“DIVIDEND POLICY OF RELIANCE

INDUSTRIES”
Introduction
The firm's dividend decision has in the last ten to fifteen years
received considerable attention from financial analysts and
academics.Divergent views have been expressed and it is understood
that the controversy has not been resolved,although the lack of new
authorship on the subject in resent times may lead one to conclude
that tha debate is deadlocked.
A dividend is a payment made by a company to its shareholders.

A company can retain its profit for the purpose of re-investment in the
business operations (known as retained earnings), or it can distribute
the profit among its shareholders in the form of dividends.

A dividend is not regarded as an expenditure; rather, it is considered a

distribution of assets among shareholders. The majority of companies
keep a component of their profits as retained earnings and distribute
the rest as dividend.

The different types of dividends include:

Special dividend:
Normally, public companies declare their dividends on a specific
schedule; however, they also have the option to declare a
dividend at any time. This type of dividend is referred to as a
special dividend.

Cash Dividends
Firms distribute as cash dividends a certain percentage of
annual earnings in payout rates. Ordance
Four dates are crucial to accounting ordance for cash
dividends as follows:

The date of declaration

It is the date a resolution to pay cash dividends to stockholders
of record on a specific future date is approved by the board of
directors. At that date the firm incurs a liability prompting the
recognition of a short-term debt—Dividends Payable and the
debit to either Retained Earnings or Cash Dividend Declared.
The ex-dividend date
It is the date the stock stops selling with dividends attached. The
period between the date of declaration and the ex-dividend
date is used by the firm to update its stockholders’ ledger.
The date of record
It is the date at which the stockholders figuring in the
stockholders’ ledger are entitled to the cash dividend. No entry
is required.
The date of payment
It is the date at which the firm distributes the dividend checks
and eliminates the dividend payable as a liability.

Case Example

Let’s assume that the Lie Reliance industries itd.,on March 15, 2009,
declared a cash dividend of $1 per share on 2,000,000 shares
payable June 1, 2009, to all stockholders of record April 15. The
following journal entries are required:

1. Date of declaration, March 15, 2009

[Debit]. Retained Earnings [Cash Dividend Declared] = 2,000,000

[Credit]. Dividends Payable = 2,000,000

2. Date of record, April 15, 2009

Memorandum entry that the firm will pay a dividend to all

stockholders of record as of today, the date of record.

3. Date of payment, June 1, 2009

[Debit]. Dividends Payable = 2,000,000[Credit]. Cash = 2,000,000

Note: It is appropriate to note that cash dividend declared is

closed at year-end to Retained Earnings.

Property Dividends
Firms may elect to declare a “property dividend” that is payable
in nonmonetary assets rather than declaring a cash dividend.
Because a property dividend can be classified as a “non-reciprocal
nonmonetary transfer to owners”, the property distributed is
restated at fair market value at the date of declaration and a gain or
loss is recognized.

Case Example

Let’s assume that the Reliance Industries ltd. declares a property

dividend, payable in bonds of Lie Dharma Company being held to
maturity and costing $500,000. At the date of declaration the bonds
had a market value of $600,000. The following journal entries are
required:

1. Date of Declaration

Investments in Lie Dharma Company

[Debit]. Bonds = 100,000[Credit]. Gain on Appreciation of Bonds =
100,000[$600,000 - $500,000]

[Debit]. Retained Earnings [Property Dividend Declared] = $600,00

[Credit]. Property Dividends Payable = $600,000

2. Date of Distribution

[Debit]. Property Dividends Payable = 600,000[Credit]. Investments

in Lie Dharma Company Bonds = 600,000

Stock dividend:
Given in the form of bonus shares or stocks of the issuing
company or a subsidiary company. Normally, they are offered on the
basis of a prorata allotment

(1) Regular Dividend.

By dividend we mean regular dividend paid annually, proposed by the
board of directors and approved by the shareholders in general
meeting. It is also known as final dividend because it is usually paid
after the finalization of accounts. It sis generally paid in cash as a
percentage of paid up capital, say 10 % or 15 % of the capital.
Sometimes, it is paid per share. No dividend is paid on calls in
advance or calls in arrears. The company is, however, authorised to
make provisions in the Articles prohibiting the payment of dividend on
shares having calls in arrears.

(2) Interim Dividend.

