DESSERTATION REPORT

ON
THE STUDY OF DIVIDEND POLICIES OF
INDIAN COMPANIES

Submitted in Partial Fulfillment of the Requirement for the Degree of

Bachelor of Business Administration from Amity School of Business,
Amity University, Noida

FACULTY
GUIDE
MS.NISHU
SINGHLA
Sr. Lecturer,
Amity School
Of Business,
. Amity University,
Sec-125, Noida.
SUBMITTED BY:
KUSHAAL CHAUDHARY
BBA -GENERAL (2008-2011)
Roll No. : A3906408252

1
 ACKNOWLEDGEMENT

I express my sincere gratitude to my mentor Ms. Nishu Singhla for her

continuous support and cooperation throughout my project, without
which the present work would not have been possible. I would also like
to thank her for assigning me a project on so enriching a topic, and
her unwavering guidance, wholehearted support, complimentary
assistance and placid criticism throughout the project.

Lastly, I must not forget to thank my family and friends for their
constant support and understanding during the work.

Kushaal Chaudhary

2
 TABLE OF CONTENTS

Chapter No. Subject

Ch.-1.0 Executive Summary

1.1 Introduction
Ch.-2.0 Research Methodology
2.1 Primary Objective(s)
2.2 Problem definition
2.3 Approach to the Problem
2.4 Sample Design
2.5 Limitations
Ch.-3.0 Critical Review of Literature
Ch.-4.0 Data
4.1 Collection
4.2 Primary Data
4.3 Secondary Data
Ch.-5.0 Findings & Analysis
Ch.-6.0 Bibliography
6.1 References
Ch.-7.0 Annexure
7.1 Tables

3
 (1) EXECUTIVE SUMMARY
When a company makes a profit, it has to decide
what to do with this money. Companies have three uses for its cash.
• To fund working capital
• To finance investments in the company, where management have
identified and developed opportunities that have returns greater than
the return on working capital
• Distribute it to shareholders.

This research is intended to empirically Analyze the Dividend Policies of

companies.

Thisreport answers various questions like:

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

Before we begin describing the various policies that companies use to

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

First, some financial analysts feel that the consideration

of as dividend policy is irrelevant because investors have the ability to
create homemade dividends. This is done by adjusting a personal portfolio
to reflect the investor's own preferences.

The second argument suggests that little to no dividend

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

The argument against dividends is based on the belief

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

According to the proponents of the no-dividend policy,

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

4
 In opposition to these two arguments is the idea that a
high dividend payout is more important for investors because the
principle behind the attractiveness of a company's ability to pay
high dividends is that it provides certainty about the company's
financial well being. Dividends are also attractive for investors
looking to secure current income.

Now, should the company decide to follow either the

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

• Residual
• Stability
• Hybrid of the above two.

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

5
 INTRODUCTION

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

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

There is, thus, a type of inverse relationship between retained earnings

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

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

comes from other sources, it is called "liquidating dividend". It mainly has
the following types:
• Regular: Regular dividends are those the company expects to
maintain, paid quarterly (sometimes monthly, semiannually or
annually).
• Extra: Those that may not be repeated.
• Special: Those that are unlikely to be repeated.
• Stock Dividend: Paid in shares of stocks. Similar to stock splits,
both increase the number of shares outstanding and reduce the stock
price.

The procedure for paying dividends is as follows:

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

dividend.

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

receive the dividend is made.

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

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

6
How Do Firms View Dividend Policy?

One firm's policy might be to pay out 40% of earnings as dividends

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

Given the objective of financial management of maximizing present

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

There are however conflicting opinions regarding the impact of

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

Before discussing the 2 school of thoughts, let us first

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

These Factors can be classified as follows:

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

A major aspect of the dividend policy of a firm is its dividend

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

• Maximizing the wealth of the firm’s owners and,

• Providing sufficient funds to finance growth.

These objectives are not mutually exclusive, but interrelated. In

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

7
cause a decline in share prices, while a high ratio may lead to a rise in the
market price of the share. Making a sufficient provision for financing
growth can be considered a secondary objective of dividend policy. The
firm must forecast its future needs for funds, and taking in to account the
external availability if funds and certain market considerations, determine
both the amount of retained earnings needed and the amount of retained
earnings available after the minimum dividends have been paid. Thus,
dividend payments should not be viewed as a residual, but rather a
required outlay after which any remaining funds can be reinvested in the
firm.

(2) Stability of dividends:

The term dividend stability refers to the consistency or to the lack

of variability in the stream of dividends.in more precise terms, it means
that a certain minimum amount of dividend is paid out regularly. The
stability of dividends can take any of the following 3 forms:
(i) Constant dividends per share,
(ii) Constant / stable D/P Ratio, and
(iii) Constant dividends per share plus extra dividend.

