DIVIDEND POLICY – AN

OVERVIEW
 Concepts
• Equity Earnings: Net earnings available to equity
shareholders
• Management of Earnings: Apportion of equity earnings
between dividends and retained earnings
• Dividend: The portion of company’s net earnings that are
paid out to the ordinary shareholders.
 STABLE DIVIDEND POLICY
(Constant DPs)

EPS

EPS and DPS

(Rs) DPS

Years
 Stable Dividend Policy (constant pay out
ratio)

EPS
EPS and DPS
(Rs)
DPS

Years
 Advantages of Stable Dividend Policy
• Builds confidence among investors
• Current income to investors
• Information about firms profitability
• Institutional investors requirements
• Raising additional finance
• Stability in market price of share
• Easy availability of debt funds
 Limitations of Stable Dividend Policy
• Difficult to change
• Adverse effect on market price of share
• Long-run effect on company
 Factors Affecting Dividend Policy
• Nature of earnings
• Age of company
• Liquidity position of company
• Equity shareholders preference for current income
• Requirements of institutional investors
• Contractual requirements
• Financial needs of company
• Control objective
• Accepts to capital market
• Inflation
• Dividend policy of competitors
• Past dividend rates of the company
• Legal Rules: Capital impairment rule; Insolvency rule; net profits
 Forms of Dividends
• Cash dividend
• Scrip dividend
• Bond dividend
• Property dividend
• Stock dividend (bonus share)
 Bonus Share
Bonus Share: Payment of bonus in the form of stock to the
existing owners
Objectives
• To bring down market price of share within more popular
range
• To promote active trading of shares
• To reduce EPS
• To achieve respectable stage in the eyes of investors
• To say company future is prospective
• To improve prospects of raising additional funds
 Advantages of Bonus Share
To Company
• More liquidity position
• Attractive share price
• Enhance company prestige
• Widening share for market
• Availability of funds for expansion
To Shareholders
• Tax savings
• Indication of future benefits
• Psychological value
 Disadvantages of Bonus Share

To Company
• Costly
• Reduces EPS and PE Ratio
• Misuse of management power
To Shareholders
• Disappointment of shareholders
• Wealth remains unaffected
• Lower existing stock value
• Less security to investors
 SEBI Guidelines on Bonus Share Issue
• No bonus issue is made which will dilute the rights of debenture
holders, convertible partly or fully
• Bonus issue should be made out of free reserves built from genuine
profits
• Reserve created by revaluation of assets cannot be capitalized
• Bonus in lieu of dividend can not be made
• Bonus issue can not be made unless partly paid shares are converted
fully paid stock
• Issue must be implement within six months from approval of Board
• AOA should allow Bonus issue, otherwise general body meeting
resolution is necessary
• After issue of bonus stock paid capital should not exceed authorized
capital
 Stock Split
Stock Split: It is the decision of a firm to increase the number of
shares by splitting the existing shares into different proportions

Reasons
• To make share trading attractive
• Indication of Higher Profits in the future
• To give higher dividends to shareholders
 Buy –back of Shares-Objectives
Buy Back of Shares: Repurchase of outstanding shares by a firm
in the market to discourage unfriendly takeover
Objectives
• To increase promotion holding
• Rationalize the capital structure
• To thwart takeover
• Unused cash
• Show better financed ratios
• Tax gain
• Market perception
• Avoid legal controls
 Resources of Buyback of Shares
• Free reserves
• Security premium account
• Proceeds of any shares
 Methods of Buyback of Shares
• Tender method
• Book-building process
• Open market
 Regulation of Buyback of Shares [Company's
Act]

• Should be authorized by AOA

• A special resolution in general meeting, when Buyback exceeds 10%
• It should not exceed 25% of paid up capital plus free reserves
• No default in debt service; redemption debt; payment of dividend
• No default in complying with the provisions of filing annual return,
dividend, and former contents of annual accounts
• Full paid-up share can only allowed to buyback
• After buying them should be extinguished and physically destroyed
• Company should not make further issue within 6 months
 Regulation of Buyback
[SEBI Guidelines]
• Promoters are barred from offering shares
• Buyback cannot be done through negotiations
• Buyback need to be done through Merchant banker
• Company should file Form ‘C’ with registrar within 30 days of
such buyback completion
 Procedure for Buyback of Shares

• Public announcement at least one English national daily one

Hindi national daily and one regional language
• Give specified date in public announcement
• Public announcement shall contain disclosures as per
Schedule I of SEBI guidelines
• A draft letter of offer shall be filed with SEBI through a
Merchant banker
 Procedure for Buyback [contd.]
• Copy of Board resolution shall be filed with SEBI and Stock
Exchange
• Buyback date shall not be less than 7 days or later than 30
days after the specified date
• Buyback of share had to be implemented within 12 months
from the date of passing the special resolution