If Articles so permit, the directors may decide to pay dividend at any
time between the two Annual General Meeting before finalizing the
accounts. It is generally declared and paid when company has earned
heavy profits or abnormal profits during the year and directors which
to pay the profits to shareholders. Such payment of dividend in
between the two Annual General meetings before finalizing the
accounts is called Interim Dividend. No Interim Dividend can be
declared or paid unless depreciation for the full year (not
proportionately) has been provided for. It is, thus,, an extra dividend
paid during the year requiring no need of approval of the Annual
General Meeting. It is paid in cash.

(3) Stock-Dividend:
Companies, not having good cash position, generally pay dividend in
the form of shares by capitalizing the profits of current year and of
past years. Such shares are issued instead of paying dividend in cash
and called 'Bonus Shares'. Basically there is no change in the equity
of shareholders. Certain guidelines have been used by the company
Law Board in respect of Bonus Shares.

(4) Scrip Dividend. Scrip dividends are used when earnings

justify a dividend, but the cash position of the company is temporarily
weak. So, shareholders are issued shares and debentures of other
companies. Such payment of dividend is called Scrip Dividend.
Shareholders generally do not like such dividend because the shares
or debentures, so paid are worthless for the shareholders as directors
would use only such investment is which were not . Such dividend
was allowed before passing of the Companies (Amendment) Act
1960, but thereafter this unhealthy practice was stopped.

(5) Bond Dividends. In rare instances, dividends are paid in the

form of debentures or bounds or notes for a long-term period. The
effect of such dividend is the same as that of paying dividend in
scrips. The shareholders become the secured creditors is the bonds
has a lien on assets.

(6) Property Dividend. Sometimes, dividend is paid in the form

of asset instead of payment of dividend in cash. The distribution of
dividend is made whenever the asset is no longer required in the
business such as investment or stock of finished good sods. But, it is,
however, important to note that in India, distribution of dividend is
permissible in the form of cash or bonus shares only. Distribution of
dividend in any other form is not allowed.

Factors affecting divided decision or determinants

of divided decision
The financial management has to take a decision regarding the
distribution of dividend. These are two possible ways of dealing with
the distribution of profit. The profit should either be retained in the
business or distributed to the shareholders. Retained profit plays an
important role in the future growth and expansion of the enterprise,
because these are internal sources of financing and do not involve
floatation costs and legal formalities. As such the company will adopt
the policy of residual or passive (lesser) distribution, so far it can
profitably invest its retained earning as a source of internal
financing. The term residual distribution here means the declaration
of dividend out of the profit remaining left after internal financing of the
company.
The dividend may be declared as higher rates if the intention of the
company is to increase the value of shares. The dividend decision is
also affected by the preference of shareholders. Let us now discuss
the factors determining divided decisions:
(1)Financial requirement of the company: - If the company has
profitable investment opportunities in the enterprise itself it will declare
divided at lower rates. Meeting long-term financial requirement out of
its own resources is always in the interest of the company, because it
is cheaper due to absence of floatation costs and legal formalities.
Higher divided will declared by the companies having few long-term
investment opportunities.
(2)Availability of funds: - The liquidity of a company or availability of
cash resources is prime consideration in divided decision. The greater
the liquidity of a company, the greater is its ability to pay dividend. The
liquidity of the company is strongly influenced by the firm’s investment
and financing decisions. The investment decision determines the rate
of asset expansion and the firm’s need for funds and the financing
decision determines the way in which this need will be financed.
(3)Stability of dividends: - It is always in the interest of the company,
investors and shareholders to follow the policy of stable dividend,
because it resolves the uncertainty in the mind of investors and
satisfies their for current income. Financial institution also like
companies, declaring dividend regularly at stable rates. No company
would like to ignore investment by financial institutions. In these
circumstances the company may adopt one of the three following
policies:
a.Constant dividend per share or constant dividend
rate:- According to this policy dividend is declared at
constant rate every year. The rate may be increased if new
level of profit is earned.
b. Constant pay out ratio:- Dividend at fixed percentage of
earning is paid every year. As earnings go on fluctuating
every year, so the dividend also fluctuates.
c. Constant dividend per share plus extra dividend :-
Under the policy, minimum dividend per share is fixed. In
case of extra earnings, extra dividend may be declared.
Investors are kept satisfied with the supplementary
dividend. Extra dividend may be taken as interior dividend.
(4)Preferences of shareholders:- Shareholders are owners of the
company, so their preferences must be given due consideration.
Small, retired and salaried people prefer regular income. They are
interested in stable and regular dividend. Wealthy investors are
interested in capital gain. They are prepared to forego their current
income over the expected higher income.

