Professional Documents
Culture Documents
Nepalese financial system is characterized by small but a growing capital market.
During the past 14 years of its operation, securities market has witnessed three
market phases of ups and downs. The latest upswing started from the fiscal year
2002/03 and is continuing. During this phase, Nepse index, the market indicator
climbed from 205 to 621 (J uly 10, 2007). The market capitalization of the listed
stocks climbed from Rs. 35.24 billion to Rs. 169.05 billion during the same
period. During the past five years, capital mobilized through public issue and
rights offerings has been in the tune of Rs. 8.4 billion from 109 issues. In the
fiscal year 2006/2007 alone, capital worth of Rs. 2.8 billion has been mobilized
from 34 issues.
In spite of expansion in size, the securities market is yet to make quality
transformation gaining depth and maturity. The market lacks sectoral
diversification of performing listed companies, access to secondary trading
services is limited , transparency and efficiency of the issuer and market is not
sufficient, capacity of the regulator, exchange and the players is limited, the
market is featured by active individual investors and the institutional investors
are conspicuously absent. The market infrastructures supporting the trading,
clearing and settlement are not sufficient. Thus the effort to build a dynamic
market is going to be an ardent task requiring a lot of commitment and efforts of
the government, regulator, market place, maker players and the investors.
The vision for a new Nepal has to have an important place for a dynamic capital
market. It should be a market where issuers have choice to tap the funds at lower
cost while people have choice to invest in the securities with different risk and
return. In essence, securities market is a mechanism that delivers public access to
ownership and share benefit from the investment. The fund requirement to
finance the establishment and expansion of corporate sector can conveniently
Monetary Policy of the Central Bank has a profound influence on the
performance of the securities market. The conduct of Monetary Policy comes
under Target and Goal Setting of Central Bank (Mishkin, 1992) that covers
various objectives such as price stability, interest rate stability, high employment,
financial market stability and stock market is an integral part of it, stability in
foreign exchange and ultimately economic stability and growth. At present,
monetary policy cannot be separated from stock market although the effects of
monetary policy are guided by the broader consideration of macro-economic
variables (Sprecher, 1994) in two ways: i) Relationship between economic
development and contribution of stock market to its sound and steady growth and
ii) Cyclical pattern generated from the changes in monetary policy and
underlying upward and downward paths creating movements in stock prices.
Apart from these basic influences, monetary policy plays a decisive controlling
function to avoid artificial rigging in stock prices to save investors from the
hands of gambling-tendency speculators.
The intervention of Central Bank (Prime, 1992) in stock market has been taken
positively to minimize the vast growing number of manipulators in the stock
market activities as well as to accomplish the goals of enhancing economic
stability, employment, income generation, capital formation, productivity of
industrial enterprises and vast economic growth to raise living standards of the
people. The monetary policy structure acts as a powerful tool (Widicus and
Stitzel, 1996) to foster and encourage the activities of the positive-driven
strategy. Monetary policy creates overall linkage to guide the stock market to
take right kind of direction and change proving vital to endure fair trading
practice and compliance of the guidelines and regulatory provisions to protect the
common interest of the investors.
People hold shares with an intention to earn money. Finance theory states that in
every return, there is some risk associated with it. While an investment in shares
has the prospect of earning good return, it also has the risk of losing large
amounts of equity. A traditional investor in stocks can only protect his or her
holdings by divesting the investments. The stock market can be a risky place for
investors if they do not know how to protect themselves from potential losses.
Change is the essence of life and risk is the integral aspect of living. This holds
equally well for the capital market. In the capital market, risk may be defined as
the chance that the expected return either may not materialize or may be less than
expected. Return earned from investment in shares of a company usually has two
components: the periodic cash flow such as receiving dividend; and the
appreciation in the price of shares, called the capital gain.
Price volatility is generally used to describe price fluctuations of a commodity.
Volatility is measured by day-to-day percentage difference in the price of
commodity. Applying the similar concept in capital market, the price volatility of
a share may be defined as the amount of variation in its price. The most volatile
shares are those with the largest variation in the value of their share price. Due to
this fact investment in such shares are considered the most risky. Volatile share
market is a market subject to price fluctuations, which increases the risk of price
changes of shares. Compared to the dividend, market price is the more crucial
factor, which contributes to the success of investment. Therefore, volatility in the
price of shares is a more critical risk associated with the capital market.
The degree of variation in the prices of shares, not the level of prices, defines a
volatile share market. Greater volatility of shares in the capital market for several
reasons matters the investors. It sheds light on what is happening in an economy-
1. Introduction
Looking back into the history of Nepalese securities market, we can find that the
market started in the mid 1930s with the issuance of shares by some companies.
However, the formal institutionalization began only after the establishment of
Securities Exchange Centre in 1976. The then Securities Exchange Centre was
responsible for undertaking the job of brokering, underwriting, managing public
issue, market making for government bonds and other securities markets
services. Introduction of the Companies Act in 1964, issuance of Government
Bond in 1964 and introduction of Securities Act in 1983 were the important past
initiatives for developing securities markets in Nepal. The development process
accelerated with the liberalization policy of the Government during 1990s.
During this period major initiatives were taken for the development of the
securities market, the most important one being establishment of Securities
Board of Nepal (SEBON) in 1993 as an apex regulator of securities markets.
With the establishment of SEBON the then, Securities Exchange Centre was
converted into Nepal Stock Exchange Ltd. (NEPSE), which started secondary
trading of securities with the introduction of stockbrokers. As of the March 2007
there are 23 stockbrokers, 3 securities dealers and 9 issue managers providing
securities market intermediation services and 131 listed companies.
The major regulatory framework for the securities markets is provided by
Securities Act, 2006, which has given authority to the SEBON for the regulation
of securities market. As per the Act, the major objectives of SEBON are to
regulate issue and trading of securities and market intermediaries, promote the
market and protect investor's rights. Besides, the duties and responsibilities of
Securities Board are to register securities and approve prospectus of public
companies, provide license to operate stock exchanges, provide license to operate
securities businesses, permit operation of collective investment schemes and
Abstract
This paper assesses the performance of Nepalese IPOs and relates them to potential
factors. The study finds that the Nepalese IPOs are heavily oversubscribed and provide
the investors with the market adjusted excess rate of return leading to the conclusion that
Nepalese IPOs are underpriced too. The study finds that the NEPSE Index and the
subscription as times of issue have significant predicting strength on the performance of
IPOs. The study results show that phenomenon of oversubscription can be explained by
the firm size and the debt equity ratios.
I. Introduction
The performance of initial public offerings (IPOs) is one of those empirical
questions that continuously draw the attention of many researchers in finance.
Several researches have been carried out to examine the performance of IPOs in
the developed countries like United States, France, Germany, United Kingdom,
J apan, Israel etc. and in the developing countries like India, Malaysia, China, etc.
where IPO market mechanisms may not be identical. Several empirical studies
put forward that IPOs are sold at a significant discount, a phenomenon known as
underpricing, from the prices that prevail in the aftermarket that results into
significantly better performance of IPOs than that of equity market in general.