Constant dividend per share:

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

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

8
 Fig: Stable Dividend Policy of Constant Rupee Dividends.

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

Constant payout Ratio:

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

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

9
 Fig: Stable Dividend Policy under Target Payout Ratio

Stable Rupee Dividend Plus Extra dividend:

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

Reasons to prefer stable dividend policy:

• Desire for current income by investors like retired person and

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

Lintner’s model came in support of this stable dividend policy.

A “Sticky Dividend Policy” or the Lintner Model

 In general, there exists a long-term target dividend

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

10
 earnings, but this is not the focus of the dividend
policy.

 At a certain point in the firm’s life cycle, it is time to

start paying dividends, at this point firms set dividend
payments at a low level and then attempt to increase
them steadily each year thereafter.

 Dividend policy is not focused on the optimal level of

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

 Management is reluctant to make significant changes in

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

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

Empirical evidence suggests:

1. Announcements of unexpected dividend increases are viewed

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

(3) Legal, contractual and internal constraints and

restrictions

The legal factors stem from certain statutory requirements, the

contractual restrictions arise from certain loan covenants and the internal
constrains are the result of the firm’s liquidity position.

11
Legal Requirements: Legal stipulations do not require a dividend
declaration but they specify the conditions under which dividend must be
paid. Such conditions pertain to
(i) Capital impairment,
(ii) Net profits and
(iii) Insolvency.

Capital Impairment Rules:

Legal enactments limit the amount of cash dividends that a
firm may pay. A firm can not pay dividends out of its paid up capital,
otherwise there would be a reduction in the capital adversely affecting
the security of its lenders. The rationale of this rule lies in protecting
the claims of the preference shareholders and creditors on the firm’s
assets by providing sufficient equity base since the creditors have
originally relied upon such an equity base while extending credit. Any
dividends that impair capital are illegal and the directors are personally
held reliable for the amount of illegal dividend.

Insolvency:
A firm is said to be insolvent in two situations: first, when the
liabilities exceeds the assets and second, when it is unable to pay its
bills. If the firm is currently insolvent in either sense, it is
prohibited from paying dividends. Similarly a firm would not pay
dividends, if such a payment leads to the insolvency of the firm of
either type

The important provisions of company law pertaining to dividends are

described below.

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

12
DIVIDEND PROPOSED AMOUNT TO BE TRANSFERRED
TO THE RESERVES

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

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

the paid up capital. the current profits.

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

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

the current profits.

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

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

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

Contractual requirements: Important restrictions on the payment of the

dividends may be accepted by a company when obtaining external capital
either by a loan agreement, a debenture indenture, a preference share
agreement, or a lease contract. such restrictions may cause the firms to
restrict the payment of cash dividends until a certain level of earnings
have been achieved or limits the amount of dividend paid to a certain

13
amount or % of earnings. Since the payment of dividends involves a cash
outflow, firms are enforced to reinvest the retained earnings within the
firm. The restrictions of dividends may take 3 forms:
In the first place, the firms may be prohibited from paying
dividends in excess of a certain percentage, say, 12 %. Alternatively, a
ceiling in terms of maximum amount of profits that may be used for
dividend payment may be laid down, say not more than 60% of the net
profits, or a given absolute amount of such profits can be paid as
dividend. Finally dividends must be restricted by insisting upon a
minimum of earnings to be retained. Reinvestment leads to a lower debt /
equity Ratio and, thus, enhances the margin of cushion (safety) for the
lenders.

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

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

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

Growth prospects:
Another set of factors which can influence the dividend policy
relates to the firm’s growth prospects. The firm is required to make plans
for financing its expansion programmes. In this context, the availability of
external funds and its associated cost together with the need for

14
investment funds would have a significant bearing on the firm’s dividend
policy.

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

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

Earnings stability:
The stability of earnings have also a significant bearing on the
dividend decisions of a firm. Generally, more stable the income stream,
the higher is the payout ratio. Such firms are more confident of
maintaining a higher payout ratio. public utility companies are classic
example of firms that have relatively stable earnings pattern and high
dividend payout ratio.

Control:
Dividend policies may also be strongly influenced by the
shareholders or the management’s control objectives. That is to say,
sometimes the management employs dividend policy as an effective
instrument to maintain its position of command and control. The
management, in order to retain control of the company in its own hands,
may be reluctant to pay substantial dividends and would prefer a small
dividend payout ratio. This will particularly hold good for the companies
which require funds to finance profitable investment opportunities when
an outside group is seeking to gain control of the firm. Added to this, if a

15
controlling group of shareholders either can not or does not wish to
purchase a new shares of equity, under such circumstances, by the issue of
additional shares to finance the investment opportunities, management
may loose its existing control.

(4) Owner’s considerations:

The dividend policy is also likely to be effected by the owner’s
considerations of
(a) The tax status of the shareholders,
(b) Their opportunities of investment, and
(c) The dilution of ownership.

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

each owner’s wealth. The firm must aim at a dividend policy which has a
beneficial effect on the wealth of a majority of the shareholders.

