CORPORATE FINANCE II END TERM PROJECT

Impact of Dividend Distribution Tax (DDT) on Dividend Payout Ratio (DPR)

Submitted to: Prof Himanshu Joshi

2010

Submitted By Radhika Gupta (91041) Shivi Aggarwal (91051) Sweta Agarwal (91059) Saket Kumar Singh (91046) Madhusudan Partani (91029)

GROUP 3- FMG 18A

Contents
Acknowledgement .................................................................................................................................. 2 Executive Summary................................................................................................................................. 3 Objectives ............................................................................................................................................... 4 Methodology........................................................................................................................................... 5 Data Collection .................................................................................................................................... 5 Classification ....................................................................................................................................... 5 Adjustments ........................................................................................................................................ 6 Statistical Tools ................................................................................................................................... 6 Scope ....................................................................................................................................................... 7 Limitations: ......................................................................................................................................... 7 Introduction ............................................................................................................................................ 8 Dividend Tax considered to be Double Taxation ................................................................................ 8 Historical Background On Dividend Taxation ....................................................................................... 11 Introduction of Corporate Dividend Tax ............................................................................................... 12 Main Provisions Relating to Corporate Dividend Tax ........................................................................... 14 Review of Literature.............................................................................................................................. 15 Irrelevance of Dividends ................................................................................................................... 15 Relevance of Dividends ..................................................................................................................... 16 Payout Trend of Each Sector ................................................................................................................. 19 Empirical Findings (using T-Test) .......................................................................................................... 27 Payout Trend – Size Wise ...................................................................................................................... 30 Empirical Findings (using T-Test) .......................................................................................................... 33 Conclusion ............................................................................................................................................. 36 Endnotes ............................................................................................................................................... 36 References ............................................................................................................................................ 36 Appendix .............................................................................................................................................. 38 I.List of Different Sectors before clubbing ........................................................................................ 38 II.Details on Composition of Final 12 Sectors ................................................................................... 39 III.List of those 211 Companies ......................................................................................................... 40 1

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Acknowledgement
We take this opportunity to acknowledge & express our profound sense of gratitude and respect to all those who helped us and hence contributed significantly to the completion of this project. We would like to offer a sincere thanks to Prof. Himanshu Joshi, Faculty at FORE School of Management, New Delhi, for his support and guidance for the fulfillment of this term paper. Thank you. Group-3 Radhika Gupta Shivi Aggarwal Sweta Agarwal Saket Kumar Singh Madhusudan Partani

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Executive Summary
This study examines the dividend trends of 215 Indian companies over the period 1995-2009 of almost all the sectors like METAL & MINING, AUTO, CAPITAL GOODS, CONSUMER DURABLES, FINANCE, FMCG, IT, OIL & GAS, POWER, HEALTHCARE etc listed on BSE for which there was no missing financial information over the period of the study. Thereafter we have studied the impact of Dividend Distribution Tax (DDT) on dividend policy, specifically on Dividend Payout Ratio (DPR). Analysis was done for the immediate three years before and after the tax regime change in 1997 and also for immediate two years before and after increase in DDT in 2007. For the purpose of this study, the sample was classified on the basis of industry and size (according to market capitalization). According to tax preference or trade-off theory, favourable dividend tax should lead to higher payouts. The Union Budget of 1997 made dividends taxable in the hands of the company paying them and not in the hands of the investors receiving them. The corporate dividend tax aimed at improving the economic growth and flexibility by eliminating the tax bias against equity-financed investments thereby promoting saving and investment. The new system aimed at reducing the tax bias against capital gains in the earlier tax system, encouraging investment, and enhancing the long-term growth potential of the Indian economy. As compared to the earlier tax regime where the recipient shareholder paid the tax on the dividend received primarily on the basis of marginal tax slab rate applicable to him/her (varying between 0% to 30%), in the current structure of corporate dividend tax, the dividend paying companies pay dividend tax at a flat rate of 12.5 per cent as of financial year 2005-06. Implicitly, the present corporate dividend tax regime can be termed as a more favourable tax policy. The analysis of influence of changes in the tax regime on dividend behaviour reveals the following:  Though the results are somewhat mixed, it can be largely inferred that there is a significant difference in average dividend payout ratio in the two different tax regimes for medium sized companies There are wide industry-wise and size-wise variations in empirical findings visible over the period of study. As a result of the introduction of DDT in the year 1997, two sectors namely “Metal and Mining” and “Finance” had significant change in the average DPR. This may be because Metal and Mining sector is primarily controlled by the public sector undertakings wherein there is large employee and management ownership of shares and preference for dividends. After introducing DDT, the management cadre who fall in the high income group benefitted from lower tax on their dividend income. For the finance sector it can be reasoned that the East Asia crisis of 1997 may a played some role. Finance companies might be trying to restore the confidence of HNIs who benefit from the introduction of DDT more than investors in lower income brackets.

 

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Objectives
The primary Objectives of the study are To study the impact of implementation of Dividend Distribution Tax in the year 1997 on Payout Policy of Indian companies To study the impact of an increase in Dividend Distribution Tax to 15% in the year 2007 on the payout policies of Indian companies. The secondary Objectives are: To study payout behaviour of different sector over the years To study the impact of DDT on differently sized firms namely-small, medium and large

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Methodology
Data Collection
For studying the impact of Dividend Distribution Tax on the trend of Payout Ratios of Indian corporate sector, we have collected data on the Payout Ratios of some selected companies for which data was available. For the study, from all the companies listed in BSE, the companies which are part of Sensex, BSE TECk, BSE-PSU, Sectoral, Bankex, BSE-Midcap were taken for further consideration. Initially, we had 512 companies. After deleting the companies which reoccurred, being part of more than one index, 345 Companies belonging to various sectors were shortlisted. For the shortlisted companies, data on Dividend Payout Ratio from the year 1995 to 2009 was collected. For the purpose of study only the data from 1995 to 2000 and from 2006 to 2009 was used (DPR for year ending March 2009 is regarded as 2009). Also the Market Capitalization as on 24th February, 2010 was collected. Finally, 211 companies were selected. The companies for which the data was not available even for a single year were rejected.