The deeper the underpricing, the higher will be the initial returns resulting into
the better performance of IPOs for the investors. On the other hand, the deeper
the underpricing, the lesser will be the net proceeds for the issuing companies
resulting into the loss of wealth of the company as it represents the part of the
cost of going public for the companies.
Various explanations have been laid down to explain why IPOs outperform the
market initially due to the underpricing of IPOs under varying IPO market
mechanisms. There are both supporting and opposing evidence for these
explanations in the finance literature. This study aims to examine the mechanism
1. Introduction
The word dividend literally means that which may or is to be divided. In
relation to an enterprise it refers to the return that a shareholder gets from the
enterprise, out of its profits, on her/his shareholding. It is that part of the profits
of the enterprise which is distributed amongst shareholders. Since business
enterprises are formed to earn profits, every such enterprise has an implied power
to declare and pay dividends, and this power is not required to express by the
memorandum or article of association. However, the mode of distribution is
regulated by the Companies Act.
Dividend is a reward to the shareholders of enterprises for their investment and
risk bearing. It is paid in cash out of profits after the depreciation and tax
requirements have been met. In addition to cash dividend, an enterprise may also
issue stock dividends (bonus shares) to its existing shareholders by means of
capitalisation of its free reserves. The amount of dividend paid to the
shareholders depends upon the type of dividend policy pursued by an enterprise.
Dividend policy refers to some kind of consistent approach to the decision
involving distribution versus retention of the profits rather than making the
decision on a purely ad-hoc basis from year to year (Hunt, Williams and
Donaldson (1971)). More recently, Brealey and Myers (2003) defined dividend
policy as the trade-off between retaining earnings on the one hand and paying out
cash and issuing new shares on the other. It is concerned with the question of
when and how much dividend should be paid. Dividend policy decision is one
of the three basic decisions of an enterprise; the other two being investment and
financing. All the three decisions are interrelated and should be taken jointly so
that an optimal combination of these decisions can be arrived at for maximisation
of owners wealth, the main objective of corporate finance.
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2. Case studies
2.1. Standard Chartered Bank Nepal Limited
2.1.1. Background information
Standard Chartered Bank Nepal Limited (previously, Nepal Grindlays Bank
Limited), one of the leading banks in the country, was established in 1985 as a
foreign joint-venture bank. Its foreign joint venture partner is the Standard
Chartered Bank Limited with 50 percent equity investment, the rest of being
Nepalese promoters. The bank is managed under Technical Services Agreement
between Standard Chartered Bank Limited and Nepalese Promoters. The bank
has wisely used newer technologies for providing services to the customers.
Table1: Deposits, investments, profits and assets
(Rs.in Mn.)
S.N. Particulars 1995 2004
Annual rate
of growth (%)
1.
2.
3.
4.
5.
6.
Deposits
Investments
Net profits after tax
Reserves
Net asset block
Total assets
5519.4
1537.5
151.1
501.7
100.2
6570.7
21161.4
11360.3
537.8
1121.1
136.2
23642.1
13.4
20.0
12.7
8.0
3.1
12.8
Source: Annual reports of Standard Chartered Bank Nepal Limited
SEBON J ournal, Vol.III, J uly 2007 52
The Bank is fairly large-sized having total paid-up capital of Rs.374.6 million as
at the end of year 2004. The Bank showed all-round improvement in its results
over the study period. Its deposits, investments, net profit after tax, reserves, net
asset block, and total assets, etc. recorded manifold increases during the 10-year
period of the study. This is evident from the Table 1.
2.1.2. Dividend policy
Review of the Banks annual reports revealed that it considered the dividend
policy to be important finance function. The Bank had target dividend payout
ratio of 100 percent on paid up value, which it maintained in four years, and in
two years it had exceeded the target level of dividend. It also viewed this policy
as a long-term finance function. Its policy is to pay more or less a stable rate of
dividend (on paid up value) to the shareholders. This is also borne out by the fact
that the Bank maintained the rate of dividend at 100 percent in years 1996, 2000,
2001, and 2002, and at 110 percent in year 2003 and 2004 with the exception of
years 1995, 1997, 1998 and 1999 when the rate was 30 percent, 90 percent, 70
percent and 80 percent respectively. The Bank also had paid 50 percent stock
dividends to its shareholders in the years 1996, 1997, and 1998 and 10 percent in
the year 2003. The Bank considered earnings and adequate capital base while
paying cash dividends and considered shareholders demand, need of capital
resource, goal of future expansion and directive of Central Bank for increasing
share capital, while paying stock dividends. The policy of maintaining the rate of
dividend was followed not only in respect of the existing equity capital but was
applicable to the increased equity capital base as well. The paid up equity capital
was increased as a result of four successive payments of stock dividends.
2.1.3. Dividend behaviour
As presented by Table 2, the total amount of dividend paid by the Bank to its
shareholders increased from Rs.30 million in the year 1995 to Rs.412.1 million in
the year 2004. This increase was caused by the increase in the equity capital as a
result of issue of stock dividends. However, in the year 1997, due to cut in the
dividend rate, the amount of dividend declined, while in the years 2000, 2001 and
2002, the amount of dividend remained constant due the maintenance of constant
SEBON J ournal, Vol.III, J uly 2007 53
dividend rate. Despite the cut in dividend rate in 1998 and 1999, the amount of
dividend increased due to the stock dividends paid in the previous years.
Table 2: Investments, profits and dividends
(Rs. in million)
Years Investments Net profits Dividends
Payout ratio*
(%)
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
1537.5
1831.0
2288.9
1031.5
2681.1
3349.9
9559.2
9275.9
10357.7
11360.3
151.1
239.2
248.1
292.4
359.4
392.6
430.8
479.2
506.9
537.8
30.0
150.0
135.0
157.9
271.6
339.5
339.5
339.5
373.5
412.1
20
63
54
54
76
86
79
71
74
77
*Ratio of equity dividends to net profits Source: Annual reports of the bank
The payout ratio recorded wide fluctuations during the study period. It ranged
from 20 to 86 percent. The decline in the payout ratio was recorded in years of
high earnings, against which only a stable rate of dividend was appropriated.
Table3: Dividend rates
Years
Dividend as % of
paid up value
Dividend as % of
net worth*
Dividend as % of
average market
price**
Stock dividend as
% of paid up
capital
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
30
100
90
70
80
100
100
100
110
110
10
37.7
16.7
18
28.3
33.4
30.5
27.5
27.3
27.5
2
11
9.7
7.6
7.3
5.7
4.2
6.4
6.9
6.5
0
50
50
50
0
0
0
0
10
0
*Paid up capital plus reserves ** Average of high, low and closing market price
Source: Securities Board of Nepal
SEBON J ournal, Vol.III, J uly 2007 54
The rate of dividend has been increased to 100 percent in the year 1996 from 30
percent in the pervious year, which has been maintained in the years 2000, 2001,
and 2002, and increased to 110 percent in the years 2003 and 2004, while in the
years 1997, 1998 and 1999 the rate has been decreased to 90 percent, 70 percent
and 80 percent respectively. The rate of dividend on net worth varied between 10
percent and 37.7 percent, while the dividend yield fluctuated between 2 percent
and 9.7 percent during the study period. The Bank paid stock dividend at the rate
of 50 percent in the years 1996, 1997 and 1998, 10 percent in the year 2003.
