TABLE OF CONTENTS

Chapter No. Ch.-1.0 1.1 Ch.-2.0 2.1 2.2 2.3 2.4 2.5 Ch.-3.0 Ch.-4.0 4.1 4.2 4.3 Ch.-5.0 Ch.-6.0 6.1 Subject Executive Summary Introduction Research Methodology Primary Objective(s) Problem definition Approach to the Problem Sample Design Limitations Critical Review of Literature Data Collection Primary Data Secondary Data Findings & Analysis Bibliography References

(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.

This report answers various questions like: How and Why Do Companies Pay Dividends? What should be the Companys dividend policy? How Do Firms View Dividend Policy?

 What factors should be considered when a company decides on its dividend policy? What are the alternatives that a company has other than paying dividends?

Before we begin describing the various policies that companies use to determine how much to pay, let's look at different arguments for and against dividends policies. First, some financial 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
3

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 the following: company's undertaking own shares, more projects, new

repurchasing

acquiring

companies and profitable assets, and reinvesting in financial assets. 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 .

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.
7

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 firms owners and, Providing sufficient funds to finance growth.

These

objectives

are

not

mutually

exclusive,

but

interrelated. In practice, shareholders have a clear cut preference for dividends because of uncertainty and imperfect capital markets. The payment of dividends can, therefore, be expected to effect the price of a share; a low D/P Ratio may 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.
10

(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) (ii) Constant dividends per share, 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

11

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.

Fig: Dividends.

Stable

Dividend

Policy

of

Constant

Rupee

12

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.

13

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.

14

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.

Lintners model came in support of this stable dividend policy.

A Sticky Dividend Policy or the Lintner Model

In general, there exists a long-term target dividend payout ratio which is high for mature
15

firms with stable earnings and low for young growth firms with unstable earnings, but this is not the focus of the dividend policy.

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

Dividend policy is not focused on the optimal level of dividends or dividend payout ratios (targets) but on changes to the existing level of dividends.

Management is reluctant to make significant changes in the dividend paid. avoid cutting dividends The focus is to sending an

and

unfavorable signal to the market.

Therefore,

significant dividends increases only occur when

16

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;

17

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 firms liquidity position.

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) (ii) Capital impairment, Net profits and

(iii) Insolvency.

18

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 firms 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

19

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.

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DIVIDEND PROPOSED

AMOUNT TRANSFERRED

TO TO be less

BE THE then

Exceeds

10%

but

RESERVES not Should

not

12.5%of the paid up capital. Exceeds 12.5% but not 15%of the paid up capital. Exceeds 15% but not 20%of the paid up capital. Exceeds 20%.

2.5% of the current profits. Should not be less then 5% of the current profits. Should not be less then

7.5% of the current profits. 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.

21

(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

22

payment of cash dividends until a certain level of earnings have been achieved or limits the amount of dividend paid to a certain amount or % of earnings. Since the payment of dividends involves a cash outflow, firms are enforced to reinvest the retained earnings within the firm. The restrictions of dividends may take 3 forms: In the first place, the firms may be prohibited from paying dividends in excess of a certain percentage, say, 12 %. 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) (ii) Liquid assets, Growth prospects,

23

(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 firms earnings are substantial, but the firm may be short of funds. This situation is common for companies like (a) Growing companies (b) Companies which have to retire the past loans as their 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

24

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 firms 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 investment funds would have a significant bearing on the firms 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.

25

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:

26

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 managements control objectives. That is to say, sometimes the management employs dividend policy as an effective instrument to maintain its position of command and control. The management, in order to retain control of the company in its own hands, may be reluctant to pay substantial dividends and would prefer a small dividend payout ratio. This will 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 controlling group of shareholders either can not or does not wish to purchase a new shares of equity, under such

27

circumstances, by the issue of additional shares to finance the investment opportunities, management may loose its existing control.

(4)

Owners considerations: The dividend policy is also likely to be effected by the

owners 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 owners 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

28

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

29

higher D / P Ratio. On the other hand, if the firms investment opportunities yield a higher rate than that obtained from similar external investments, a low D/P is suggested. Therefore, in formulating a dividend policy, the evaluations of the external opportunities of the owners is very significant.

