CHAPTER 1

INTRODUCTIO

Dividend policy is the percentage of earnings to be distributed as earnings and percentage of

earnings to be retained by the firm (Droms & Wright, 2010). According to Brigham &
Gapenski (1998), the main objective of dividend decision should be to maximize
shareholders wealth in the long run than in short run. According to Baker, Veit and Powell
(2001), size and pattern of cash distribution provided to the shareholders by the managers is
the dividend policy. Dividend decision is still a puzzle in corporate finance. According to
Brealey, R.A., S.C. Myers, et al., (2005), dividend policy is still one of the top unsolved
problem in finance. Black, F., (1976) provided the statement “the harder we look at dividend
the more it seems like a puzzle with pieces that just don’t fit together”.

Dividend policy is different from Country to country, industry to industry and company to
company. Gordon, M.S., (1959) argued that dividend policy increases the shareholders
wealth, Merton, H. Miller and Franco Modigliani (1961) and Miller, M.H. and M.S. Scholes
(1978) argued that the dividend policy is irrelevant whereas Litzenberger, R.H and K.
Ramaswamy (1982) argued that dividend policy decreases the shareholders wealth.

According to Allen et al (2000), “Although a number of theories have been put forward in
the literature to explain their pervasive presence, dividends remain one of the horniest
puzzles in corporate finance”. Even Frankfurter et al (2002) concluded that “The dividend
puzzle both as a share value enchancing and as a matter of policy is one of the most
challenging topics of modern finance/ financial economics. Forty years of research… has not
been able to resolve it”

THEORETICAL BACKGROUND

DIVIDEND - MEANING

Dividend is derived from the Latin word “Dividendum”. This means “that which is to be
distributed”. Earnings distribution to the shareholders according to their ownership
proportion is called as Dividend. All the shareholders of the company have share in dividend
based on their ownership proportion in the company.

Dividend decision or dividend policy is defined as the ratio of retained earnings to the
distributed earnings. Dividend decision is interrelated with other three decision viz
investment decisions, financing decisions and liquidity decisions. Companies decide the
proportion of earning to be distributed as dividend and proportion of earnings to be retained
with the objective of wealth maximization of shareholders. The companies should find out
the optimum dividend payout with risk return trade off leading to the objective of
shareholders wealth maximization. The firms have to decide the form and timing of dividend
payment.

1.1. CLASSIFICATION OF DIVIDEND

Sanju (2011) classified dividend based on the following categories

Based on type of securities

It can be classified as Equity dividend and Preference dividend. Equity or Ordinary

shareholders receive equity dividend as they are the real owners of the company with voting
rights. Equity dividend is not fixed and depends on the earnings of the company. Investments
in the preference share of the company make the preference shareholders to receive fixed
preference dividend. Preference shareholders have preferential right for dividend while equity
shareholders have preferential right in capital during wound up.

Based on source of payment

According to section 2(35) of the companies act, 2013, dividend can be paid from the
following sources. (i) From the profit of the current year (ii) From last year profits (iii) From
the reserves and surplus (iv) From the money given by central and state government for
dividend and (v) From the capital or assets of the company called as Liquidation dividend.

Based on Form of payment

According to Kell, Kieso and Weygandt (1995), dividend can be paid in the form of cash,
stock, scrip, bond and property,

Cash dividend: The most preferred form of dividend by the shareholders is cash dividend.
This type of payment should be done at caution otherwise would result in scarcity of cash. At
the time of fund scarcity, other forms of dividend can be considered.

Stock dividend or Bonus shares: Additional equity stock would be given to the existing
shareholders as dividend based on their shareholding proportion. This increases the number
of shares without affecting ownership proportion of shareholders.
Scrip dividend: At the time of cash scarcity or investment demand, the firms issue promissory
note mentioning the future date of dividend payment.

Bond dividend: If the firms decide to postpone the dividend payment, bond or debentures
with fixed interest rate would be issued.

Property dividend: Assets other than cash would be issued as dividend to the shareholders. It
may be in the form of company’s products or services subsidiary company’s share.

