Dividend Decisions

Dividend -Meaning
Dividend refers to that part of the profits of a company which is distributed among its shareholders. It is the return that a shareholder gets from the company, out of its profits, on his shareholdings It is a distribution to shareholders out of profits or reserves available for this purpose

Dividend Policy -Meaning

Dividend policy refers to the policy concerning the quantum of profits to be distributed as dividend It implies that the BOD evolve a pattern of dividend payments which has a bearing on future course of action The finance manager cannot do much about the dividend policy since he works only in an advisory capacity and the power to declare dividends vests completely in the hands of BODs

Nature of Dividend Decisions

Dividend decision is of crucial importance as it determines the amount of profit to be distributed among the shareholders and the amount of profit to be retained in the business for financing its long term growth. There is a reciprocal relationship between the cash dividends and retained earnings The dividend decision is largely based on its impact on the value of the firm

Nature of Dividend Decisions

Dividend decision is of crucial importance as it determines the amount of profit to be distributed among the shareholders and the amount of profit to be retained in the business for financing its long term growth. There is a reciprocal relationship between the cash dividends and retained earnings The dividend decision is largely based on its impact on the value of the firm

Factors Affecting Dividend Policy

External factors
General state of the economy State of capital market Legal restrictions (after providing for depreciation and reserves) Contractual restriction- (after paying the creditors) Tax policy

Factors Affecting Dividend Policy

Internal factors
Desire of the shareholders Financial needs of the company Nature of earnings Desire of control Liquidity position

Types of Dividend Policy

Regular dividend policy Stable dividend policy Irregular dividend policy

Forms of Dividend
Cash dividend Bond/scrip dividend Property dividend Stock dividend

Bonus Issue

Bonus Issue
A company can pay bonus to its shareholders either in cash or in form of shares. Most of the times the company may not be in a position to pay bonus in cash in spite of sufficient profits because of unsatisfactory cash position or adverse effect on the working capital of the company. In such a case, if the AOA provides, the company can pay bonus to its shareholders either by converting partly paid shares into fully paid or by issuing fully paid bonus shares

Reasons for Issuing Bonus Shares

Bonus issue tends to increase the market price It increases the number of shares and promotes active trading The share capital base would increase leading to achieve a respectable size in the eyes of community It gives a firm indication that the prospects of the company is bright

Advantages of Issue of Bonus Shares

Advantages to the company
Conservation of cash Keeps EPS at a reasonable level (Workers and consumers feel unhappy when the EPS is more) Wider marketability of companys shares

Advantages to investors
Tax benefits Indication of higher future profits Increase in future dividends High psychological value

SEBI Guidelines on Bonus Issue

1. The guidelines are applicable to existing listed companies 2. The bonus issue should not dilute the rights of partly and fully convertible debentures 3. Bonus issue to be made out of free reserves and share premium only 4. Reserves created by revaluation of fixed assets are not capitalised 5. Declaration of bonus issue, in lieu of dividend, is not made

SEBI Guidelines on Bonus Issue

6. The bonus issue is not made unless the partlypaid shares, if any, are made fully paid-up 7. The company has not defaulted any statutory payments to debenture holders and employees 8. A company announcing the bonus issue after the approval should implement within six months 9. There should be a provision in the AOA for capitalisation of reserves 10. Consequent to the issue of bonus shares, if the subscribed and paid up capital exceed the authorised share capital, a resolution shall be passed at its general body meeting for increasing the share capital

Stock Split
Stock split is reducing the par value of the shares by increasing the number of shares proportionately.

Bonus Issue. VS. Stock Split

Bonus Issue Stock Split 1. Par value is unchanged 1. Par value is reduced 2. Part of reserve is 2. No capitalisation of capitalised reserves

Rights Issue
The shareholders of joint stock company are given the pre-emptive right to purchase additional issues of common stock This right gives the option to the existing shareholders an option to buy a security at a specified price during the specified period. It preserves the power of control of present shareholders

Advantages of Rights Issue

It ensures equitable distribution of shares without disturbing the existing equilibrium of shareholders The expenses of public issue can be avoided There is a certainty of the shares being sold to the existing shareholders It betters the image of the company It ensures that the directors do not issue the shares to their relatives to get more controlling power

Rights and Small Shareholders

On account of their inability to raise funds, the small shareholders are not in a position to take advantage of the rights issue On account of ignorance and lack of interest, they even fail to make profit by renouncing their rights in favour of other persons After rights issue, the price of the companys share may fall. The small shareholders may panic and sell their shareholding during such time