Dilution of ownership: The financial manager should recognize that a high D / P Ratio may result in the dilution of both control and earnings for the existing 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

30

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 managers 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:

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Finally, inflation is another factor which effects the firms dividend decisions. With rising prices, the funds generated from depreciation may be inadequate to replace obsolete equipments. These firms have to 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 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

32

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-

33

term goal. In today's markets, this approach is commonly used by companies that pay dividends.

34

(2) RESEARCH METHODOLOGY

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)

35

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.

36

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 Companys dividend policy?

37

 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?

38

PROBLEM DEFINITION

Management decision problem

Marketing research problem

How

and

Why

Do

How

Do

Firms

View

Companies Pay Dividends? What should be the dividend policy of a firm? Does losses leads to

Dividend Policy? What factors should be

considered when a company decides policy? what are the alternatives that a company has, other than paying dividends? on its dividend

dividend reductions?

39

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.

40

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 dividends 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 share repurchases for cash

41

interrelations

between

dividend

and

other

corporate finance decisions

(4) DATA

DATA COLLECTION:

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

42

(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

43

in 2001 to Rs. 2.93 crore in 2011 and Rs. 4.19 crore in 2012. Further, compared to PAT the dividend payments have exhibited a smooth trend implying that dividend smoothening is occurring in the Indian context . Table Trend in Dividends and PAT During 2001-2012 Year Number Average Crore) 0.99 0.98 1.11 1.11 1.27 1.56 1.85 2.05 2.26 2.39 2.93 4.19 SD Crore) 3.92 3.79 4.54 4.85 6.19 8.42 10.80 13.91 17.18 22.14 26.46 44.71 of Average Crore) 4.68 4.05 4.19 3.06 4.15 6.96 7.19 6.38 5.69 5.09 6.11 9.36 SD Crore) 48.45 37.88 40.45 46.76 51.41 57.55 62.92 65.65 103.52 88.19 103.54 134.39 of

of firms dividend(Rs. dividend(Rs. PAT(Rs. PAT(Rs. 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Common firms 1707 2184 2505 3097 4020 5115 5600 5855 5980 6248 6225 4766 871

44

Trends in Average Dividend and Average PAT during 1990-2001

10 8 Rs. Crore 6 4 2 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Average Dividend Average PAT

years

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 2011 before declining slightly in 2001. Firms, which have never paid dividend, constituted a significant proportion through out the sample period
45

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 2001-2012

Year Paid Dividend( Firms) 1033 1272 1533 1823 2333 2775 2723 2386 2101 2007 1988 1531

Paid

Not

Paid Not %

Paid Total Numbe of Firms 1707 2184 2505 3097 4020 5115 5600 5855 5980 6248 6225 4766 of r

Dividend(% Dividend(Num Dividend( ber of Firms) 674 912 972 1274 1687 2340 2877 3469 3879 4241 4237 3235 Firms) 39.50 41.80 38.80 41.10 42.00 45.70 51.40 59.20 64.90 67.90 68.10 67.90

Number of of Firms) 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 60.50 58.20 61.20 58.90 58.00 54.30 48.60 40.80 35.10 32.10 31.90 32.10

46

Dividend Behaviour of Indian Corporate Firms during 1990-2001

80 % of Firms 60 40 20 0 1991 1993 1996 1998 2000 1990 1992 1994 1995 1997 1999 2001 Payers Non Payers

Years

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 2006 and recorded declines thereafter. Initiators have shown a steady decline from 2002 and have fallen to 5% in 2012. Average dividend paid by payers has increased steadily from Rs. 1.69 crore in 1991 to Rs. 9.16 crore in 2011 and Rs. 13.05 crore in 2012. Regular payers are more in number and have paid higher average dividend compared to that of current payers and

47

initiators. Current payers have paid higher dividend compared to initiators except in the year 2012. 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 2011.

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 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 2012, the exception being Tata Engineering and Locomotive Company Ltd(TELCO).

48

Analysis of industry-wise average dividend paid shows that in the early 2000s, firms in the diversified industry have paid more dividends followed by mining firms and electricity firms. However, by the end of 2011 and 2012 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 2006 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

49

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.