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

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

Dilution of ownership:

16
 The financial manager should recognize that a high D / P Ratio may
result in the dilution of both control and earnings for the existing equity
holders. Dilution in earnings results because low retentions may
necessitates the issue of new equity shares in the future, causing an
increase in the number of equity shares outstanding and ultimately
lowering EPS and their price in the market . By retaining a high percentage
of its earnings, the firm can minimize the possibility of dilution of
earnings.

Although the ultimate dividend policy depends on numerous factors,

the avoidance of shareholders’ discontent is important. If the shareholder
becomes dissatisfied with the existing dividend policy, they may sell their
shares, increasing the possibility that control of the firm will be seized by
some outside groups. The “takeover” of a firm by an outsider is more
likely when owners are dissatisfied with its dividend policy. It is the
financial manager’s responsibility to keep in touch with the owners’
general attitude towards dividends.

(5) Capital market considerations:

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

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

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

• Residual
Companies using the residual dividend policy choose to rely on
internally generated equity to finance any new projects. As a result,
dividend payment can only come out of the residual or leftover equity

17
after all project capital requirements are met . These company's usually
attempt to maintain balance in their debt/equity ratios before making any
dividend distributions, which demonstrates that such a company decides
upon dividends only if there is enough money leftover after all operating
and expansion expenses are met.

• Stability
The fluctuation of dividends created by the residual policy
significantly contrasts the certainty of the dividend stability policy The
fluctuation of dividends created by the residual policy significantly
contrasts the certainty of the dividend stability policy . With the stability
policy, companies may choose a cyclical policy that sets dividends at a
fixed fraction of quarterly earnings, or they may choose a stable policy
whereby quarterly dividends are set at a fraction of yearly earnings. In
either case, the aim of the dividend stability policy is to reduce
uncertainty for investors and to provide them with income.

• Hybrid of the above two.

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

(2) Research Methodology for Analysis of Trends

To analyze the trends in dividend payment pattern, number of
companies paying dividend as percentage of total firms, average dividend
paid, dividend per share, payout ratio, and dividend yield are computed
for the period 1990 to 2001. Dividend per share (DPS) is calculated as
DPS(j,t) = Dividend(j,t)
EQCap(j,t)

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

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

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

18
 Where, PR(j,t) is dividend payout ratio, Dividend(j,t) refers to
amount of dividend paid by company j in year t; and PAT(j,t) refers to
net profit or profit after tax for firm j in year t.
Dividend Yield (DY) is computed as

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

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

Payers are further classified into regular payers, initiators and

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

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

and current non-payers. Never paid firms are those that have never paid
even a single dividend, where as former payers are those firms which at
some previous point had paid dividends. Current non-payers are those
firms which are recently listed and that they are neither former payers nor
are in the never paid category in any of the previous years.

Primary Objectives:
 How and Why Do Companies Pay Dividends?

 What should be the Company’s dividend policy?

 How Do Firms View Dividend Policy?

 What factors should be considered when a company decides on its

dividend policy?

 What are the alternatives that a company has other than paying
dividends?

 Does losses leads to dividend reductions?

19
Problem definition:

Management decision problem Marketing research problem

• How and Why Do Companies • How Do Firms View Dividend

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

Approach to the Problem:

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

Do they have some special strategy? These were some of the

questions that struck me. I decide to get into this study to get answers to
these questions and see if I could learn something from there policies.

These problems can be studied by finding out the underlying

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

Limitations:
• Non-availability of latest database of Dividend Paying
firms.
• Scale of research is small.
• The present study has considered only cash dividends
and not share repurchases. Share repurchases or
buyback has been permitted in the Indian context only
recently and this may well have influenced the
dividend behavior of Indian companies, as some firms
would have substituted share repurchases for cash
dividends

20
• In the present study only final cash dividends are
considered and the stock dividends by firms are not
considered which may limit generalizations of the
findings
• Further, the present study has not considered the stock
market reactions to dividend events and has not
examined at great depth the interrelations between
dividend and other corporate finance decisions

21
 (4) DATA

DATA COLLECTION:

1) Secondary Source
• Websites.
• Books, Newspapers, Fact Sheets of different firms.

22
 ( 5) Findings and Analysis

Trends in Dividends and Influence of Changes in Tax Regime

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

Average Dividend Paid

Despite fluctuations in PAT, the average aggregate dividend
payments have steadily increased from Rs. 0.99 crore in 1990 to Rs. 2.93
crore in 2000 and Rs. 4.19 crore in 2001. Further, compared to PAT the
dividend payments have exhibited a smooth trend implying that dividend
smoothening is occurring in the Indian context
.