2.1.4. Determinants of dividend policy
Changes in profit level and financing policy are the major determinants of the
dividend policy of the Bank. The Bank increased the amount of dividend in
response to the increase in its net profits. It is evident from Table 2 that there is
an increasing trend of net profit of the Bank in 1996 and onwards. Accordingly,
the amount of dividend has been increased in those years compared to previous
years. Table 3 revealed that the Bank has declared 50 percent stock dividend in
the years 1996, 1997 and 1998 and 10 percent in 2003. The purpose of issuing
stock dividend as stated in its annual reports are to raise the capital to fulfil the
requirement of central bank, goal of future expansion and fulfilment of
shareholders' demand. In those years except in 2003, the amount of dividend has
been decreased to some extent compared to that of other years.
As a growing Bank, its requirements for funds to finance various expansion plans
were also in increasing trend, which is evident from Table 4 that the total paid up
share capital of the Bank increased from Rs.100 million to Rs.374.6 million in
during the study period. The impact of such requirements on dividend policy
would depend upon the financing policy of the Bank. The Bank obtained funds
from the sources like issue of shares, issue of stock dividends, loans from the
banks and foreign financial institutions and retained earnings. Short-term loan of
the bank has increased from Rs.16.1 million to Rs.78.3 million; retained earnings
increased from Rs.183.5 million to Rs.217.6 million and the Bank had not used
any long-term loans during the study period. In view of relying more on equity
funds and having substantial earnings, the investment requirements did not have
any adverse impact on the dividend policy.
SEBON J ournal, Vol.III, J uly 2007 55
Table 4: Share capital and loans
(Rs.in million)
Years
Total Paid-up
Capital
Long-term
loans
Short-term
loans
Retained
earnings
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
100
150
150
225.6
339.5
339.5
339.5
339.5
339.5
374.6
0
0
0
0
0
0
0
0
0
0
16.1
861.9
997.6
344.5
190.1
2430.2
1666.7
684.7
79.2
78.3
183.5
174.9
235.8
236.8
123.7
94.5
99.6
130.9
216.0
217.6
Source: Annual reports of Standard Chartered Bank Nepal Limited
2.1.5. Findings
The dividend policy of the Bank had the following characteristics.
a) Dividend policy is being taken as primary policy variable.
b) Dividend policy is being treated as a long-term finance function.
c) Attempt has been made for regular dividend payment with stable rate in
most of the years.
d) Target payout ratio is set and attempt has been made to meet the target.
e) Rate of dividend is increased or decreased with the changes in profits.
f) Requirement to increase share capital, goal of future expansion, and
shareholders demand influenced dividend policy
2.2. Peoples Finance Limited
2.2.1. Background information
Peoples Finance Limited was established in year1993. The company had a total
paid-up capital of Rs.31.3 million in 2004. It is evident from Table 5 that the
company had shown all-round improvement in its results over a period of time.
SEBON J ournal, Vol.III, J uly 2007 56
Its deposits, investments, net profit after tax, reserves, net block assets and total
assets etc. recorded manifold increases during the study period.
Table 5: Deposits, investments, profits and assets
(Rs.in million)
S.N. Particulars 1995 2004
Annual rate
of growth *
(%)
1.
2.
3.
4.
5.
6.
Deposits
Investments
Net profits after tax
Reserves
Net asset block
Total assets
116.4
4.0
1.0
1.0
1.6
138.2
187.3
18.1
4.7
8.5
2.6
279.4
4.7
15.1
15.5
21.4
4.8
7.0
Source: Annual reports of Peoples Finance Limited
2.2.2. Dividend policy
The company paid cash dividend only in four years over the study period. In the
years 1996, 1997, 2000 and 2004, it paid 30 percent, 30.8 percent, 18 percent and
10 percent dividends respectively. It did not pay any stock dividend over the
study period. The company considered earnings and directives of central bank for
capital adequacy requirement while paying dividends, which is evident from the
Chairmans speeches.
2.2.3. Dividend behaviour
Table 6 reveals that the total amount of dividend paid by the company remained
more or less constant as the amount of dividend in the years 1996, 1997, 2000
and 2004 being Rs.3 million, Rs.4 million, Rs.3 million, and Rs.3.1 million
respectively. It was seen that the company paid dividend based on increase in net
profits. The net profit of the company was Rs.3.1 million in 1996 increased from
Rs.1.0 million in the previous year and again increased to Rs.5.2 million in 1997.
Same trend was in 2000 and in 2004. There was no dividend paid by the
company in 1998 as the company suffered loss in that year and in the following
year, though there was profit made by the company, there was no dividend paid,
which may be due to cumulative loss in that year. Similarly, no dividends were
SEBON J ournal, Vol.III, J uly 2007 57
paid in those years in which there were no significant profits. The range of
dividend payout ratio was 21.9 percent to 96.8 percent over the study period.
Table 6: Investments, profits and dividends
(Rs.in million)
Years Investments Net profits Dividends
Payout ratio *
(%)
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
4.0
6.0
6.0
11.0
13.2
12.8
15.7
20.1
16.1
11.1
1.0
3.1
5.2
-15.8
8.7
13.7
0
1.7
0.8
4.7
0
3.0
4.0
0
0
3.0
0
0
0
3.1
0
96.8
76.9
0
0
21.9
0
0
0
65.9
*Ratio of equity dividends to net profits
Source: Annual reports of Peoples Finance Limited
The rate of return in the form of dividend to the shareholders on paid up value
was zero in 1995, which increased to 30 percent in 1996 and 30.8 percent in
1997. Then, the rate of dividend on paid up value decreased to 17.6 percent in
2000 and 9.9 percent in 2004. The rate of dividend on net worth ranged from 7.8
percent to 26.9 percent and that on average market price ranged from 6.3 percent
to 22.6 percent.
Table 7: Dividend rates
Years
Dividend as %
of paid up
value
Dividend as %
of net worth*
Dividend as %
of average
market price**
Stock dividend
as % of paid
up capital
1995
1996
1997
1998
1999
2000
2001
0
30.0
30.8
0
0
17.6
0
0
26.9
20.6
0
0
11.6
0
0
14.6
22.6
0
0
6.3
0
0
0
0
0
0
0
0
SEBON J ournal, Vol.III, J uly 2007 58
Years
Dividend as %
of paid up
value
Dividend as %
of net worth*
Dividend as %
of average
market price**
Stock dividend
as % of paid
up capital
2002
2003
2004
0
0
9.9
0
0
7.8
0
0
9.5
0
0
0
*Paid up capital plus reserves ** Average of high, low and closing market price
Source: Securities Board of Nepal
Thus, it is seen that the company proposed dividend when it was in profit and did
not propose dividend when it was in loss. Besides, the dividend is also influenced
by the directives of Central Bank for loan loss provision. These facts indicate that
the company considered the dividend policy as an important decision variable in
financial policy making.
2.2.4. Determinants of dividend policy
The analysis of Chairmans speeches of the company highlighted various factors
influencing its dividend policy. One of the factors is the increase in net profits. It
is evident from Table 6 that the company has increased or decreased the amount
of dividend in response to the increase or decrease in net profits.