50

Table 4.3 Average Dividend Paid During 1990-2001 Industry-wise (in Rs. Crore)

51

Industry

20 01 Chemicals 1.0 and 9 plastics Diversifie 3.5 d 6 Electricity 1.2 8 Financial 0.6 Services 7 Food and 0.8 Beverages 8 Machiner 0.7 y 0 Metal and 0.8 Metal 0 Products Mining 2.5 7 Misc. 0.3 manufact 9 uring Non0.5 metallic 0 Mineral Pro Other 1.0 Services 2 Textiles 0.4 8 Transport 1.2 Equipmen 5 t

20 02 0.9 6 3.8 8 1.1 4 1.3 9 0.9 7 0.6 5 0.9 0 2.7 9 0.5 1

20 03 1.0 5 4.2 4 1.1 9 1.4 7 0.9 8 0.7 2 1.3 7 2.9 7 0.7 2

20 04 0.9 7 5.1 1 2.2 6 1.3 8 0.8 9 0.7 3 1.3 6 3.5 7 0.6 2

20 05 1.0 8 6.1 4 5.8 5 1.4 9 0.9 4 0.8 3 1.7 2 2.8 7 0.7 3

20 06 1.3 8 7.7 2 9.5 4 2.1 0 1.0 2 0.9 9 2.2 0 2.9 4 0.7 0

200 7 1.5 7 10. 13 13. 08 2.4 6 0.8 0 1.1 1 2.3 9 8.8 7 0.7 5

200 8 1.6 9 10. 99 18. 31 2.7 2 0.9 0 1.1 3 2.1 4 17. 44 0.5 7 1.0 0 1.2 3 0.5 8 3.5 8

200 9 1.9 2 12. 86 17. 37 3.1 6 1.1 2 1.2 0 1.8 0 22. 23 0.3 5 0.8 6 1.3 4 0.4 8 2.9 5

201 0 1.6 8 17. 17 26. 33 3.2 0 1.1 3 1.3 4 1.4 0 21. 99 0.5 6 0.9 0 1.3 4 0.4 8 2.9 5

201 1 2.4 1 22. 76 27. 24 4.2 5 1.3 4 1.5 8 1.7 2 26. 31 0.5 8 1.1 2 1.4 2 0.5 6 3.4 4

201 FIRM 2 S 2.4 1138 6 29. 55 28. 67 5.2 9 1.8 9 2.1 1 3.0 8 35. 36 1.0 5 1.5 1 4.0 7 0.5 6 3.0 3 184 58 1097 745 1065 555 81 324 296

0.6 0.7 0.6 0.6 0.8 1.1 2 0 4 3 5 8 0.7 6 0.4 7 1.1 7 0.8 6 0.4 7 1.2 0 0.9 2 0.5 3 1.0 6 1.0 1 0.7 2 1.3 9 1.0 7 0.8 6 2.0 2 1.1 8 0.8 2 2.8 3

1264 750225

Dividend Per Share

52

Average dividend per share (DPS) has increased from 14 paisa in 2001 to 26 paisa in 2011 and 15 paisa in 2012. An

analysis of distribution of firms shows that 39 percent have paid nil DPS in 2001 and the percentage has increased to 67.7 in

2012. 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 2001 to 18.5 in 2012. 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 2001 to 27 paisa in 2011 and 25 paisa in 2012. Where as textiles firms have shown a decline in DPS from 13 paisa in 2001 to 6 paisa in 2012. Machinery firms have paid a steady 12 to 14 paisa except for the years 2007 and 2008 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.