23
Table
Trend in Dividends and PAT During 1990-2001
Year Number Average SD of Average SD of
of firms dividend(Rs. dividend(Rs. PAT(Rs. PAT(Rs.
Crore) Crore) Crore) Crore)

1990 1707 0.99 3.92 4.68 48.45

1991 2184 0.98 3.79 4.05 37.88
1992 2505 1.11 4.54 4.19 40.45
1993 3097 1.11 4.85 3.06 46.76
1994 4020 1.27 6.19 4.15 51.41
1995 5115 1.56 8.42 6.96 57.55
1996 5600 1.85 10.80 7.19 62.92
1997 5855 2.05 13.91 6.38 65.65
1998 5980 2.26 17.18 5.69 103.52
1999 6248 2.39 22.14 5.09 88.19
2000 6225 2.93 26.46 6.11 103.54
2001 4766 4.19 44.71 9.36 134.39
Common 871
firms

Trends in Average D ividend and Average P AT during

1990-2001

10
8
Rs. Crore

6 Average D ividend
4 Average PAT
2
0
1992
1993
1994
1995

1999
2000
2001
1990
1991

1996
1997
1998

ye ars

24
 Number of firms paid dividend during the study period have shown
an up trend till 1995 and have fallen subsequently, where as the
percentage of companies paying dividends has declined from 60.5 percent
in 1990 to 32.1 percent in 2001. The fact that percentage of companies
paying dividends have declined whereas the average dividend paid has
increased implies that companies which have been paying dividend have
paid higher amounts in recent years. Total non-payers have steadily
increased from 1990 to 2000 before declining slightly in 2001. Firms,
which have never paid dividend, constituted a significant proportion
through out the sample period – constituting more than 50% from 1991 to
2001 continuously. The number of firms, which at some previous time
paid dividend, have increased overtime and reached almost 50% of non-
payers in 2001.

Table
Trend in Dividend Payments During 1990-2001

Year Paid Paid Not Paid Not Paid Total

Dividend(Number Dividend(% Dividend(Number Dividend(% Number
of Firms) of Firms) of Firms) of Firms) of
Firms
1990 1033 60.50 674 39.50 1707
1991 1272 58.20 912 41.80 2184
1992 1533 61.20 972 38.80 2505
1993 1823 58.90 1274 41.10 3097
1994 2333 58.00 1687 42.00 4020
1995 2775 54.30 2340 45.70 5115
1996 2723 48.60 2877 51.40 5600
1997 2386 40.80 3469 59.20 5855
1998 2101 35.10 3879 64.90 5980
1999 2007 32.10 4241 67.90 6248
2000 1988 31.90 4237 68.10 6225
2001 1531 32.10 3235 67.90 4766

25
 D iv id e n d B e h a v io u r o f In d ia n C o rp o ra te F irm s
d u rin g 1 9 9 0 -2 0 0 1

80

60
% of Firms

P a y ers
40
N o n P ay ers
20

0
1990

1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
1991

Ye a rs

Figure

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

has registered sustained decline there after. Mirroring these trends firms,
which have paid dividends regularly, peaked in 1995 and recorded
declines thereafter. Initiators have shown a steady decline from 1991 and
have fallen to 5% in 2001. Average dividend paid by payers has increased
steadily from Rs. 1.69 crore in 1991 to Rs. 9.16 crore in 2000 and Rs.
13.05 crore in 2001. Regular payers are more in number and have paid
higher average dividend compared to that of current payers and initiators.
Current payers have paid higher dividend compared to initiators except in
the year 2001. The number of initiators have increased up to the year 1995
and have shown a decline thereafter, where as current payers have steadily
increased in number up to 2000.

A comparison of index and non-index firms shows that the former

group of companies on average has paid more dividend than the latter
group. Similarly, it is observed that companies, which constitute popular
market indices such as Sensex and Nifty paid more dividends compared to
companies in the broad market indices such as BSE 100, CNX Mid-Cap,
BSE 200, CNX 500, and BSE 500. These observations are on the expected
lines as higher dividend payment is one of the important criteria for

26
inclusion of stocks into indices. A study of number of companies, paying
dividend also reveals that a significantly larger proportion of index firms
have paid dividend compared to non-index firms. 29 out of 30 Sensex
firms and 49 out of 50 Nifty firms have paid dividend in 2001, the
exception being Tata Engineering and Locomotive Company Ltd(TELCO).

Analysis of industry-wise average dividend paid shows that in the

early 1990s, firms in the diversified industry have paid more dividends
followed by mining firms and electricity firms. However, by the end of
2000 and 2001 firms in the electricity industry have paid more dividend
followed by mining and diversified companies. It has also been observed
that textile companies have continued to pay low amounts on an average
throughout the sample period where as firms in the financial services
industry have improved their average dividend payments over the sample
period. The recent high growth firms in the computer 12 hardware and
software segments, which are part of the machinery industry, have
generally shown lower dividend payments.