Based on time of payment

It may be classified as Interim dividend and final dividend. Board of directors decide the final
dividend and announced in the AGM. Before finalizing accounts, between two AGM, interim
dividend would be declared. Only if authorized in the articles of association, the board of
directors of the company can declare interim dividend.

1.2. OTHER FORMS OF DIVIDEND

Apart from cash dividends, the following are the alternative forms of dividend.

(i) If there is excess cash, the firms could declare robust dividend or buyback its
shares. Share buyback or equity repurchase is a very popular method. By buying
back its shares from the shareholders, the company’s earnings per share and share
price would increase substantially. It is optional for the shareholders. Share
buyback was not permitted in India until 1998. It shows the company’s financial
position, increases promoter shareholding percentage, avoids hostile takeover and
leads to change in the shareholding pattern and capital structure of the company.
(ii) Shareholders fund or shareholders equity is the combination of equity share
capital and reserves and surplus. Increase in reserve and surplus, increases book
value which in turn increases the share price. Bonus shares are issued when there
is increase in reserves and surplus than subscribed capital. This brings back the
proper proportion between reserves and surplus and shareholders’ funds. This is
another form of providing dividend to the shareholders.
(iii) Stock split is another form of giving dividend by increasing the number of shares
outstanding by reducing the face value and thereby additional shares are issued to
shareholders than cash.
1.3. DIVIDEND POLICY

The portion of earnings to be distributed as dividend and portion to be retained for future
investment opportunities is called as dividend policy. Weston and Brigham (1993) explained
dividend policy is the partition of earnings for dividend payment and retention. Gitman
viewed dividend policy as plan of action. It should be followed at the time of decision on
dividend. Dividend policy should be reviewed in annual general meeting or might be
published in the annual report.

Dividend policy would be of two types: Managed dividend policy and Residual dividend
policy. After making the desirable positive NPV investments, if the left out earnings are
distributed as dividend, then it is called as Residual dividend policy. If the manager decides
that the dividend policy is important that would maximise the value of the company, then it is
called as Managed dividend policy. The optimum dividend policy should maximize
companies share prices which in turn maximizes the wealth of shareholders. In the real world,
many factors favour retention than dividend distribution which includes tax advantage from
capital gain, presence of floatation costs, phenomenon of under-pricing and legal constraints.
The only factor that favours the cash dividend payment is the transaction cost. The companies
should adopt a passive residual dividend policy which indicates that only the excess cash
after providing for investments would be distributed as dividend. Under this policy dividend
volatility would be higher. Empirical studies showed that investors preferred stable dividend
policy. Investors can be categorised as dividend preferring investors and Capital gain
preferring investors. This is called as Clientele effect. Based on the dividend preference, the
investors would choose the firms. Dividend policy changes would make these investors to
change their portfolio.

Pure and Smoothed residual dividend policy

As per Kapoor (2008), the residual dividend policy can be calculated as

Dividend = Net income – Investment for new projects – Debt to be raised as per target capital
structure

If the companies distribute dividend exactly by deducting the investment amount and debt to
be raised from net income, then it is called as pure residual dividend policy. Under this the
dividend would vary every year. This policy would not create any value to the firm. The
companies should follow a Smoothed residual dividend policy where the dividend would be
increased gradually by satisfying the clienteles of the companies. Signalling effect is given by
the dividend policy on the firm’s credit level, share prices and future growth.

The following are the basic dividend policies followed by companies. The dividend policy of
the company is affected by many internal and external factors.

(i) Constant rate of dividend

It is the fixed rate on the paid up share capital. This provides investors about their
return. This method of dividend policy would be useful for the companies if they
earnings are stable every year. Experts feel that fixing the low constant rate of
divided would be good for the companies.
(ii) Constant percentage of earnings
A constant percentage on earnings can be distributed as dividend. This would give
investors higher dividend during the years of higher profits and lower dividend in
the years of lower profits. This variation in dividend according to earnings affects
the market price of share which would affect the companies to source funds from
external sources.
(iii) Stable rupee dividend plus extra dividend
During the years of higher profits, extra dividend would be given to shareholders
along with the regular dividend.