Table

53

Average Dividend Per Share (DPS) During 2001-2012 (in Rs.) Year Number Minimum Maximum Average Std. DPS 0 0 0 0 0 0 0 0 0 0 0 0 DPS 12.71 10.58 15.58 51.2 57.5 135.33 174.67 222 350.33 249.75 266.38 61.5 DPS 0.1406 0.1385 0.1427 0.1415 0.1582 0.1803 0.2158 0.198 0.2337 0.2544 0.2571 0.1538 Deviation 0.3455 0.3009 0.3568 1.0025 1.2983 2.3543 3.3243 3.4834 5.8833 4.8938 4.4156 1.2899

of firms 2001 1694 2002 2153 2003 2468 2004 3028 2005 3953 2006 5032 2007 5536 2008 5801 2009 5911 2010 6176 2011 6167 2012 4734 Common 866 firms

Average Dividend Per Share (DPS) During 2001-2012

54

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
55

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 2001-2012 Percentage of Companies in the Year

56

DPS 2001 Rs. 0 39 Rs. 45.9 00.25 Rs. 0.250.50 Rs. 0.500.75 Rs. 0.751 Rs. 1-2 Rs. 2-5 > Rs. 5 0.2 0.1 0.1 0.4 0.9 13.5

2002 2003 2004 2005 2006 2007 2008 2009

41 43.1 37.9 46.2 39.9 46.9 41.1 45 44.9 42.3 50.8 35.8 58.9 27.5 64.5 22.2

2010
67.5 19.5

2011 2012
67.8 18.6 67.7 18.5

13.7

13.7

11.2

12.1

10.6

10.4

9.8

8.7

7.6

7.4

7.8

1.3

1.4

0.9

0.7

1.1

1.5

2.3

2.8

2.5

2.6

2.7

0.5

0.4

0.7

0.8

0.4

0.6

0.6

0.6

1.1

1.2

1.3

0.3 0.1 0

0.3 0 0

0.2 0.1 0.2

0.2 0.1 0.1

0.3 0.2 0.1

0.4 0.2 0.2

0.6 0.1 0.2

1 0.2 0.2

1.1 0.3 0.3

1.4 0.6 0.4

1.4 0.4 0.5

Industry-wise Dividend Per Share (DPS) During 2001-2012 (in Rs.) Industry Chemica ls 20 01 0. 20 02 0. 15 20 03 0. 14 20 04 0. 12 20 05 0. 17 20 06 0. 15 200 200 200 201 201 201 FIR 7 8 9 0 1 2 MS 0.1 0.1 0.1 0.1 0.2 0.2 1138 2 7 7 8 7 5

and 14

57

plastics Diversifi ed Electrici ty Financia l Services Food and Beverage s Machine ry Metal and Metal

0. 19 0. 13 0. 08 0. 20

0. 21 0. 10 0. 11 0. 20

0. 26 0. 11 0. 13 0. 18

0. 20 0. 11 0. 34 0. 23

0. 20 0. 11 0. 24 0. 31

0. 19 0. 10 0. 21 0. 47

0.2 0.2 0.2 0.2 0.2 0.2 184 1 2 1 2 7 1 0.1 0.0 0.1 0.1 0.1 0.1 58 2 9 0 0 3 0 0.2 0.1 0.1 0.1 0.1 0.1 1097 8 2 5 4 9 8

0.4 0.5 0.8 0.2 0.1 0.1 745 9 8 5 1 6 3

0. 12 0. 13

0. 13 0. 11

0. 14 0. 11

0. 14 0. 09

0. 13 0. 10

0. 13 0. 10

0.1 0.1 0.1 0.1 0.1 0.1 1065 7 9 2 4 4 4 0.1 0.0 0.0 0.0 0.0 0.0 555 2 9 7 6 7 7

Products Mining 0. Misc. manufac turing Non05 0. 12 0.

0. 07 0. 12 0.

0. 06 0. 14 0.

0. 07 0. 10 0.

0. 09 0. 11 0.

0. 06 0. 10 0.

0.0 0.0 0.1 0.1 0.1 0.0 81 7 8 3 0 1 9 0.1 0.1 0.0 0.1 0.2 0.3 324 0 5 6 6 1 0

0.1 0.0 0.0 0.0 0.0 0.0 296

58

metallic Mineral Pro Other Services Textiles Transpo rt Equipme nt

10

11

11

09

09

09

0. 17 0. 13 0. 12

0. 15 0. 14 0. 12

0. 17 0. 13 0. 12

0. 15 0. 11 0. 12

0. 13 0. 12 0. 13

0. 24 0. 09 0. 13

0.3 0.2 0.4 0.8 0.7 0.1 1264 8 8 2 8 3 2 0.0 0.0 0.0 0.0 0.0 0.0 750 8 6 6 5 7 6 0.1 0.1 0.1 0.1 0.2 0.1 225 5 8 6 5 1 7