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

Table 4.3

27
 Average Dividend Paid During 1990-2001 – Industry-wise (in Rs. Crore)
Industry 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 FIRMS

Chemicals and 1.09 0.96 1.05 0.97 1.08 1.38 1.57 1.69 1.92 1.68 2.41 2.46 1138
plastics
Diversified 3.56 3.88 4.24 5.11 6.14 7.72 10.13 10.99 12.86 17.17 22.76 29.55 184

Electricity 1.28 1.14 1.19 2.26 5.85 9.54 13.08 18.31 17.37 26.33 27.24 28.67 58

Financial 0.67 1.39 1.47 1.38 1.49 2.10 2.46 2.72 3.16 3.20 4.25 5.29 1097
Services
Food and 0.88 0.97 0.98 0.89 0.94 1.02 0.80 0.90 1.12 1.13 1.34 1.89 745
Beverages
Machinery 0.70 0.65 0.72 0.73 0.83 0.99 1.11 1.13 1.20 1.34 1.58 2.11 1065
Metal and 0.80 0.90 1.37 1.36 1.72 2.20 2.39 2.14 1.80 1.40 1.72 3.08 555
Metal Products
Mining 2.57 2.79 2.97 3.57 2.87 2.94 8.87 17.44 22.23 21.99 26.31 35.36 81
Misc. 0.39 0.51 0.72 0.62 0.73 0.70 0.75 0.57 0.35 0.56 0.58 1.05 324
manufacturing
Non-metallic 0.50 0.62 0.70 0.64 0.63 0.85 1.18 1.00 0.86 0.90 1.12 1.51 296
Mineral Pro
Other Services 1.02 0.76 0.86 0.92 1.01 1.07 1.18 1.23 1.34 1.34 1.42 4.07 1264
Textiles 0.48 0.47 0.47 0.53 0.72 0.86 0.82 0.58 0.48 0.48 0.56 0.56 750-
Transport 1.25 1.17 1.20 1.06 1.39 2.02 2.83 3.58 2.95 2.95 3.44 3.03 225
Equipment

Dividend Per Share

Average dividend per share (DPS) has increased from 14 paisa in
1990 to 26 paisa in 2000 and 15 paisa in 2001. An analysis of distribution
of firms shows that 39 percent have paid nil DPS in 1990 and the
percentage has increased to 67.7 in 2001. Percentage of firms in the
average class i.e., DPS in the range of Rs. 0 to Rs. 0.25 have declined
from a high of 45.9 in 1990 to 18.5 in 2001. This implies that the
increased average DPS over the latter period has mainly been due to a few
firms paying larger DPS. Firms in chemicals and plastics industry have
steadily improved their DPS from 14 paisa in 1990 to 27 paisa in 2000 and
25 paisa in 2001. Where as textiles firms have shown a decline in DPS
from 13 paisa in 1990 to 6 paisa in 2001. Machinery firms have paid a
steady 12 to 14 paisa except for the years 1996 and 1997 when they paid
marginally more. An analysis of index and non-index firms DPS shows
that index firms on an average paid more DPS than non-index firms.
Similarly, narrow indices have high average DPS than broad indices.

28
Table
Average Dividend Per Share (DPS) During 1990-2001
(in Rs.)

Year Number Minimum Maximum Average Std.

of firms DPS DPS DPS Deviation
1990 1694 0 12.71 0.1406 0.3455
1991 2153 0 10.58 0.1385 0.3009
1992 2468 0 15.58 0.1427 0.3568
1993 3028 0 51.2 0.1415 1.0025
1994 3953 0 57.5 0.1582 1.2983
1995 5032 0 135.33 0.1803 2.3543
1996 5536 0 174.67 0.2158 3.3243
1997 5801 0 222 0.198 3.4834
1998 5911 0 350.33 0.2337 5.8833
1999 6176 0 249.75 0.2544 4.8938
2000 6167 0 266.38 0.2571 4.4156
2001 4734 0 61.5 0.1538 1.2899
Common 866
firms

Average Dividend Per Share (DPS) During 1990-2001

Averag e D ividend per share(in R s.) durin g 1990-

2001

0.3
Average DPS (In Rs.)

0.25
0.2
0.15 A verage DP S
0.1
0.05
0
1991

1993

1995

1998
1999
2000
2001
1990

1992

1994

1996
1997

Ye a rs

29
 An analysis of recurrence of dividend per share group shows that
two firms have consistently paid dividend in the range of 25 to 50 paisa
per share for all the 12 years, where as 18 firms have paid up to 25 paisa.