(5)Capital market consideration:- Companies can raise their

additional funds either by issue of shares or by retaining their profit. If
the capital market is favorable the company will raise funds by issue
of shares and declare dividends at higher rates. In case the capital
market is unfavorable, the company will go in for retained earnings
and declare dividends at lower rates.
(6)Legal restrictions:- The companies act has laid down certain
restrictions regarding payment of dividend. The company can use its
current profits or past profits after providing for depreciation for the
payment of dividend. The company cannot pay dividend out of its paid
up capital.
Company will have to satisfy itself, whether it has sufficient cash to
make payment of dividends. The company is future required to make
payment of interest before dividends are paid.
(7)Information value:- The company should be aware of the possible
impact of dividend decision on valuation of its shares. Most
companies look at the dividend pay out ratios of other companies in
the industry, particularly those having about the same growth.
Investor’s expectation also plays an important role in dividend
decision. If investor’s expectation is for high dividend pay out then
company should take that into account while making a dividend
decision. On the other hand, if investor expects a high market value of
shares then company may decide for low dividend payout for future
expansion plans.
(8)Borrowing capability:- The borrowing capability of a firm affects
dividend decision in the sense that high dividend payout is possible
with greater borrowing capability and vice-versa. This ability to borrow
can be in the form of credit or a revolving credit from the bank or
simply the informal willingness of a financial institution to extend
credit. The large and more established a company; the better is its
access to capital markets.
Issue for bonus shares:- Sometimes the company can also issue
bonus shares, known as stock dividend in place of making payment of
dividend in cash, It increases the number of shares and the capital
base of the company, it keeps investors happy, The issues of bonus
shares is an integral part of dividend policy.
Announcem Effective Dividen Dividen Rema
ent Date d Type d (%) rks
Date
26-04-10 10-05-10 Final 70.00 -
07-10-09 16-10-09 Final 130.00 -
21-04-08 08-05-08 Final 130.00 -
02-03-07 21-03-07 Interim 110.00 -
27-04-06 01-06-06 Final 100.00 -
27-04-05 12-05-05 Final 75.00 AGM
 DIVIDEND
Payment of Dividend
The Dividend is paid under two modes viz:
(a) National Electronic Clearing Services (NECS)
(b) Physical dispatch of Dividend Warrant
Payment of dividend through National Electronic Clearing
Service (NECS) facility

NECS facility is a centralised version of ECS facility. The NECS

system takes advantage of the centralised accounting system in
banks. Accordingly, the account of a bank that is submitting or
receiving payment instructions is debited or credited centrally at
Mumbai. The branches participating in NECS can, however, be
located anywhere across the length and breadth of the country.

Payment of dividend through NEFT Facility and how does it

operate?

NEFT denotes payment of dividend electronically through RBI clearing

to selected bank branches which have implemented Core Banking
solutions (CBS). This extends to all over the country, and is not
necessarily restricted to the 68 designated centres where payment
can be handled through ECS. To facilitate payment through NEFT,
theareholder is required to ensure that the bank branch where his/her
account is operated, is under CBS and also records the particulars of
the new bank account with the DP with whom the demat account is
maintained.

Dividend through Direct Credit

The Company will be appointing one bank as its Dividend banker for
distribution of dividend. The said banker will carry out direct credit to
those investors who are maintaining accounts with the said bank,
provided the bank account details are registered with the DP for
dematerialised shares and / or registered with the R &TA prior to the
payment of dividend for shares held in physical form.
Benefits of NECS (payment through electronic facilities)