Dividend Payout Ratio An analysis of average percentage dividend payout (PR) during 2001-2012 shows a volatile trend. Percentage PR

increased from 27.39 in 2001 to 32.95 in 2008 and then showed a declining trend till 2011 before reaching the peak average percentage PR of 40.53 in 2012. Year No. of Avg.% 2001 2002 2003 2004 firms 1382 1714 2022 2533 payout 27.39 25.19 27.54 27.98 SD 37.77 41.04 48.31 37.83 1%Trimmed avg. payout 24.98 23.11 24.25 25.72 !%trimmed no. of firms 1369 1697 2002 2508
59

2005 2006 2007 2008 2009 2010 2011 2012

3156 3770 4042 4258 4335 4503 4383 3387

28.19 25.88 27.44 32.95 31.39 22.82 21.6 40.53

61.96 38.06 88.12 139.85 453.37 120.19 67.49 1196.96

24.92 23.84 23.99 23.91 18.64 16.98 17.47 16.81

3125 3733 4002 4216 4292 4458 4340 3354

An analysis of distribution of firms by dividend payout percentage shows that as high as 26 percent of firms in 2001 and 56.6 percent in 2012 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.

60

Average % Payout During 2001-20112 Average payout %

Average % payout During 2001-2012

50 40 30 20 10 0
20 01 20 02 20 05 20 06 20 09 20 11

Average % payout 1% Trimmed Average % Payout

Year

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 2001, have less than 14 percent in 2012. Firms in metals and metal products industry have registered a high degree fall in DPO from 22.84 percent in 2001 to 8.74 percent in 2012. Distribution of Firms Payout Percentage During 2001-2012 % of Firms

61

Dividend 200 1 payout % 0 0-10 10-20 20-30 30-40 40-50 50-75 75-100 100-200 >200 Firms 26 6.9 14.5 16.5 12.6 8.2 10.1 3.5 1.2 0.4 138 2

200 2

200 3

200 4

200 5

200 6

200 7

200 8

200 9

201 0

201 1

2012

26.5 9.3 14.1 17.2 12.6 7.1 9 2.9 0.9 0.2 171 4

25.3 9.2 13.9 16.1 13.3 8.8 8.9 2.7 1.4 0.4 202 2

28.9 7.2 11.9 13.5 12.3 9.5 10.5 4.6 1.3 0.4 253 3

26.6 8 14.3 15 12.4 7.7 10.2 4.5 0.9 0.3 315 6

26.7 6.6 15.6 16.7 12.5 8.7 8.6 3.4 0.9 0.3 377 0

33.3 5.5 13.6 13.7 10.8 7.3 8.6 5.4 1.4 0.4 404 2

45.4 3.1 7.9 10.9 8.5 6.4 9.1 5.2 2.1 1.3 425 8

52.8 3.1 7.6 9.8 7.5 5.4 7.8 3.2 1.6 1 433 5

57 3.4 6.7 8.2 6.9 5.2 6.7 3.9 1.3 0.7 450 3

55.8 3.8 6.6 8.9 6.7 5.4 6.5 4.2 1.5 0.7 438 3

56.6 3.8 7.6 7.9 6.9 4.8 7.1 3.2 1.5 0.7 3387

Table 4.9 Industry-wise Dividend Payout During 2001-2012 (in %)

Industry

20 20 20 20 20 20 200 200 200 201 201 201 01 02 03 04 05 06 7 8 9 0 1 2 Chemicals 23. 20. 21. 23. 20. 21. 20. 18. 14. 13. 14. 13. and plastics Diversifie 92 38 51 38 14 88 53 37 23. 27 16. 76 19. 34 10. 84 17. 41 9.3 18 17. 52 12. 71 13. 59 13.
62

25. 20. 22. 25. 22. 23. 21.

d 28 95 78 48 74 23 61 Electricity 17. 16. 14. 13. 12. 16. 12.