An analysis of dividend reductions by firms shows that only five

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

Distribution of Firms in terms of Dividend Per Share During 1990 –

2001
Percentage of Companies in the Year
DPS 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
Rs. 0 39 41 37.9 39.9 41.1 44.9 50.8 58.9 64.5 67.5 67.8 67.7
Rs. 45.9 43.1 46.2 46.9 45 42.3 35.8 27.5 22.2 19.5 18.6 18.5
0-
0.25
Rs. 13.5 13.7 13.7 11.2 12.1 10.6 10.4 9.8 8.7 7.6 7.4 7.8
0.25-
0.50
Rs. 0.9 1.3 1.4 0.9 0.7 1.1 1.5 2.3 2.8 2.5 2.6 2.7
0.50-
0.75
Rs. 0.4 0.5 0.4 0.7 0.8 0.4 0.6 0.6 0.6 1.1 1.2 1.3
0.75-
1
Rs. 0.2 0.3 0.3 0.2 0.2 0.3 0.4 0.6 1 1.1 1.4 1.4
1-2
Rs. 0.1 0.1 0 0.1 0.1 0.2 0.2 0.1 0.2 0.3 0.6 0.4
2-5
> 0.1 0 0 0.2 0.1 0.1 0.2 0.2 0.2 0.3 0.4 0.5
Rs. 5

30
Industry-wise Dividend Per Share (DPS) During 1990-2001 (in Rs.)

Industry 19 19 19 19 19 19 199 199 199 199 200 200 FIRM

90 91 92 93 94 95 6 7 8 9 0 1 S
Chemicals 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.2 0.2 1138
and 4 5 4 2 7 5 2 7 7 8 7 5
plastics
Diversifie 0.1 0.2 0.2 0.2 0.2 0.1 0.2 0.2 0.2 0.2 0.2 0.2 184
d 9 1 6 0 0 9 1 2 1 2 7 1
Electricit 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.0 0.1 0.1 0.1 0.1 58
y 3 0 1 1 1 0 2 9 0 0 3 0
Financial 0.0 0.1 0.1 0.3 0.2 0.2 0.2 0.1 0.1 0.1 0.1 0.1 1097
Services 8 1 3 4 4 1 8 2 5 4 9 8
Food and 0.2 0.2 0.1 0.2 0.3 0.4 0.4 0.5 0.8 0.2 0.1 0.1 745
Beverages 0 0 8 3 1 7 9 8 5 1 6 3
Machiner 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 1065
y 2 3 4 4 3 3 7 9 2 4 4 4
Metal and 0.1 0.1 0.1 0.0 0.1 0.1 0.1 0.0 0.0 0.0 0.0 0.0 555
Metal 3 1 1 9 0 0 2 9 7 6 7 7
Products
Mining 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.1 0.1 0.1 0.0 81
5 7 6 7 9 6 7 8 3 0 1 9
Misc. 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.0 0.1 0.2 0.3 324
manufact 2 2 4 0 1 0 0 5 6 6 1 0
uring
Non- 0.1 0.1 0.1 0.0 0.0 0.0 0.1 0.0 0.0 0.0 0.0 0.0 296
metallic 0 1 1 9 9 9 0 8 8 7 9 9
Mineral
Pro
Other 0.1 0.1 0.1 0.1 0.1 0.2 0.3 0.2 0.4 0.8 0.7 0.1 1264
Services 7 5 7 5 3 4 8 8 2 8 3 2
Textiles 0.1 0.1 0.1 0.1 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 750
3 4 3 1 2 9 8 6 6 5 7 6
Transport 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.2 0.1 225
Equipmen 2 2 2 2 3 3 5 8 6 5 1 7
t

Dividend Payout Ratio

31
 An analysis of average percentage dividend payout (PR) during
1990 – 2001 shows a volatile trend. Percentage PR increased from 27.39
in 1990 to 32.95 in 1997 and then showed a declining trend till 2000
before reaching the peak average percentage PR of 40.53 in 2001.

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

firms payout avg. payout no. of firms
1990 1382 27.39 37.77 24.98 1369
1991 1714 25.19 41.04 23.11 1697
1992 2022 27.54 48.31 24.25 2002
1993 2533 27.98 37.83 25.72 2508
1994 3156 28.19 61.96 24.92 3125
1995 3770 25.88 38.06 23.84 3733
1996 4042 27.44 88.12 23.99 4002
1997 4258 32.95 139.85 23.91 4216
1998 4335 31.39 453.37 18.64 4292
1999 4503 22.82 120.19 16.98 4458
2000 4383 21.6 67.49 17.47 4340
2001 3387 40.53 1196.96 16.81 3354

An analysis of distribution of firms by dividend payout percentage

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

32
Average % Payout During 1990-2001

A v e ra g e % p a y o u t D u rin g 1 9 9 0 -2 0 0 1

50
40
Average payout %

A verage % pay out

30
20 1% Trim m ed A verage
% P ay out
10
0
90

92

94

96

98

00
19

19

19

19

19

20

Ye a r

An analysis of industry-wise DPO shows a declining trend across all

industries during the sample period. Diversified firms, which have a DPO
in excess of 25 percent in 1990, have less than 14 percent in 2001. Firms
in metals and metal products industry have registered a high degree fall in
DPO from 22.84 percent in 1990 to 8.74 percent in 2001.