At the time of framing dividend policy, the management should consider shareholder wealth
maximization. Kapoor (2008) explained that the dividend paying companies are entitled to
pay tax while the investors are exempted. Announcement and payment of dividend are
viewed as positive information while decrease or decline in dividend is considered as
negative information by the shareholders and analyst which in turn referred as Dividend
puzzle.

1.4. PROCESS OF DIVIDEND DECLARATION

Dividend declaration date, Ex-dividend date, Record date and Dividend payment date are the
four important dates in the process of dividend declaration (Pinches, 1996). Dividend
declaration date is the date of dividend announcement, size of dividend, dividend forms, the
ex-dividend date, record date and payment date by Board of Directors. To identify the exact
shareholders, ex-dividend date would be informed which is two days prior to the record date.
Shareholders who buy the shares before the ex-dividend date would be eligible to receive
dividend. Any shareholder who sells the shares after ex-dividend date would also receive the
dividend. Record date would be two days after the ex-dividend date. All the shareholders
whose name appears in the record date would receive dividend. Payment date would be after
the record date.

1.5. DIVIDEND THEORIES

Dividend theories show the reasons for dividend payment by companies, determinants of
dividend and relation between dividend and firm value. Different dividend theories differ in
their view towards relation and impact of dividend on firm value.

Theories of dividend

(i) Irrelevancy theory

Modigliani & Miller (1961) proved that there was no impact of dividend on the
value of the firm. It was assumed that all investors have equal access to stock
market information with no cost, no fee for brokerage, no tax for transfer, no
transaction costs and no difference in tax for dividends and capital gains. Under
these assumptions, the only concern for investors is their wealth either through
dividend or capital gains. Based on the company’s investment decision, dividend
decision of the firm does not impact the firm value.
(ii) Relevancy theory
Gordon (1962) and Walter (1963) confirmed that dividend decision has impact on
the firm value. Gordon model on theory shows the relationship between
productivity of retained earnings (IRR) (r) and cost of capital (k). For growing
firms ‘r’ would be greater than ‘k’ with huge investment opportunities. For these
companies the value of the share increases if retention ratio is more than the pay
out ratio.
(iii) Agency theory (or) Free cash flow theory
This theory substantiates the dividend payment importance. This showcases the
reduction in agency conflicts due to dividend payment. Principal (shareholders)
provide funds to the company. Managers of the company act as agents of the
company. Often in this principal – agent relationship problem occurs due to non-
common objectives. Shareholders invest in the companies with the goal of getting
maximum returns. Managers should invest in valuable and a profitable project that
maximises firm value in turn maximizes shareholders return. Sometimes
managers
 may invest based on their own interests and they have more information about the
company and not transparent with the shareholders. In this case conflict arises
between shareholders and managers. To solve this problem, company should
spend some costs known as agency costs. Dividend should be paid either from
internal fund or externally raised funds to reduce agency problems (Jensen and
Meckling, 1976, Roseff, 1982 and Easterbrook, 1984).
(iv) Bird-in-the-hand theory
This theory was proposed by Gordon, M.S., (1963). This reduces the uncertainty
about dividend among the investors. Investors receive return in the form of
dividend and capital gain. Risk-averse investors prefer current dividend than the
future capital gain. Bird in the hand (current certain dividend) is more worth than
two birds in the bush (future uncertain capital gain). Payment of dividend provides
confidence to the investors by reducing uncertainty and impact the share price.
This theory proves the importance of dividend and its impact on market value of
firm.
(v) Dividend Signalling and Information Asymmetry theory
Merton, H. Miller and Franco Modigliani, (1961) identified that dividend has
signalling effect and provides information to the market. Future growth of the firm
can be explained with this theory by dividend payment. Managers have more
information about the company than the investors. This gap in information leads
to information asymmetry. To decrease this dividend is used as a tool. It conveys
the future prospects of the company. Majority of the investors prefer regular
income through dividend. They assume higher dividend is a positive signal which
impacts the increase of share prices while the decrease in dividend or dividend cut
is a negative signal which leads to fall in the share prices. This theory proves the
relevancy of dividend and has informational content.
(vi) Residual theory
It shows the importance of investment demand on the payment of dividend.
According to this theory, dividends are paid if anything left after providing for
profitable investments. The core of this theory is to fund profitable investments
that maximize firm value and shareholders wealth. If no investment opportunity,
earnings can be paid as dividends. Payment of dividend is considered as passive
residual by this theory. As per this theory, there would not be stable dividend
policy. Sometimes no-payment or low payment of dividend based on investment
 proposals. If the return from investment is more than dividend, then investors
would opt for retention than current dividend.
(vii) Catering theory
This was proposed by Baker & Wurgler (2004). According to this, the dividend
payment’s important motivator would be investor desire on dividend. If the
investors prefer dividend which would be seen by the increase in the market of
that stock, then the managers would provide dividend. If there is no change in the
stock prices due to dividend, then the managers would opt for non-payment of
dividend because of investors’ sentiment on non-payers preference.
(viii) Life cycle theory
This theory was proposed by Mueller (1972). Life cycle or business cycle of the
firm would be the major determinant on dividend. Mature and saturated firms with
huge reserves have less investment proposals pay higher dividend. New
establishments and fast growth firms with less access to capital market would pay
fewer dividends as the funds will be reinvested for growth.
(ix) Tax Preference theory
Berman, M.D., (1977) proposed this theory and states that tax is very important
for personal and corporate investment decisions. Capital gains are taxed at lower
interest rate than dividend tax so that shareholders prefer capital gains than
dividend. Al-Malkawi (2010) explained that investors prefer companies that retain
more than which distributes more dividends because of the tax effects. Low
dividend payout ratio would reduce the cost of equity and increases the market
value of the stock.
(x) Pecking order hypothesis
Donaldson, T. and L.E. Preston, (1995) argued that to avoid floatation and other
costs of debt, firms opt for retained earnings. Firms prefer debt than external
equity because the cost of debt is cheaper than cost of equity. Myers, S.C. (1984)
and Myers, S.C. and N.S. Majluf (1984) that the benefits of debt is more than the
costs associated. Preference of retained earnings would help the company to
increase the shareholders wealth. Use of external equity would decrease the
shareholders wealth.
 (xi) Transaction cost theory
According to Higgins (1972) and Fama (1974), high level of debt finance would
leads to high level of fixed interest charges would result in low payment of
dividend. Financial leverage has negative relationship with dividend.