Financial

98 21 15 37 48 98 70 23. 27. 28. 32. 29. 27. 31.

32 29. 19 16. 14 19. 45 16. 78 14. 65 15. 55 13. 62

42 16. 12 12. 73 16. 23 12. 56 11. 50 9.8 4 10. 78

5 14. 82 12. 67 15. 36 9.3 7 9.8 7 12. 18 9.6 6

68 16. 21 12. 80 15. 24 9.1 6 11. 98 12. 59 8.9 3

08 14. 30 10. 22 15. 15 8.7 4 11. 76 15. 09 11. 29

Services 28 01 50 11 87 25 74 Food and 24. 23. 24. 22. 20. 17. 17. Beverages 47 15 19 14 40 01 23 Machiner 23. 20. 22. 23. 23. 22. 20. y 93 36 87 42 67 07 83 Metal and 22. 21. 19. 20. 20. 19. 18. Metal Products Mining Misc. manufact uring Nonmetallic Mineral Pro Other Services Textiles 20. 21. 19. 19. 21. 19. 19. 01 15 25 84 15 60 34 16. 15. 17. 20. 20. 19. 17. 84 47 86 65 92 76 82

10. 7.2 12. 9.5 14. 12. 16. 28 9 28 6 04 10 58 18. 18. 15. 17. 17. 18. 17. 10 08 69 18 87 91 81

19. 17. 16. 16. 14. 14. 13. 71 75 95 27 78 92 87

17. 43 13. 84 22. 46

14. 00 11. 29 20. 96

12. 27 7.9 9 18. 74

12. 85 9.0 4 20. 18

12. 54 8.0 2 17. 29

63

83 98 26 98 54 20 30 Transport 19. 19. 21. 21. 23. 20. 19. Equipmen 31 96 61 29 26 99 69

Total payers have registered an increase in payout from 31.25% in 2002 to a peak of 43.02% in 2008 and finally paid out 37.64% in 2012. 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. In sum, average percentage PR showed a more stable pattern up to 2008 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

64

Average dividend yield for all companies during the period 2001 to 2012 has declined from 1.73% in 2001 to .55 in 2004 before finally recovering to 1.61 in 2009 and again falling marginally to 1.24% in 2012. On the whole the dividend yield is range bound in the region of 0.5% to 1.73%. The reason for the fall in 2004 could be due to high increases in market capitalizations of a number of stocks in the face or irregularities in the stock market in 2003. 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 2001 to 1.51% in 2004 before recovering and reaching an all time high of 10% in 2009. Compared to this current payers yielded about 5% in 2002 before falling to 1.81 in 2004 and have subsequently recovered and reached all time high of 8.12% in 2011. 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 2011.

65

On the whole dividend yield of aggregate payers shows a significant increase from 2001-2012.

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 2002 while financial services and mining firms paid the lowest. By 2012 diversified firms and electricity continue to pay higher dividend yields where firms in transport industry have improved their dividend yields by 2012. However, food and beverages and textile firms recorded lowered their dividend yield by 2012, 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 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

66

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 2006 and has fallen subsequently. Average DPS on the other hand has shown a steady growth except for year 2012. 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

67

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,
68

one year changes show that DPS has more or less remained at the same level, where as payout percentage has come down from 2008-2010.

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:

The Finance Minister raised tax on dividend from currently 10% to 20% in the year 2011-2012. 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 2009-2010 is Rs101.6bn. This implies that the corporate sector paid Rs10.2bn (10% of the 101.6bn) as dividend tax in FY10. Raising dividend tax from 10% to 20% would mean additional Rs10.2bn tax.

69

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. Summary and Conclusion This study examines the dividend behavior of Indian corporate firms over the period 2001-2012 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 2006 and has fallen subsequently. Average DPS on the other hand has shown a steady growth except for year 2012. Average percentage PR showed a more stable pattern up to 2008 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

70

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 doesnt seem to deter Indian firms from

71

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

72

some firms would have substituted share repurchases for cash dividends. Similarly, 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.

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.

73

74

(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.

75

 Dividend Policies of SoEs in India An Analysis , Finance India, Vol. X, by Mishra, C. and V. Narender (1996), pg no. 633-645.

76