33
Distribution of Firms’ Payout Percentage During 1990 – 2001

% of Firms
Dividend 199 199 199 199 199 199 199 199 199 199 200 2001
payout % 0 1 2 3 4 5 6 7 8 9 0
0 26 26.5 25.3 28.9 26.6 26.7 33.3 45.4 52.8 57 55.8 56.6
0-10 6.9 9.3 9.2 7.2 8 6.6 5.5 3.1 3.1 3.4 3.8 3.8
10-20 14.5 14.1 13.9 11.9 14.3 15.6 13.6 7.9 7.6 6.7 6.6 7.6
20-30 16.5 17.2 16.1 13.5 15 16.7 13.7 10.9 9.8 8.2 8.9 7.9
30-40 12.6 12.6 13.3 12.3 12.4 12.5 10.8 8.5 7.5 6.9 6.7 6.9
40-50 8.2 7.1 8.8 9.5 7.7 8.7 7.3 6.4 5.4 5.2 5.4 4.8
50-75 10.1 9 8.9 10.5 10.2 8.6 8.6 9.1 7.8 6.7 6.5 7.1
75-100 3.5 2.9 2.7 4.6 4.5 3.4 5.4 5.2 3.2 3.9 4.2 3.2
100-200 1.2 0.9 1.4 1.3 0.9 0.9 1.4 2.1 1.6 1.3 1.5 1.5
>200 0.4 0.2 0.4 0.4 0.3 0.3 0.4 1.3 1 0.7 0.7 0.7
Firms 138 171 202 253 315 377 404 425 433 450 438 3387
2 4 2 3 6 0 2 8 5 3 3

Table 4.9
Industry-wise Dividend Payout During 1990 – 2001 (in %)
Industry 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

Chemicals and 23.9 20.3 21.5 23.3 20.1 21.8 20.53 18.37 14.76 13.84 14.18 13.71
plastics 2 8 1 8 4 8
Diversified 25.2 20.9 22.7 25.4 22.7 23.2 21.61 23.27 19.34 17.41 17.52 13.59
8 5 8 8 4 3
Electricity 17.9 16.2 14.1 13.3 12.4 16.9 12.70 16.32 10.42 9.35 12.68 13.08
8 1 5 7 8 8
Financial 23.2 27.0 28.5 32.1 29.8 27.2 31.74 29.19 16.12 14.82 16.21 14.30
Services 8 1 0 1 7 5
Food and 24.4 23.1 24.1 22.1 20.4 17.0 17.23 16.14 12.73 12.67 12.80 10.22
Beverages 7 5 9 4 0 1
Machinery 23.9 20.3 22.8 23.4 23.6 22.0 20.83 19.45 16.23 15.36 15.24 15.15
3 6 7 2 7 7
Metal and 22.8 21.4 19.8 20.6 20.9 19.7 18.82 16.78 12.56 9.37 9.16 8.74
Metal Products 4 7 6 5 2 6
Mining 10.2 7.29 12.2 9.56 14.0 12.1 16.58 14.65 11.50 9.87 11.98 11.76
8 8 4 0
Misc. 18.1 18.0 15.6 17.1 17.8 18.9 17.81 15.55 9.84 12.18 12.59 15.09
manufacturing 0 8 9 8 7 1
Non-metallic 19.7 17.7 16.9 16.2 14.7 14.9 13.87 13.62 10.78 9.66 8.93 11.29
Mineral Pro 1 5 5 7 8 2
Other Services 20.0 21.1 19.2 19.8 21.1 19.6 19.34 17.43 14.00 12.27 12.85 12.54
1 5 5 4 5 0
Textiles 16.8 15.9 17.2 20.9 20.5 19.2 17.30 13.84 11.29 7.99 9.04 8.02
3 8 6 8 4 0
Transport 19.3 19.9 21.6 21.2 23.2 20.9 19.69 22.46 20.96 18.74 20.18 17.29
Equipment 1 6 1 9 6 9

Total payers have registered an increase in payout from 31.25% in

1991 to a peak of 43.02% in 1997 and finally paid out 37.64% in 2001. Of

34
the payers, regular payers have consistently paid higher payout compared
to that of current payers. Further, initiators have shown higher
fluctuations in their payout compared to that of regular payers. In sum,
average percentage PR showed a more stable pattern up to 1997 and then
has shown a declining trend. Analysis of dividend payout recurrence
shows that very few firms have maintained the same payout for a longer
period of time. Industry-wise DPO shows a declining trend across all
industries during the sample period. Of the payers, regular payers have
consistently paid higher payout compared to that of current payers.
Further, initiators have shown higher fluctuations in their payout
compared to that of regular payers.

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

On the whole dividend yield of aggregate payers shows a significant

increase from 1991 to 2001.

Average dividend yield has differed from industry to industry.

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

On the whole the dividend yield is range bound during the study
period. Analysis of dividend yield by type of payer shows that initiators

35
have always paid higher levels of dividend yield compared to that of
current payers and regular payers. Diversified firms and firms in the
electricity industry have paid higher dividend yields during the study
period.