1.6. DIVIDEND BEHAVIOUR OF INDIAN COMPANIES

The following table presented the dividend behaviour of SENSEX companies during 2001 to
2015.

From the table 1.6.1, it observed that there was gradual increase in dividend payout for
majority of the companies. Companies Adani ports, Bajaj auto, Bharti Airtel, Coal India,
Maruti Suzuki, NTPC, Tata motors and TCS have understood the importance of dividend
payment after neglecting the same in the initial years. The core industries listed in BSE was
Automobile, Infrastructure & Constrction, Energy, Information technology and
Pharmaceutical industry. The automobile companies listed in BSE SENSEX during 2001 to
2015 were Bajaj Auto, Hero motocorp, Mahindra & Mahindra, Maruti Suzuki and Tata
motors. The average dividend payout ratio for these companies were 208, 2263, 168, 115 and
99. The average of mean dividend payout ratio of automobile companies in BSE SENSEX
during 2001 to 2015 was 571.20. The Infrastructure & Construction companies listed were
Adani ports & SEZ, BHEL and L&T with average dividend payout ratio were 22, 136 and
655 respectively. The average of mean dividend payout ratio of these companies was 271.
The Energy industry companies listed were GAIL, NTPC, ONGC and RIL with average
dividend payout ratio of 79, 27, 274 and 84 respectively. The average of mean dividend
payout ratio of these companies was 116.
The Information technology companies listed were Infosys, TCS and Wipro with average
dividend payout ratio were 820, 1813 and 342 repectively. The average of mean dividend
payout ratio of these companies was 992. The Pharmaceutical companies listed were Cipla,
Dr. Reddy Lab, Lupin and Sun Pharma with average dividend payout during 2001 to 2015
was 105, 177, 128 and 188 respectively. The average of mean dividend payout of these
companies was 149.50. This has shown that information technology companies have paid
more dividend on average followed by automobile companies and Infrastructure &
Construction companies. The least dividend paid by pharmaceutical companies and energy
companies.
 Table 1.6.1 - Dividend payout ratio (%) of SENSEX companies: 2001 – 2015

