“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

 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.

Announcement Effective Dividend DividendRemark

Date Date Type (%)s
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 75.00AGM
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
cost of equity
ke =
capital
Dividend to
be received
D1 =
at the end of
period 1 and
Market price
of a share at
P1 =
the end of
period 1.

(n + ∆ n) P1–
Value of the I+E
=
firm, nP0
(1 + ke)

Where: n = number of
shares
outstanding
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(K e) 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
capital or the
Ke =
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

P = $20 (1 - 0 => $81.63

0.17 – (Case A)
 (0.60 x
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

P = 2.5 + =>$85
[0.08 /
0.10] [10 -
2.5]
 0.10

Conclusions of Walter's model:

When r > k e, 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 < k e, 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.