Summary of Analysis of Dividend Trends

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

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

Further, narrower indices appear to have higher dividends compared to

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

Changes in Tax Regime and Dividend Propensity

Analysis of influence of change in tax regime on dividend

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

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

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

burden on corporates:

36
The Finance Minister raised tax on dividend from currently 10% to 20% in
the year 2000-01. An India Info line analysis of dividend pay out of 863
listed companies has shown that there would be an additional Rs10bn
burden on the corporate sector. Total dividend pay out of 863 listed
companies for 1998-99 is Rs101.6bn. This implies that the corporate
sector paid Rs10.2bn (10% of the 101.6bn) as dividend tax in FY99.
Raising dividend tax from 10% to 20% would mean additional Rs10.2bn
tax. Companies whose dividend payout is more than Rs500mn (39
companies) accounts 65% of the total pay out of 863 companies.

An interesting point to note is that 6 out of the top 10 companies are

PSUs which anyway pay most of the dividend to the government.

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

ONGC 8,705.3 870.5 1,741.1 870.5

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

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

Hindustan Lever Ltd 4,830.5 483.0 966.1 483.0

Reliance Industries Ltd 4,144.1 414.4 828.8 414.4

ICICI Ltd 3,634.2 363.4 726.8 363.4

HPCL 2,760.7 276.1 552.1 276.1

MTNL 2,097.9 209.8 419.6 209.8

BPCL 2,081.3 208.1 416.3 208.1

Larsen & Toubro Ltd 1,796.2 179.6 359.2 179.6

TISCO 1,632.9 163.3 326.6 163.3

I T C Limited 1,498.3 149.8 299.7 149.8

Max India Ltd 1,292.9 129.3 258.6 129.3

HDFC 1,123.8 112.4 224.8 112.4

Bajaj Auto Ltd 1,060.2 106.0 212.0 106.0

Castrol India Ltd 1,018.9 101.9 203.8 101.9

Tata Chemicals Ltd 1,002.6 100.3 200.5 100.3

Neyveli Lignite Corporation Ltd 997.2 99.7 199.4 99.7

37
Procter And Gamble India Ltd 960.8 96.1 192.2 96.1

Digital Equipment India Ltd 871.9 87.2 174.4 87.2

NACL 858.2 85.8 171.6 85.8

Tata Engineering & Locomotive 852.0 85.2 170.4 85.2

Videsh Sanchar Nigam Ltd 843.6 84.4 168.7 84.4

NFC 770.7 77.1 154.1 77.1

Oriental Bank Of Commerce Ltd 748.0 74.8 149.6 74.8

Bank Of India Ltd 709.3 70.9 141.9 70.9

Nestle Ltd 689.4 68.9 137.9 68.9

Bharat Heavy Electricals Ltd 679.2 67.9 135.8 67.9

GESC 638.4 63.8 127.7 63.8

Mahindra & Mahindra Ltd 631.1 63.1 126.2 63.1

Grasim Industries Ltd 626.5 62.7 125.3 62.7

Ranbaxy Laboratories Ltd 616.1 61.6 123.2 61.6

Tata Tea Ltd 593.7 59.4 118.7 59.4

Chambal Fertilisers 570.3 57.0 114.1 57.0

Gujarat Ambuja Cement Ltd 569.8 57.0 114.0 57.0

Punjab Tractors Ltd 562.0 56.2 112.4 56.2

Indo Gulf Corporation Ltd 512.1 51.2 102.4 51.2

Sterlite Industries India Ltd 503.1 50.3 100.6 50.3

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

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

Summary and Conclusion

38
This study examines the dividend behavior of Indian corporate firms over
the period 1990 – 2001 and attempts to explain the observed behavior.

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

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

Further, smaller indices appear to have higher dividends compared

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

Analysis of influence of tax regime changes shows that the tradeoff

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

Analysis of characteristics of payers and non-payers shows that

dividend-paying companies are more profitable and large in size.
However, growth doesn’t seem to deter Indian firms from paying higher
dividends. Further, firms appear to prefer the pecking order of funds in
building their larger asset base.

An analysis of shows that average earnings of dividend omitting firms

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

Further analysis also shows that dividend changes are impacted

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

The present study has considered only cash dividends and not share
repurchases. Share repurchases or buyback has been permitted in the
Indian context only recently and this may well have influenced the
dividend behavior of Indian companies, as some firms would have
substituted share repurchases for cash dividends. Similarly, in the present

39
study only final cash dividends are considered and the stock dividends by
firms are not considered which may limit generalizations of the findings.
Further, the present study has not considered the stock market reactions to
dividend events and has not examined at great depth the interrelations
between dividend and other corporate finance decisions.

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

40
 ( 6) Bibliography
 “Fundamentals of corporate finance” by Ross WesterField Jordan,
6 t h edition, Tata McGraw Hills, New Delhi, pg no. 623-629

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

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

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

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

 “Dividend Decision: A Study of Managers’ Perceptions” by Bhat

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

 “Dividend Policies of SoEs in India – An Analysis”, Finance

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

41