Some of the major benefits are :

a. Shareholder need not make frequent visits to his bank
for depositing the physical paper instruments.
b. Prompt credit to the bank account of the investor
through electronic clearing.
c. Fraudulent encashment of warrants is avoided. d. Exposure to
delays / loss in postal service avoided. e. As there can be no loss in
transit of warrants, issue
of duplicate warrants is avoided.
NECS facility
NECS has no restriction of centres or of any geographical area inside
the country. Presently around 32,000 branches of 114 banks
participate in NECS.
Dividend which was given to shareholder of
Reliance
Directors have recommended a dividend of Rs. 7/- per Equity Share
(last year Rs. 13/- per Equity Share on pre bonus share capital) for the
financial year ended March 31, 2010, amounting to Rs. 2,430 crore
(inclusive of tax of Rs. 346 crore) one of the highest ever payout by
any private sector domestic company. The dividend will be paid to
members whose names appear in the Register of Members as on
May 11, 2010; in respect of shares held in dematerialised form, it will
be paid to members whose names are furnished by National
Securities Depository Limited and Central Depository Services (India)
Limited as beneficial owners.
The dividend payout for the year under review has been formulated in
accordance with the Company’s policy to pay sustainable dividend
linked to long term performance, keeping in view the Company’s need
for capital for its growth plans and the intent to finance such plans
through internal accruals to the maximum.

Bonus share paid to Reliance ShareHolders

Financial Year Ratio

1980-81 3:5
1983-84 6:10
1997-98 1:1
2009-10` 1:1
Dividend paid to shareholder for the period of 10
years

Miller and Modigliani Model (MM Model)

Miller and Modigliani Model assume that the dividends are irrelevant.
Dividend irrelevance implies that the value of a firm is unaffected by
the distribution of dividends and is determined solely by the earning
power and risk of its assets. Under conditions of perfect capital
markets, rational investors, absence of tax discrimination between
dividend income and capital appreciation, given the firm’s investment
policy, its dividend policy may have no influence on the market price of
the shares, according to this model.
Assumptions of MM model

Existence of perfect capital markets and all investors in it are

rational. Information is available to all free of cost, there are no
transactions costs, securities are infinitely divisible, no investor is
large enough to influence the market price of securities and there
are no floatation costs.
There are no taxes. Alternatively, there are no differences in tax
rates applicable to capital gains and dividends.
firm has a given investment policy which does not change. It
implies that the financing of new investments out of retained
earnings will not change the business risk complexion of the firm
and thus there would be no change in the required rate of return.
Investors know for certain the future investments and profits of
the firm (but this assumption has been dropped by MM later).

Argument of this Model

By the argument of arbitrage, MM Model asserts the irrelevance

of dividends. Arbitrage implies the distribution of earnings to
shareholders and raising an equal amount externally. The effect
of dividend payment would be offset by the effect of raising
additional funds.
MM model argues that when dividends are paid to the
shareholders, the market price of the shares will decrease and
thus whatever is gained by the investors as a result of increased
dividends will be neutralized completely by the reduction in the
market value of the shares.
The cost of capital is independent of leverage and the real cost of
debt is the same as the real cost of equity, according to this
model.
That investors are indifferent between dividend and retained
earnings implies that the dividend decision is irrelevant. With
dividends being irrelevant, a firm’s cost of capital would be
independent of its dividend-payout ratio.
Arbitrage process will ensure that under conditions of uncertainty
 also the dividend policy would be irrelevant.

MM Model:

Market price of the share in the beginning of the period = Present

value of dividends paid at the end of the period + Market price of
share at the end of the period.

P0 = 1/(1 + ke) x (D1 + P1)

Prevailing
Where: P0 = market price
of a share
ke cost of equity
=
capital
Dividend to
D1 be received
=
at the end of
period 1 and
Market price
P1 of a share at
=
the end of
period 1.

(n + ∆ n) P1 –
Value of the I+E
firm, nP0 =
(1 + ke)
 number of
shares
outstanding
Where: n =
at the
beginning of
the period
change in the
number of
shares
outstanding
∆n = during the
period/
additional
shares
issued.
Total amount
I = required for
investment
Earnings of
the firm
E =
during the
period.

Gordon's Dividend Capitalization Model

Gordon's theory contends that dividends are relevant. This model
is of the view that dividend policy of a firm affects its value.