YEAR 1 2 3 4 5 6 7 8 9 10

2001 0 75 15 0 0 30 45 0 140 40

2002 0 100 20 0 0 40 70 0 50 45

2003 0 100 22 0 0 40 100 0 100 110

2004 0 90 25 0 0 95 150 0 100 80

2005 0 100 28 0 0 85 175 0 100 100

2006 0 135 35 0 0 105 100 0 100 95

2007 0 75 45 0 0 185 100 0 75 85

2008 15 170 60 200 0 153 100 0 75 60

2009 30 195 100 220 20 170 100 0 125 90

2010 40 270 120 400 20 133 140 0 225 75

2011 45 330 140 400 20 312 100 39 225 55

2012 50 400 160 450 20 320 100 100 275 87

2013 50 475 180 450 20 171 100 140 300 96

2014 50 600 200 500 69 141 100 290 360 104

2015 55 650 230 500 44 58 100 207 400 60

Avg 22 251 92 208 14 136 105 52 177 79

YEAR 11 12 13 14 15 16 17 18 19 20

2001 125 20 400 450 20 300 100 65 35 55

2002 250 25 600 500 20 500 135 70 50 50

2003 110 30 900 826 75 580 150 75 50 55

2004 135 35 1000 550 75 2400 200 1300 65 90

2005 170 45 1000 500 85 260 310 875 65 130

2006 200 55 1000 550 85 870 265 1100 65 100

2007 220 70 850 900 100 250 310 750 50 115

2008 250 85 950 650 110 745 350 750 100 115
2009 300 100 1000 700 110 470 370 525 125 100

2010 360 120 9500 650 120 1100 1000 625 135 190

2011 450 165 5250 700 140 700 445 725 150 230

2012 550 215 2250 1650 165 940 450 825 160 250

2013 625 275 3000 1150 200 940 525 616.5 200 520

2014 700 343 4750 1350 230 1460 600 713 300 280

2015 750 400 1500 1550 250 790 625 813 375 240

Avg 346 132 2263 845 119 820 389 655 128 168
YEAR 21 22 23 24 25 26 27 28 29 30

2001 0 0 110 43 50 50 0 50 0 25

2002 0 0 140 48 60 50 0 80 0 50

2003 0 0 300 50 85 100 40 80 0 50

2004 30 0 440 53 110 65 80 100 300 1450

2005 40 24 450 75 125 75 125 130 1450 250

2006 70 28 380 100 140 110 130 130 1350 250

2007 90 32 310 110 140 135 150 155 1300 400

2008 100 35 320 130 215 210 150 160 1700 200

2009 70 36 320 130 290 275 60 160 1200 200

2010 120 38 470 70 300 275 150 80 2000 300

2011 150 38 140 80 300 350 200 120 1600 300

2012 150 40 170 85 350 425 200 120 2500 300

2013 160 58 190 90 415 250 100 80 2400 350

2014 240 58 190 95 300 150 100 100 7400 400

2015 500 25 180 100 350 300 0 80 4000 600

Avg 115 27 274 84 215 188 99 108 1813 342

(Source: www.bseindia.com)
1-Adani ports & SEZ, 2-Asian paints, 3-Axis bank, 4-Bajaj Auto, 5-Bharti Airtel, 6-BHEL, 7-Cipla, 8-Coal India, 9-Dr.Reddy Lab,
10- GAIL, 11-HDFC, 12-HDFC bank, 13-Hero Motocorp, 14-HUL, 15-ICICI bank, 16-Infosys, 17-ITC, 18-L&T, 19-Lupin, 20-
M&M, 21-Maruti Suzuki, 22-NTPC, 23-ONGC, 24-RIL, 25-SBI, 26-Sun Pharma, 27-Tata motors, 28-Tata steel, 29-TCS, 30-Wipro
 Figure 1.6.1 - Dividend payout ratio of SENSEX companies: 2001 – 2015