The other factor determining the dividend policy of the company was its
financing policy. The company under the study period appeared to use external
sources of fund to finance expansion requirements. The use of external sources of
funds is borne out by the fact that the company increased share capital from
Rs.10 million to Rs.31.3 million during the period. The company had not used
any loans (short term or long term). As there was very low level of retained
earnings, it can be inferred that the company had also not used its internal
sources of funds.
SEBON J ournal, Vol.III, J uly 2007 59
Table 8: Share capital and loans
(Rs.in million)
Years
Total Paid-up
Capital
Long-term
loans
Short-term
loans
Retained
earnings
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
10.0
10.0
13.0
17.0
17.0
17.0
20.0
20.0
20.0
31.3
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0.7
0.1
0.1
-15.7
-7.0
0.1
0.1
-1.1
0.3
0.9
Source: Annual reports of Peoples Finance Limited
2.2.5. Findings
The dividend policy of the company had the following characteristics.
a) Dividend policy is being taken as primary policy variable.
b) Dividend payment is irregular and the rate is also not stable.
c) Rate of dividend is increased or decreased with the changes in profits.
d) Dividend policy is influenced by loan loss provision requirement.
2.3. Nepal Insurance Company Limited
2.3.1. Background information
Nepal Insurance Company Limited was established in 1947. The company, as a
subsidiary company of Nepal Bank Ltd. with 51 percent share ownership, is the
oldest insurance company with successful track record.
The investments increased to Rs.208.5 million in 2003 from Rs.99 million in
1995 with an annual growth rate of 8.3 percent. Total assets increased to
Rs.454.2 million in 2003 from Rs.135.3 million in 1995 with an annual growth
rate of 13.4 percent. Net block assets and reserves increased with annual growth
rate of 7 percent and 7.6 percent respectively from 1995 to 2003. The company's
SEBON J ournal, Vol.III, J uly 2007 60
investments, reserves, net assets block and total assets recorded manifold
increases during the year 1995 to 2003. Its net profits after tax, however,
increased with an annual growth rate of 1.0 percent and reached to Rs.28.8
million in 2003, which as compared to its business expansion is very low.
Table 9: Investments, profits and assets
(Rs. in million)
S.N. Particulars 1995 2003
Annual rate
of growth *
(%)
1.
2.
3.
4.
5.
Investments
Net profits after tax
Reserves
Net asset block
Total assets
99
26.3
39.7
5.7
135.3
208.5
28.8
79
10.7
454.2
8.3
1
7.6
7
13.4
Source: Annual reports of Nepal Insurance Company Limited
2.3.2. Dividend policy
The annual reports of the company revealed that it considered the dividend policy
to be active and primary finance function. It paid cash dividend in all the years
during the study period, which ranged from 10 to 50 percent of paid up value. It
also paid stock dividend in four years and the rate ranged from 20 percent to 25
percent of paid up value. From 1995 to 1997, the company paid dividend at
increasing rate of 20 percent to 35 percent. In 1998 and 1999 the rate of dividend
was 25 percent. In 2000, it paid 50 percent dividend, which is the highest one
compared to other years during the study period. In 2001, the dividend paid was
20 percent and in the years 2002 and 2003, the rate of dividend was 10 percent.
2.3.3. Dividend behaviour
As revealed by Table 10, the amount of dividend paid by the company increased
from Rs.7.3 million to Rs.18.4 million from 1995 to 1997, which is decreased to
Rs.13.2 million in 1998. Again, it increased to Rs.31.6 million in 2000 and
decreased to Rs.12.6 million in 2001. In 2002 and 2003, it further decreased to
eight million. Dividend payout ratio ranged from 23.2 percent to 81.2 percent
during the study period.
SEBON J ournal, Vol.III, J uly 2007 61
Table 10: Investments, profits and dividends
(Rs. in million)
Years Investments Net profits Dividends
Payout ratio *
(%)
1995
1996
1997
1998
1999
2000
2001
2002
2003
99
109
143.6
146.3
168.7
132.9
143.9
164.5
208.5
26.3
34.5
35.6
25.6
25.4
38.9
37.8
34.4
28.8
7.3
13.1
18.4
13.2
15.8
31.6
12.6
8
8
27.7
38
51.7
51.6
62.2
81.2
33.3
23.2
27.8
*Ratio of equity dividends to net profits
Source: Annual reports of Nepal Insurance Company Limited
The company also paid stock dividend in four different years. In 1995, 1996, and
1997, it paid dividend in the increasing rate of 20 percent, 30 percent and 35
percent respectively. In 1998 the rate of dividend was 25 percent which was
increased to 50 percent in 1999, while it was decreased to 25 percent in 2000, 20
percent in 2001 and 10 percent in 2002 and 2003.
Table 11: Dividend rates
Years
Dividend as %
of paid up
value
Dividend as %
of net worth*
Dividend as %
of average
market price**
Stock dividend
as % of paid up
capital
1995
1996
1997
1998
1999
2000
2001
2002
2003
20
30
35
25
25
50
20
10
10
8.7
14.7
15.1
10.6
10.6
19.7
9.8
5.1
5.1
0.8
2.6
4.2
3.3
3.6
5.1
1.8
1.5
1.7
20
20
0
20
0
0
25
0
0
*Paid up capital plus reserves ** Average of high, low and closing market price
Source: Securities Board of Nepal
SEBON J ournal, Vol.III, J uly 2007 62
The rate of dividend on net worth ranged from 5.1 percent to 19.7 percent while
the dividend yield fluctuated in between 0.8 percent and 5.1. The company paid
stock dividend at the constant rate of 20 percent in the years 1995, 1996 and 1998
and 25 percent in 2001.
2.3.4. Determinants of dividend policy
From the above analysis, it is clear that one of the major determinants of
dividend policy of the company is its net profits. In 1995 to 1997 there was
increasing trend of net profits and accordingly the rate of dividend declared was
also in the same trend. In 1998, as the net profit decreased, the rate of dividend
was also decreased. In 2000, the amount of net profits increased at highest level
to Rs.38.9 million; accordingly, there was increased rate of dividend to the
highest level of 50 percent. In 2001 to 2003, the amount of net profits decreased
gradually, in response to that rate of dividend was also decreased to 10 percent.
Table 12: Share Capital, loans and retained earnings
(Rs. in million)
Years
Total paid-up
capital
Long-term
loans
Short-term
loans
Retained
earnings
1995
1996
1997
1998
1999
2000
2001
2002
2003
36.5
43.8
52.6
52.6
63.2
63.2
63.2
79
79
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0.09
0.04
1.4
0.07
2.0
1.2
1.2
1.4
11.3
Source: Annual reports of Nepal Insurance Company Limited
Company's financing policy was the other determinant of dividend policy. Table
9 revealed that the total assets of the company increased from Rs.135.3 million to
Rs.454.2 million and net assets block increased from Rs.5.7 million to Rs.10.7
million during the study period. To finance this expansion requirement, the
company relied on the share capital, which can be inferred from the fact that the
share capital of the company was also increased from Rs.36.5 million to Rs.79
SEBON J ournal, Vol.III, J uly 2007 63
million during the period. It also financed its capital requirements from the
retained earning as evident from the fact that the amount of which had been
increased from 0.04 million to 11.3 million over the period. The company had
not used any loans, which is evident from the Table 12.
