive method is used to analyze
collected primary data and information. Besides, for the analytical purpose the annual reports,
past performance, records and relevant materials are considered.

2.3 Population and Samples of Data

The term population of data denotes the data of listed hydropower companies in NEPSE. In
NEPSE altogether there are five listed hydropower companies viz. Arun Valley Hydropower
Development Company Limited(AHCP), Butwal Power Co. Ltd.(BPCL) Chilime Hydro power
Co.(CHCL), National Hydro Power Co. and Sanima Mai Hydropower Ltd. This study has taken
three companies as sample companies they are Arun Valley Hydropower Development Company
Limited(AHCP), Butwal Power Co. Ltd.(BPCL) Chilime Hydro power Co.(CHCL).

2.4 Data collection procedures

Data were not available in readymade format. Data manipulated as per research requirements.
First, needed data assessed. Second, data are collected and only essential are selected, classified
and such a way that they represent qualitative and quantitative glimpse. Only manipulated data
used in this research. To manipulate data Computer Application program MS- Office,
Professional Edition, 2002 were used. Techniques of data collection are as follows:

Library Research
Internet, Homepages and Related Links study
Review and reports of concerns

2.5 Data Analysis Tools

Method of analysis is an important part in research work. The careful study of available facts for
proper understanding of data and extraction of the conclusion from them on the basis of
established principles and sound logic is Analysis.
The analysis of data requires a number of closely related operations such as establishment of
categories, the application of these categories to raw data through collecting, tabulation and then
drawing statistical interlays. On the basis of research problem and objectives of the study data
and information needed is identified and collected. The collected data will be properly processed

and arranged in the form of the table for simplicity. Financial and statistical tools will be used for
analysis and interpretation of arranged data. For this purpose, statistical tools such as Karl
Pearsons coefficient of correlation and regression analysis have been calculated to see the
relationship between various variables. Likewise, some financial tools such as ratio analysis and
trend analysis have been used.
For quantitative analysis and calculation of correlation and regression and other required
calculation computer will be used.
Financial Analysis Tools:
To evaluate the performance of any organization financial tools are very useful to determine the
strengths and weakness of a firm as well as its historical performance and current financial
condition. Ratio is an important analytical tool to summarize the large quantities of data and to
make quantitative judgments about organization. The financial tools employed in this study
basically represent ratio analysis like dividend payout ratio, stock valuation Po= Do (1+g)/r-g,
dividend yield ratio etc.
Statistical Analysis Tools:
Many statistical stools are often employed in the analysis and interpretation of data as an aid to
management and to meet the objectives of the study. Following statistical tools and others as per
the requirement are used more systematically in this chapter:

Arithematic mean (A.M)

Standard deviation (S.D)
Co efficient of variation ( C.V)
Karl pearsons correlation coefficient (r)

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web site
http://www.nepalstock.com