Assumptions of this model:

The firm is an all equity firm. No external financing is used and
investment programmes are financed exclusively by retained
earnings.
Return on investment( r ) and Cost of equity(Ke) are constant.
The firm has perpetual life.
The retention ratio, once decided upon, is constant. Thus, the
growth rate, (g = br) is also constant.
Ke > br

Arguments of this model:

Dividend policy of the firm is relevant and that investors put a

positive premium on current incomes/dividends.
This model assumes that investors are risk averse and they put a
premium on a certain return and discount uncertain returns.
Investors are rational and want to avoid risk.
The rational investors can reasonably be expected to prefer
current dividend. They would discount future dividends. The
retained earnings are evaluated by the investors as a risky
promise. In case the earnings are retained, the market price of
the shares would be adversely affected. In case the earnings are
retained, the market price of the shares would be adversely
affected.
Investors would be inclined to pay a higher price for shares on
which current dividends are paid and they would discount the
value of shares of a firm which postpones dividends.
The omission of dividends or payment of low dividends would
lower the value of the shares.
 Dividend Capitalization model:
According to Gordon, the market value of a share is equal to the
present value of the future streams of dividends.

E(1 - b)
P = Ke - br

Where:
Price of a
P =
share
Earnings per
E =
share
Retention
b =
ratio
Dividend
1-b =
payout ratio
Cost of
Ke capital or the
=
capitalization
rate
Growth rate
(rate or
return on
br - g =
investment of
an all-equity
firm)

Example: Determination of value of shares, given the following data:

Case A Case B
D/P Ratio 40 30
Retention Ratio 60 70
Cost of capital 17% 18%
r 12% 12%
EPS $20 $20

$20 (1 - 0
0.17 – $81.63
P = =>
(0.60 x (Case A)
0.12)
$20 (1 -
0.70)
$62.50
P = 0.18 – =>
(Case B)
(0.70 x
0.12)

Gordon's model thus asserts that the dividend decision has a

bearing on the market price of the shares and that the market
price of the share is favorably affected with more dividends.

Walter's Dividend Model

Walter's model supports the principle that dividends are relevant.
The investment policy of a firm cannot be separated from its
dividend policy and both are inter-related. The choice of an
appropriate dividend policy affects the value of an enterprise.

Assumptions of this model:

1) Retained earnings are the only source of finance. This means
that the company does not rely upon external funds like debt or
new equity capital.
2) The firm's business risk does not change with additional
investments undertaken. It implies that r(internal rate of return)
and k(cost of capital) are constant.
 3) There is no change in the key variables, namely, beginning
earnings per share(E), and dividends per share(D). The values of
D and E may be changed in the model to determine results, but
any given value of E and D are assumed to remain constant in
determining a given value.
The firm has an indefinite life.

Formula: Walter's model

P = DKe – g

Where: P = Price of
equity shares
D = Initial
dividend
Ke = Cost of
equity capital
g = Growth rate
expected

After accounting for retained earnings, the model would be:

P = DKe – rb

Where: r = Expected
rate of return
on firm’s
investments
b = Retention
rate (E - D)/E

Equation showing the value of a share (as present value of all

dividends plus the present value of all capital gains) – Walter's model:
P = D + r/ke (E -
D)

ke

Where: D = Dividend per

share and
E = Earnings per
share

Example:

A company has the following facts:

Cost of capital (ke) = 0.10
Earnings per share (E) = $10
Rate of return on investments ( r) = 8%
Dividend payout ratio: Case A: 50% Case B: 25%
Show the effect of the dividend policy on the market price of the
shares.

Solution:

Case A:
D/P ratio = 50%
When EPS = $10 and D/P ratio is 50%, D = 10 x 50% = $5

5 + [0.08 /
0.10] [10 -
P = 5] => $90

0.10

Case B:
D/P ratio = 25%
When EPS = $10 and D/P ratio is 25%, D = 10 x 25% = $2.5
 2.5 +
[0.08 /
0.10] [10 -
P = => $85
2.5]

0.10

Conclusions of Walter's model:

When r > ke, the value of shares is inversely related to the D/P
ratio. As the D/P ratio increases, the market value of shares
decline. It’s value is the highest when D/P ratio is 0. So, if the
firm retains its earnings entirely, it will maximize the market value
of the shares. The optimum payout ratio is zero.
When r < ke, the D/P ratio and the value of shares are positively
correlated. As the D/P ratio increases, the market price of the
shares also increases. The optimum payout ratio is 100%.
When r = ke, the market value of shares is constant irrespective
of the D/P ratio. In this case, there is no optimum D/P ratio.

Limitations of this model:

Walter's model assumes that the firm's investments are purely

financed by retained earnings. So this model would be applicable
only to all-equity firms.
The assumption of r as constant is not realistic.
The assumption of a constant ke ignores the effect of risk on the
value of the firm.