2.3.5. Findings
The preceding analysis reveals the following characteristics of dividend policy.
a) Dividend policy is taken as primary policy variable.
b) There is regularity in dividend payment.
c) There is fluctuating rates of dividend.
d) There is direct impact of net profit to the rate of dividend.
2.4. Soaltee Hotel Limited
2.4.1. Background information
Soaltee Hotel Limited was established in 1968 as a private limited company.
Later on, in 1975 it was converted into public limited company and International
Finance Corporation, Washington D.C. and Oberoi Hotel, India also involved as
its shareholders. The Hotel is one of the leading hotels in the country. The paid
up capital of the Hotel as at the end of 2004 was Rs.87 million.
Table13: Sales, investments, profits and assets
(Rs. in million)
S.N Particulars 1995 2004
Annual Rate of
Growth*(%)
1
2
3
4
5
6
Net sales
Investments
Net profits after tax
Reserves
Net assets block
Total assets
392.3
15.3
22.9
290.5
338.3
639.6
370.5
20.5
-44.4
186.7
508.8
414.1
-0.6
2.9
-
-4.4
4.1
-4.3
Source: Annual reports of Soaltee Hotel Limited
As can be seen from Table 13, from 1995 to 2004, investments and net assets
block of the Hotel have increased with an annual growth rate of 2.9 percent and
SEBON J ournal, Vol.III, J uly 2007 64
4.1 percent respectively. Its sales, reserves, and total assets were decreased in
2004 with an annual decrease rate of -0.6 percent, -4.4 percent and -4.3 percent
respectively from 1995. Its net profits after tax decreased drastically to Rs.44.4
million in 2004 from Rs.22.9 million in 1995.
2.4.2. Dividend policy
The trend of dividend payment by the Hotel showed that it paid dividend
regularly to the shareholders from 1995 to 2001, and stock dividend in 2001. It
paid 30 percent dividend in 1995, 40 percent in 1996, 35 percent in 1997, 40
percent in 1998, 50 percent in 1999, 40 percent in 2000 and 10 percent in 2001.
Along with cash dividend, the Hotel also paid 33 percent stock dividend in 2001.
The trend of dividend payment and Chairmans speeches revealed that the Hotel
has a policy to pay more or less a stable rate of dividend.
2.4.3. Dividend behaviour
Table 14 reveals that dividend paid by the Hotel to its shareholders during 1995
to 2004, ranged from zero to Rs.32.6 million. The amount of dividend paid was
19.9 million in 1995, Rs.26.1 million in 1996, Rs.22.8 million in 1997, Rs.26.1
million in 1998, Rs.32.6 million in 1999, Rs.26.1 million in 2001 and Rs.6.5
million in 2001. From 2001 onwards the Hotel had paid no dividends. In each
year during 1995 to 2001, the Hotel is in profit and thereafter it is in loss. It can
be seen that whenever the Hotel has highest profit, the amount of dividend paid
was also highest and when there was no profit, there was no dividend paid. This
behaviour of dividend reflected the fact that the Hotel made dividend payments
based on the level of profits. This also indicated that the Hotel considered the
dividend policy as an important variable in financial policymaking.
The ratio of the amount of dividend on net profits ranged from zero to 86.9
percent during the study period. The net sales of the Hotel was Rs.392.3 million
in year1995 which was increased as high as to Rs.527.8 million in year 1999 and
decreased as low as to Rs.296.3 million in year 2002. From the year 1995 to
1999, sales increased smoothly, and after this year the downfall of the sales
started.
SEBON J ournal, Vol.III, J uly 2007 65
Table 14: Sales, investments, profits and dividends
(Rs. in million)
Years Net sales Investments Net profits Dividends
Payout ratio*
(%)
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
392.3
476.4
497.3
523.9
527.8
499.7
454.9
296.3
300.3
370.5
15.3
14.2
15.2
31.8
29.8
31.8
29.8
29.8
27.6
20.5
22.9
47.3
42.5
51.7
57.5
46
21.6
-59.6
-37.8
-44.4
19.9
26.1
22.8
26.1
32.6
26.1
6.5
0
0
0
86.9
55.2
53.6
50.5
56.7
56.7
30.1
0
0
0
*Ratio of equity dividends to net profits Source: Annual reports of Soaltee Hotel Limited
The investments of the Hotel was Rs.15.3 million in year 1995, the sales more or
less remained constant up to year 1997, increased to Rs.31.8 million in year
1998, this sales amount more or less remained constant up to year 2002, and then
after it started to fall down.
Table 15: Dividend rates
Years
Dividend as %
of paid up
value
Dividend as %
of net worth*
Dividend as %
of average
market price**
Stock dividend
as % of paid up
capital
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
30
40
35
40
50
40
10
0
0
0
7.2
7.7
6.2
6.7
8
6.1
1.5
0
0
0
2.8
4
5.4
5.5
5.9
3
0.6
0
0
0
0
0
0
0
0
0
33.3
0
0
0
*Paid up capital plus reserves ** Average of high, low and closing market price
Source: Securities Board of Nepal
SEBON J ournal, Vol.III, J uly 2007 66
The rate of dividend on net worth ranged from zero percent to 8 percent during
the study period, on which average market price ranged from zero to 5.9 percent.
2.4.4. Determinants of dividend policy
One of the major factors affecting dividend policy of the Hotel is changes in
profit level. The record of profits and dividend data of the Hotel indicated that
the rate of dividend fluctuated in conformity with the changes in its net profits.
The other important factor affecting the dividend policy is its financing policy.
The financing policy of the Hotel under the study period appeared to use external
as well as internal sources of funds to finance expansion requirements. This is
borne out by the fact that the Hotel used both long term and short-term loans in
all the years under study.
Table 16: Share capital, loans and retained earnings
(Rs. in million)
Years
Total paid-up
capital
Long-term
loans
Short-term
loans
Retained
earnings
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
65.2
65.2
65.2
65.2
65.2
65.2
25.2
87
87
87
146
104
100
74.2
38.7
15.7
5.2
40
125.2
140
57.9
81.3
83.6
54.9
42.4
8.8
8.8
8.8
6.8
0.4
7.6
21.2
19.7
25.6
24.9
19.9
15.1
0
0
0
Source: Annual reports of Soaltee Hotel Limited
The policy of using internal sources of financing is evidenced by the trend of
increasing level of retained earnings from 1995 to 2001. The Hotel, however, did
not depress the dividend payment because of retained earnings. Thus investment
requirements did not have any bearing on its dividend policy in view of the
financing policy of the Hotel to use the funds provided by external sources
(equity) and also internal sources of finance.
SEBON J ournal, Vol.III, J uly 2007 67
2.4. 5. Findings
The dividend policy of the Hotel has following feature from the above analysis.
a) Active and primary decision variable in the financial policymaking.
b) Irregularity in dividend payment due to losses in some years.
c) More or less stable rates of dividend on paid up value of share.
d) The major factors determining the dividend policy were net profits and
financing policy of using equity.