10000
2001
9000 2002
2003
8000 2004
2005
7000 2006
2007
2008
6000
2009
2010
5000 2011
2012
4000 2013
2014
3000 2015

2000

1000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30

1.7. DETERMINANTS OF DIVIDEND PAYOUT

Ayan (2013) explained that dividend decision shows its impact at the micro level and macro
level. It displays the company’s performance at the micro level and savings rate of the
country if all the companies’ dividend policy pooled together at the macro level. Many
factors affect the dividend policy of the company. Some of the factors are measurable while
others are not measurable. The following are the major determinants of dividend decision of
the company. Profitability is one of the most important determinants of dividend. It decides
the firms’ capacity to pay dividend. It is expected to have positive relationship with dividend.
It is defined in terms of firms return. It could be measured in terms of Return on equity,
Return on Networth, Net profit after tax etc. Firm risk is another dividend determinant. High
risk firms pay low dividend because they prefer internal finance. It could be measured in
terms of beta, Price earnings ratio etc. Maturity of the company measures the age of the
company from the date of incorporation. It could be measured in terms of Age, Square of age
etc. Asset structure refers to the tangibility of assets of the company. Companies with more
tangible assets have less debt. Liquidity is the other dividend determinant which cash
dividend distribution. High cash position influence firms to pay high dividend. Leverage
implies the mix of debt and equity which forms the capital structure of the company has an
impact of the dividend policy of the company.
Growth opportunities is another determinant which could be measured in terms of annual
sales growth. Firms with high growth opportunities require more funds for investment and
pay fewer dividends. Previous years’ profits referred to lagged profit and Past dividend refers
to the dividend paid in the last year. Taxation refers to the the total corporate tax paid in the
current fiscal year. Investment demand is defined as the fund needed for investment by
calculating change in inventory and change in fixed assets. Institutional shareholding is the
percentage of shareholding held by institutional investors. Size of the company refers to the
size of the company in terms of total assets or total sales or total market capitalization.
Agency costs is the cost arise due to problems between principal and agent. It could be
measured to dispersion of ownership. Audit type indicates the type of auditing companies
which might be any one of the top ten auditing company or other than top ten auditing
company audits the annual report of the company. Promoters shareholding is percentage of
Indian and foreign promoter hold in the organization. Interest expenses, Share price
behaviour, Legal requirements, Management Control, Opportunities available to
shareholders, Capital market consideration, Inflation, Preference of shareholders, Stability of
earnings, Nature of industry, Government policies and Loan covenants etc were the other
determinants of dividend . There are many other factors which impact the dividend decision
of the firm. This study identifies the factors that impact the dividend among the Indian
companies.
1.8. IMPACT OF DETERMINANTS OF DIVIDEND ON SHAREHOLDERS
WEALTH

The scope of financial management and the functions of finance manager have undergone
changes in the last few decades but the goal or objective of the company remains unchanged.
The main objective of the firm is shareholders wealth maximization. It is represented by the
positive net present value of the financial decisions. According to Azhagaiah & Sabaripriya
(2008) Shareholders think the wealth is created by increase in the firm’s market price of the
share. Even many reseachers have proved the same. All the four financial decisions viz,
Investment decisions, financing decisions, Dividend decisions and Liquidity decisions decide
the value of the firm. All the four decisions together contribute in the wealth creation for
shareholders. Dividend decision is one of the important financial decisions that contribute in
shareholders wealth creation. There are some dividend theories which prove that dividend
decision affects the market value of the firm while others disprove it. Those who proved the
relationship between dividend decision and value of the firm often link dividend decision
with the investment opportunities of the firm.