2.5. Salt Trading Company Limited
2.5.1. Background information
Salt Trading Company Limited was established in 1963. The company is one of
the leading trading companies in the country. The paid up capital of the company
was Rs.24.8 million as at the end of 2004. The Company showed all-round
improvement in its results except investments over study period year 1995 to
year 2004. Its sales, net profits after tax, reserves, net assets block and total assets
etc. recorded manifold increases during the study period. This is evident from the
Table 17.
Table17: Sales, investments, profits and assets
(Rs. in million)
S.N Particulars 1995 2004
Annual rate
growth*(%)
1
2
3
4
5
6
Net sales
Investments
Net profits after tax
Reserves
Net assets block
Total assets
1557.4
231.7
6
42.9
35.6
744.8
3898.9
151.8
73
584.2
466
1793
9.2
-4.2
25
26.1
25.7
8.8
Source: Annual reports of Salt Trading Company Limited
The net sales increased to Rs.3898.9 million in 2004 from that of Rs.1557.4
million in 1995 with an annual growth rate of 9.2 percent. The net profits
increased to Rs.73 million, reserves to Rs.584.2 million, and net block assets to
SEBON J ournal, Vol.III, J uly 2007 68
Rs.466 million in 2004 from Rs.6 million, Rs.42.9 million, and 35.6 million
respectively in 1995 with an annual growth of 25 percent, 26.1 percent and 25.7
percent respectively. The total assets increased to Rs.1793 million in 2004 from
Rs.744.8 million in 1995. The companys investments were decreased to
Rs.151.8 million in 2004 from Rs.231.7 million in 1995 with a decrease rate of
4.2 percent.
2.5.2. Dividend policy
The trend of dividend payment by the company during the study period shows
that it paid dividend regularly except in 2000. The rate of dividend payment on
paid up value ranged from 20 percent to 30 percent. As presented in Table 19, the
company maintained the rate of dividend at 20 percent from 1995 to 2004 except
in 2000, when it paid no dividend. In 2001 and 2002 it paid 25 percent and 30
percent dividend. The trend of dividend payment and chairman speeches revealed
that the company considered the dividend policy as a primary variable in its
financial policymaking and viewed as a long-term finance policy.
2.5.3. Dividend behaviour
The total amount of dividend paid by the company in 1995 was Rs.3.3 million
increased to Rs.4.9 million in 1996, and remained constant till 1999. The net
profit was Rs.6.1 million in 1995 increased to Rs.7.5 million in 1996 and more or
less remained constant till 1998 and decreased to Rs.5.3 million in 1999. In 2000,
it suffered loss of Rs.15.3 million and in this year it paid no dividend. Again, the
company started paying increasing rate of dividends when it started making
increasing profits 2001 onwards. This trend of dividend payment indicated that
the company paid dividend based on the level of profits.
SEBON J ournal, Vol.III, J uly 2007 69
Table 18: Sales, investments, profits and dividends
(Rs. in million)
Years Net sales Net profits Dividends
Payout ratio *
(%)
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
1557.4
1965.6
1968.9
1738.5
1842.4
1580.5
1743.1
1875.9
2461
3898.9
6.1
7.5
7.6
7.8
5.3
-15.2
10.5
26.7
50.2
73
3.3
4.9
4.9
4.9
4.9
0
6.2
7.4
5
5
54.1
65.3
64.5
62.8
92.4
0
59
27.7
10
6.8
*Ratio of equity dividends to net profits Source: Annual reports of the Company
The dividend payout ranged from zero to 92.4 percent. The return to shareholders
on their net worth ranged from zero to 8 percent and the yield rate ranged from
zero to 9.2 percent.
Table 19: Dividend rates
Years
Dividend as %
of paid up value
Dividend as %
of net worth*
Dividend as %
of average
market price**
Stock dividend
as % of paid up
capital
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
20
20
20
20
20
0
25
30
20
20
5.5
8
7.7
7.6
7.6
0
6.7
1.5
0.9
0.8
1
2.8
4.2
5.9
4.9
0
7.6
9.2
6.6
6.5
0
0
0
0
0
0
0
0
0
0
*Paid up capital plus reserves ** Average of high, low and closing market price
Source: Securities Board of Nepal
SEBON J ournal, Vol.III, J uly 2007 70
2.5.4. Determinants of dividend policy
The above analysis revealed that the company paid dividend when there was
profit and did not pay dividend when there was no profit. This fact indicates that
level of profit was one of the major factors determining the dividend policy.
The other factor determining the dividend policy was the financing policy of the
company. The company contemplated greater use of external sources of funds to
finance expansion requirements. The net assets block of the company increased
from Rs.35.6 million in1995 to Rs.466 million in 2004 and the total assets moved
up from Rs.744.8 million to Rs.1793 million during this period (Table 17). To
finance this large-scale expansion, the company relied, to a greater extent, on
external sources as evident from its long-term loans being increased from
Rs.355.9 million in 1995 to Rs.1359.6 million in 2003, which was slightly
decreased to Rs.1184.1 million in 2004. The company, however, did not use any
short-term loans during the study period. The retained earnings of the company
being less than Rs.1 million, it was not significant to finance the expansion
requirements of the company. However, the amount of retained earnings in 2003
and 2004 were high as there were higher profits and the company took policy of
paying stable rate of dividend.
Table 20: Share capital, loans and retained earnings
(Rs. in million)
Years
Total Paid-up
Capital
Long-term
loans
Short-term
loans
Retained
earnings
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
24.8
24.8
24.8
24.8
24.8
24.8
24.8
24.8
24.8
24.8
355.9
522.9
532.6
623.1
691.8
691
874.8
902.8
1359.6
1184.1
0
0
0
0
0
0
0
0
0
0
0.9
0.6
0.5
0.7
0.4
0
0.7
1.5
5.5
12
Source: Annual reports of Salt Trading Company Limited
SEBON J ournal, Vol.III, J uly 2007 71
2.5. 5. Findings
The above analysis revealed the following features of dividend policy of the
company.
a) Active and primary policy variable in the financial policymaking.
b) Regularity in dividend payment.
c) Stable rate of dividend on paid up value of share.
d) Rate of dividend based on the profit level
2.6. Unilever Limited
2.6.1. Background information
Unilever Limited (previously Nepal Lever Limited) was established in 1994 as a
joint-venture company with Hindustan Lever Limited, which has 80 percent
ownership stake. It is one of the leading manufacturing & processing company in
the country. The paid up capital of the company was Rs.92.1 million as at the end
of 2004.
Table 21: Sales, profits and assets
(Rs. in million)
S.N Particulars Year 1995 Year 2004
Annual rate
growth*(%)
1
2
3
4
5
Net sales
Net profits after tax
Reserves
Net assets block
Total assets
67.7
-3.8
-3.8
234.6
294.5
1524.9
140.8
303.9
135.7
859.9
31.1
-
-
-5.5
10.7
Source: Annual reports of Unilever Limited
As evident from Table 21, the total assets of the company increased to Rs.859.9
million in 2004 from Rs.294.5 million in 1995. Its net sales increased to
Rs.1524.9 million in 2004 from Rs.67.7 million in 1995 with an annual growth
rate of 31.1 percent, while its net profits increased to Rs.140.8 million in 2004
from -Rs.3.8 million in 1995 and reserves increased to Rs.303.9 million in 2004
from -Rs.3.8 million.
SEBON J ournal, Vol.III, J uly 2007 72
2.6.2. Dividend policy
Review of annual reports of the company revealed that it considered the dividend
policy to be active and primary finance function. In 1995, 1996 and 1997, it did
not pay any dividend, the reason for which being lack of surplus for
appropriation due to losses in 1995 and 1996. It paid dividend in uninterrupted
pattern from 1998 to 2004, which ranged from 20 percent to 100 percent. In
1998, 1999, 2000, 2001, 2002, 2003 and 2004, it paid dividend at the rate of 20
percent, 40 percent, 50 percent, 55 percent, 40 percent, 90 percent and 100
percent respectively.
2.6.3. Dividend behaviour
Table 22 reveals that the amount of dividend increased to Rs.18.4 million in
1998, increased to Rs.36.8 million in 1999 and Rs.46 million in 2000. The reason
behind the increase in dividend payment was increase in net profits to Rs.99.7
million in 1998, Rs.119 million in 1999 and Rs.120.6 million in 2000. However,
despite the decreased net profits to Rs.68 million in 2001, the amount of dividend
increased to Rs.50.6 million.
Table 22: Sales, profits and dividends
(Rs. in million)
Years Net sales Net profits Dividends
Payout ratio *
(%)
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
67.7
351.8
789.7
1193.6
1503.7
1728.6
1541
1236
1244.7
1524.9
-3.8
-4
24
99.7
119
120.6
68
42.6
93.2
140.8
0
0
0
18.4
36.8
46
50.6
36.8
82.9
92.1
0
0
0
18.4
30.9
38.1
74.4
86.4
88.9
65.4
*Ratio of equity dividends to net profits Source: Annual reports of Unilever Limited
SEBON J ournal, Vol.III, J uly 2007 73
In 2002, net profits decreased to Rs.42.6 million, and the amount of dividend also
decreased to Rs.36.8 million, while in 2003 and 2004, the amount of dividend to
Rs.82.9 million and Rs.92.1 million as the net profits increased to Rs.93.2 million
and Rs.140.8 million respectively. The range of dividend payout on net profits
was zero to 88.9 percent during 1995 to 2004. The financial profile of the
company thus depicted that dividend policy had been an active decision variable
as it paid dividend regularly in spite of the fair degree of variability in its
earnings. The rate of return in the form of cash dividend on paid up value was 20
percent in 1998, which was increased to 40 percent in 1999, 50 percent in 2000,
and 55 percent in 2001. This rate of return was zero in the first three years. The
company paid 20 percent dividend on paid up value in 1998, and increased to
100 percent in 2004.
Table 23: Dividend rates
Years
Dividend as %
of paid up value
Dividend as %
of net worth*
Dividend as %
of average
market price**
Stock dividend
as % of paid up
capital
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
0
0
0
20
40
50
55
40
90
100
0
0
0
10.9
14.7
14.1
14.8
10.6
23.1
23.2
0
0
0
4.5
3.4
2.4
2.4
2.4
8
7.5
0
0
0
0
0
0
0
0
0
0
*Paid up capital plus reserves ** Average of high, low and closing market price
Source: Securities Board of Nepal
During the study period, the rate of dividend on net worth ranged from zero
percent to 23.2 percent while dividend yield ranged between zero percent to 8
percent. The Unilever did not pay any stock dividend during the study period.
SEBON J ournal, Vol.III, J uly 2007 74
2.6.4. Determinants of dividend policy
Based on the company's trend of financing, dividend behaviour and chairmans
speeches, the level of profit and financing policy were identified as the major
factors influencing dividend policy. It is evident from Table 22 that the company
paid dividend in conformity with the changes in its net profits.
Table 24: Share capital, loans and retained earnings
(Rs. in million)
Years Total Paid-up
Capital
Long-term
loans
Short-term
loans
Retained
earnings
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
92.07
92.07
92.07
92.07
92.07
92.07
92.07
92.07
92.07
92.07
180
157.5
112.5
67.5
0
0
0
0
0
0
22.1
71
74.9
0
0
0
0
0
0
0
-3.8
-25.1
-5.2
76.1
158.3
232.9
250.3
256
266.3
303.9
Source: Annual reports of Unilever Limited
The financing policy of the company was to rely on internal sources of fund to
finance its expansion requirements. However, it was forced to use external
sources as well in the initial few years due to losses. Thereafter the company had
zero debt level because of receipt of dues, improved collection from domestic
businesses and strong business performance. The total assets of the company
increased to Rs.859.9 million in 2004 from Rs.294.5 million in 1995. To finance
its increasing total assets and business expansion the company extensively
retained its earnings. The retained earnings increased to Rs.303.9 million in 2004
from Rs.76.1 million in 1998; however, it did not depress the dividend payment.
2.6. 5. Findings
The above analysis revealed that the dividend policy of the company had
following characteristics;
SEBON J ournal, Vol.III, J uly 2007 75
(a) Active decision variable in the financial policymaking.
(b) Treated as a long-term finance function.
(c) Regularity in payment with increasing rate.
(d) Net profit was the major determinant
(e) Expansion requirements did not have any bearing on its dividend payment.
2.7. National Productivity & Economic Development Centre Limited
2.7.1. Background information
National Productivity & Economic Development Centre Limited was established
in 1988 for providing consulting services in designing industrial projects,
enhancing productivity and other industrial and economic matters. As evident
from Table 25, its total paid up capital as at the end of 2003 was Rs.7.9 million.
Its paid up capital remained constant in all the years during the study period of
1996 to 2003. The revenue increased to Rs.30.7 million in 2003 from Rs.17.2
million in 1996 with an annual growth rate of 7.2 percent. During the period, its
investments, net profits after tax, reserves, net assets block and total assets
increased to Rs.94.8 million, 7.8 million, 72.4 million, 3.7 million and Rs.80.3
million with annual growth rate of 6.2 percent, 14.7 percent, 6.5 percent, 1.8
percent and 1.2 percent respectively from Rs.57.7 million, 2.4 million, 43.1
million, 3.2 million and 73.1 million respectively.
Table 25: Revenue, investments, profits and assets
(Rs. in million)
S.N Particulars Year 1996 Year 2003
Annual rate
growth*(%)
1
2
3
4
5
6
Revenue
Investments
Net profits after tax
Reserves
Net assets block
Total assets
17.2
57.7
2.4
43.1
3.2
73.1
30.7
94.8
7.8
72.4
3.7
80.3
7.2
6.2
14.7
6.5
1.8
1.2
Source: Annual reports of National Productivity & Economic Development Centre Limited
SEBON J ournal, Vol.III, J uly 2007 76
2.7.2. Dividend policy
The company considered the dividend policy to be active and primary finance
function. It regularly paid dividend during the study period. The rate of dividend
on paid up value was 15 percent in all the years except in 1997, in which it paid
25 percent dividend. It segregated certain portion of net profits in all the years to
dividend equalisation funds to maintain stability in dividend payment. The
company earned profits in all the years during the study period. It did not pay any
stock dividend during the study period.