If there are good and profitable investment opportunities, retention of earnings would be a
better option than dividend distribution. This would increase the value of the firm. If there are
no better investment opportunities, dividend distribution would be a better choice for the
management. Shareholder wealth is created if there is increase in the market value of the
firm. It is the function of all the four decisions of the firm. Finance manager should identify
optimum dividend policy that maximizes shareholders wealth by increase in the market value
of the firm. This study would analyse the impact of dividend determinants on the
shareholders wealth

1.9. EFFECT OF DIVIDEND ANNOUNCEMENT ON THE MARKET PRICE OF

SHARE:

According to Pettit (1972), market price of shares changes to the change in dividend
announcements. Gordon (1959, 1962) and Vickery (1978) found that there were positive
abnormal returns after dividend payment announcements. Easton and Sinclair (1989) found
that there was negative reaction of stock prices on dividend announcements. Uddin and
Chowdhury (2005) analysed and found that there was no information content of dividend
announcement. It was found that based on the previous literature dividend announcement’s
impact on market price of share had shown a mixed reaction. In this study, the impact of
dividend announcement on the market price of share was analysed through yearwise and
market capitalization wise.

1.10. GLOBAL FINANCIAL MELTDOWN

Financial meltdown occurred periodically in the world. In the recent era, due to US Subprime
crisis, meltdown happened in 2008 which affected the entire World. According to
Riksbanken (2009), the financial crisis that occurred in the US because of subprime loans
was an acute financial crisis globally. Acute decline in World economy and the GDP of many
countries were the result of the crisis. World GDP was reduced to 6% in 2008. Even though
India’s financial foundation is very healthy, due to lack of confidence among investors and
shortage of foreign funds, Indian economy was hit by the Global financial crisis. Indian
equity market, money market, forex market (due to reverse cash flow) and credit markets
were affected by the crisis. The rupee value was under pressure. India’s export to US, EU and
Middle East (all three regions contribute to India’s one third of goods and services export)
were under huge pressure. Growth of GDP dropped to 6.7% from 8.8% (Source:
www.commerce.nic.in). All the Indian companies were under pressure during the crisis. Few
studies were conducted to analyse the determinants of dividend and its impact on
shareholders wealth during pre and post financial meltdown (Henrik and Victor (2015),
Gejalakshmi and Azhagaiah (2015)). According to Henrik and Victor (2015), Profitability,
size, risk, retained earnings and firm value were the major dividend policy determinants in
Swedan and there was no signficant difference in deteminants during pre and post financial
meltdown. According to Gejalakshmi and Azhagaiah (2015), dividend per share ad retained
earnings per significant impact on shareholders wealth. There was signficant shift in
shreholders wealth before and after financial meltdown. This study focuses on to identify
dividend determinants and its impact on shareholders wealth in Automobile, Infrastructure &
Construction, Energy, Information technology and Pharmaceutical industry on a whole
during 2001 to 2015, pre financial meltdown (2001 to 2007) and post financial meltdown
(2009 to 2015).

1.11. DIVIDEND DISTRIBUTION UNDER INDIAN LAW

Dividend payments of the Indian companies follow the regulations under the Companies Act,
1956. Dividend declaration and dividend payment was mentioned in Section 205. Profit
making companies which have share capital other than Section 25, should pay dividend to the
shareholders. Current or accumulated profits can be used to pay dividend after declaring
depreciation for the entire year. Dividend declared should be transferred to a separate bank
account. Within 30 days of dividend declaration, it has to be remitted. The following steps are
involved in the declaration and distribution of dividend under the Companies Act, 1956.

(i) Depreciation should be calculated as per Schedule XIV

(ii) A portion of profit has to be transferred compulsorily to the reserves before
declaring the dividend.
(iii) Board decision on dividend should be informed to the shareholders in the Annual
General Meeting (AGM).
(iv) Dividend decided by the board should be informed to the members and creditors.
 (v) A separate bank account should be opened and dividend declared should be
transferred. Dividend warrants should have been sent to the shareholders within
30 days of declaring the dividend.
(vi) Unpaid or unclaimed dividend should be transferred to a separate bank account
within 7 days from the closing of 30 days from dividend declaration. Dividend not
paid or claimed for 7 years could be transferred to Investor Education and
Protection Fund as per Section 205 C of Investor Education and Protection Fund
(Awareness and Protection of Investor) Rules, 2001.
(vii) Tax rate 0f 15% is applicable for dividend declared and distributed from the
current or accumulated profits other than the regular tax of total income. Dividend
tax has to be paid within 14 days of declaration.
(viii) Venue of board meeting in advance and dividend particulars within 15 minutes of
closure of meeting should be informed to the stock exchanges.

Under section 51 of the Companies Act, 2013, the board of directors decide the dividend on
pro rate basis. Final dividend must be informed at AGM whereas interim dividend can be
declared any time. Directors’ report should contain the amount of dividend declared.
Dividend should be paid from current year profit or from last year profit after providing
depreciation or from money provided by central and state Government for dividend payment.
Before declaring dividend, companies should transfer that dividend percentage profit to the
reserves of the companies. Companies willing to pay dividend from last year or accumulated
profits should follow Companies (Declaration and payment of dividend) rules, 2014.

1.12. OBJECTIVES OF THE STUDY

 To analyze the behaviour of selected dividend determinants during 2001 to 2015.

 To find out differences in dividend payout and shareholders wealth between the
industries and between market capitalization.
 To compare dividend payout and shareholders wealth before and after financial
meltdown.
 To investigate the determinants of dividend payout among the Indian industries.
 To examine the impact of dividend payout and its determinants on the Shareholders
wealth.
 To analyze the effect of dividend announcement on the market price of share.
1.13. NEED AND SCOPE OF THE STUDY

This study would help the investors to choose the stocks that would increase their wealth.
This research would also help the corporates in designing the best pay out policy that
maximizes shareholders wealth with minimum risk. The financial performance analysis of
dividend payout ratio, profitability, liquidity, leverage, firm size, firm risk, growth
opportunities, audit type, institutional sharholding, maturity, past dividend, agency cost,
investment demand and TOBINS’Q would help the companies on identifying dividend
determinant factors and investors in choosing the right stock at the right time. According to
Morgan (2011), decision makers should increase liquidity and distributes the wealth to
shareholders by prioritising the firms’ capital.

According to Tahir & Raja (2014), this would help the investors to understand the importance
of management decision on dividend and its impact n their wealth. This study would help the
investors and companies to know about the behaviour of dividend determinants before and
after financial meltdown for large capitalization, mid capitalization and small capitalization
companies of important industries. It is difficult to make profits in the era of Globalization
and privatization (Sarwar, 2013). Based on the study, companies could formulate a dividend
policy which would add value to the company. In this modernized era, this research would
help the managers to know how to compete with the competitors by framing optimal
dividend policy by maximising profits and shareholders wealth.

1.14. CHAPTERIZATION

This research is segmented into eight chapters. Chapter one discusses about the dividend, its
importance, types and theories of dividend. It also focuses on different dividend policies.
Process of dividend declaration and other forms of dividend have also been discussed. The
determinants of dividend and its impact on shareholders have been emphasized this chapter.
It also discusses about the Global financial meltdown and its impact on Indian industries and
other countries. Effect of dividend announcement on share prices, Dividend distribution
under Indian law (The companies Act, 1956 and The companies Act, 2013) was discussed.
Introduction and importance of Indian industries and the dividend behaviour were discussed.
This chapter also presents the objectives of the study and its need and scope in detail.

Chapter two focuses on literature review with the first part on determinants of dividend and
the second part on impact of dividend payout on shareholders wealth. Chapter three discusses
the research methodology used in the study. First the different dimensions of the study were
emphasized. Variables used, Sample size, sampling method and research design was also
discussed in this chapter. Basis for selection of industries, list of companies and variables
used were elaborated. Tools for data analysis, hypothesis framed and limitations of the study
were focussed. Chapter four focussed on behaviour of selected variables, difference between
dividned payout ratio and TOBINS’Q among different industries and market capitalization.
This chapter also discussed the difference in dividend payout ratio and TOBINS’Q before
and after financial meltdown. Chapter five deals with data analysis to find out the
determinants of dividend based on market capitalization and different industries and
classification. Chapter six emphasises empirical analysis of dividend determinants and its
impact on shareholders wealth. Chapter seven emphasized on the effect of dividend
announcement on the share prices and Chapter eight summarizes the research with findings
of the study, its implications and scope for further research.