2.7.3. Dividend behaviour
Table 26 reveals that the amount of dividend was constant in all the years to
Rs.1.2 million except Rs.2 million in 1997, whereas there was fluctuating trend
of net profits during the period that ranged from Rs.2.4 million to Rs.11.7
million. The highest net profit was in 2000 and the lowest net profit was in 1996.
The range of dividend payout on net profits was 10.3 percent to 51.3 percent
during the study period.
Table 26: Revenue, profits and dividends: year 1996 to year 2003
(Rs. in million)
Years Revenue Net profits Dividends
Payout ratio *
(%)
1996
1997
1998
1999
2000
2001
2002
2003
17.2
20.6
20.7
25.5
31.6
33.5
22.7
30.7
2.4
3.9
3.2
6.3
11.7
2.7
4.7
7.8
1.2
2
1.2
1.2
1.2
1.2
1.2
1.2
50
51.3
37.5
19
10.3
44.4
25.5
15.4
*Ratio of equity dividends to net profits Source: Annual reports of National Productivity
& Economic Development Centre Limited
The rate of return in the form of dividend on paid up value was 15 percent in all
the years except in 1997. The rate of dividend on net worth ranged from 1.5
SEBON J ournal, Vol.III, J uly 2007 77
percent to 3.8 percent. The company thus had smooth pattern of dividend
payment during the study period.
Table 27: Dividend rates
Years
Dividend as
% of paid up
value
Dividend as % of
net worth*
Dividend as
% of average
market
price**
Stock dividend
as % of paid up
capital
1996
1997
1998
1999
2000
2001
2002
2003
15
25
15
15
15
15
15
15
2.3
3.8
2.1
1.9
1.6
1.7
1.6
1.5
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
*Paid up capital plus reserves ** Average of high, low and closing market price
Source: Securities Board of Nepal
2.7.4. Determinants of dividend policy
Table 28 revealed that the company had retained earnings only in year 1997. It
used share capital as external sources of financing. The share capital was also
constant to Rs.7.9 million in all the years during the study period. The company
being a consultant did not require short-term as well as long-term loans, neither
required to retained earnings. It had not used any loans during study period.
Table 28: Share capital, loans and retained earnings
(Rs. in million)
Years
Total Paid-up
Capital
Long-term
loans
Short-term
loans
Retained
earnings
1996
1997
1998
1999
2000
2001
2002
2003
7.9
7.9
7.9
7.9
7.9
7.9
7.9
7.9
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
1.4
0
0
0
0
0
0
Source: Annual reports of National Productivity & Economic Development Centre Limited
SEBON J ournal, Vol.III, J uly 2007 78
The above analysis revealed that the company maintained dividend equalisation
funds from its profit to pay a constant rate of dividend. As it had not used
external loans as well as retained earnings as sources of financing, its financing
policy also did not have any influence to its dividend policy.
2.7.5. Findings
The dividend policy of the Centre had the following characteristics.
(a) Primary policy variable in the financial policymaking.
(b) A target payout ratio was maintained with stable rate.
(c) Financing pattern did not have significant influence.
2.8. Conclusions
The study reveals the dividend policy being treated as an active and primary
variable in the financial policymaking. This is characterised by the regular
payment of dividend. Standard Chartered Bank Nepal Limited, Salt Trading
Company Limited and National Productivity & Economic Development Centre
Limited pursued the policy of target dividend payout. In case of National
Productivity & Economic Development Centre Limited, dividend equalisation
fund was also created to pay target dividend.
The dividend behaviour of Standard Chartered Bank Nepal Limited and Nepal
Insurance Company Limited were uninterrupted and fluctuating, while that of
Salt Trading Company Limited and National Productivity & Economic
Development Centre Limited was at stable rate on paid up value. The dividend
behaviour of Peoples Finance Limited, Soaltee Hotel Limited and Unilever
Limited were interrupted.
The foremost factor determining dividend policy was the level of profits of the
enterprises. In all the cases the amount of dividend was in accordance with the
level of profits except in the case of National Productivity & Economic
Development Centre Limited. Financing policy was the other important factor
influencing the dividend policy. In four enterprises, the financing policy was to
SEBON J ournal, Vol.III, J uly 2007 79
rely on the external sources of funds. Consequently, investment requirements did
not have any adverse influence on the dividend policy of these enterprises. In the
cases of the enterprises, whose emphasis was on using internal sources of funds,
still it did not constraint the dividend payment. In case of stock dividend, need to
increase share capital as per the directives of the regulator, goal of future
expansion and shareholders demand were the major determinants.
References
Brealey, Richard A.and Stewart C. Myers, 2003, Principles of Corporate Finance Seventh Edition,
Tata McGraw-Hill Publishing Company Limited, New Delhi.
Hunt, Williams and Donaldson, 1971, Basic Business Finance: Text & Cases, Richard D. Irwin Inc.
Standard Chartered Bank Nepal Limited, Annual Reports fiscal years 1994/952003/04, New
Baneswor, Kathmandu.
Peoples Finance Limited, Annual Reports fiscal years 1994/95-2003/04, Tripureswor, Kathmandu.
Nepal Insurance Company Limited, Annual Reports fiscal years 1994/95 2002/03, Kamaladi,
Kathmandu.
Soaltee Hotel Limited, Annual Reports fiscal years fiscal years 1994/95 2003/04, Tahachal,
Kathmandu.
Salt Trading Limited, Annual Reports fiscal years 1994/95 2003/04, Kalimati, Kathmandu.
Unilever Limited, Annual Reports fiscal years 1994/95- 2003/04, Heritage Plaza, Kathmandu.
National Productivity & Economic Development Centre Limited, Annual Reports fiscal years
1995/962002/03, BID Balaju, Kathmandu.
Institutional Investment in Nepalese Securities Market
1. Introduction
Nepalese securities market has a history of institutionalisation of about three
decades. However, it has not fully developed to contribute meaningfully in the
economic development of the country. Total market capitalisation value reached
to Rs. 61365.89 million by the end of the fiscal year 2004/05, which is 12.17
percent of the GDP. Total paid up capital of listed securities has reached to Rs.
16771.84 million and the average annual value of securities trading in the stock
exchange is Rs. 1341.65 million. The average percentage of turnover on market
capitalisation for the last 12 years is only 4.21, which indicates low level of
liquidity in the market. The average annual public issue for the last 12 fiscal
years is Rs. 597.07 million. Till the fiscal year 2004/05, the total amount of
issued securities is Rs. 8.6 billion consisting of 76.6 percent common stock, 2.7
percent preferred stock, 8.3 percent collective investment schemes and 12.3
percent debentures. This shows not only the low supply of securities in the
market but also the lack of diversification of securities instruments. If we
particularly see the trend of debenture issue from the fiscal year 1993/94 to
2004/05 there were only four issues of debentures. There is also wide variation in
the interest rate of those debentures ranging from 6 to 14 percent. The
government securities market is yet to be integrated with the corporate bond
market that could provide benchmarking interest rate and lead to the
development of full-fledged debt market in the country. There are only two
mutual funds with total amount of capital mobilisation of Rs. 613.09 million by
the end of the fiscal year 2004/05. There is no encouraging issue of securities
from corporate sectors other than banks and financial institutions. Thus, the
insufficient supply of securities and diversification in the securities instrument
and issuing companies has been limiting the scope for institutional investment in
the market.