Classification
Since, a sector wise analysis is being done, the sector of each selected company was found out. There were a total of 38 different sectors. For ease of calculation and analysis, sectors which had less than 5 companies were clubbed under one common head. Finally 12 sectors were arrived at. The sector heads before and after clubbing and the composition of each sector after clubbing are provided in appendix. The objective of the study also includes determining the impact of DDT on different sizes of firms namely-small, medium and large. The Market Capitalisation as on 24 th February 2010
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was used as sorting criteria. The companies having M-Cap less than Rs.5000 crore were termed as small sized companies, between Rs.5000 Crore and Rs.20000 Crore termed as medium sized and more than Rs.20000 Crore are termed as large sized companies.
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Adjustments
For certain companies the Financial Year was changed from year ending December to year ending March, but this doesn’t need adjustment in DPR since DPR available is annualised. In certain cases DPR arrives at negative figure, since the formula used is DPR = 𝐷𝑃𝑆
𝐸𝑃𝑆

. In

certain cases Companies tend to pay Dividends even though they have made losses. Thus, even though DPS is positive, EPS turns out to be negative and finally DPR turns out to be negative. In this case absolute value of DPR has been taken ignoring the sign.

Statistical Tools
For analysing the impact of introduction and enhancement of DDT on the DPR, it is necessary to use some scientific methods and tools. The implementation of DDT, making dividend taxable in hands of companies, will change the behaviour of companies and their dividend payout policy. Thus to validate its influence, Paired T-test (Student’s test) has been used. The test has been used twice, once, to study the impact of the implementation of DDT in the year 1997 and secondly to study the influence of an increase in DDT to 15% in the year 2007. Thus, the Null Hypothesis is that there is no change in DPR i.e. payout policy of selected companies due to Implementation of DDT and also due to increase of DDT. Thus H0: Average DPR for the years 1995, 1996 and 1997 and Average DPR for years 1998, 1999 and 2000 are same. (DPR1=DPR2) H1: Average DPR for the years 1995, 1996 and 1997 and Average DPR for years 1998, 1999 and 2000 are not same. (DPR1≠DPR2) Also, H0: Average DPR for the years 2006 and 2007 and Average DPR for years 2008 and 2009 are same. (DPR1=DPR2) H1: Average DPR for the years 2006 and 2007 and Average DPR for years 2008 and 2009 are not same. (DPR1≠DPR2)
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The level of Confidence is at 90%

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Scope
The period of study is from the year 1995 to 2000 and from 2006 to 2009. The data related to year ending March 1995 (December 1994 in some cases) to year ending March 2009 (December 2008 in some cases) has been taken. The scope was restricted to the companies listed on the BSE (Bombay Stock Exchange). The study is done for a total of 215 companies belonging to 38 different Industries (sectors) and for ease of study the number of sectors was reduced to 12, and rest were clubbed into related sectors or “Others”.

Limitations:
The use of paired t-Test will just depict whether there was significance difference in payout trend o companies before and after introduction of DDT, but the positive impact or negative impact cannot be determined. Thus Graphs are used to depict the same. Many companies which are though significant for study were ignored on the basis of non-availability of data.

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Introduction
Dividend decision has been a subject of enquiry for the financial analysts, academicians, and researchers for about five decades now. The objective of such a decision is to determine the extent to which the earnings of a company should be distributed as ‘dividend’ among the shareholders and thereby also ascertain the retained earnings. The dividend decision is an integral part of a company’s financial decision-making as it is explicitly related to the other two major decisions — investment and financing decision.

Corporate taxation influences the dividend decision in more than one way. On the one hand, it influences the net income-after-tax of the company, which, in turn, determines the capacity of the company to pay dividends, and, on the other hand, it may have implications for the net value received by the shareholders. In this sense, the structure and the rate of corporate tax play an important role in determining the dividend policy.

Corporate tax is levied on the income of the company and corporate dividend tax, which is a form of corporate tax, is levied on the amount of dividend declared, distributed or paid by the company. In most of the countries, corporate tax has been in the form of tax levied on net profits/earnings of the company. However, in India, tax is also levied on the dividend paid by the company or what is termed as dividend tax. A zero-dividend payout is not uncommon for young rapidly growing companies with good investment opportunities (Hindustan Times, 2003).

Dividend Tax considered to be Double Taxation
On an average, dividend payout in the US1 has decreased to 30 per cent at present from 60 per cent 30 years ago. However, companies may also be discouraged from paying higher dividends when these are doubly taxed once in the hands of the company and again in the
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hands of the shareholders. Tax exemption is desirable on both dividends and capital gains that reflect primarily the retained earnings of the company.

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There is a school of thought that argues for tax exemption for dividend income. The basis of their argument is that taxation of dividend income amounts to double taxation. The rationale behind this claim is that corporate profits are subject to corporate tax. Since dividends are paid out of profits, the argument is that the personal income tax paid on dividend income amounts to a second tax on corporate profits.

This logic is challenged on two grounds. First, there is a legal and logical distinction between the corporation as an entity and the individual shareholders who own the company. Second, the tax rates currently in place were set with the knowledge that there was taxation both at the corporate and the individual level. This means that if there was a moral objection to ‘double taxation,’ then, the remedial action would also require an increase in the corporate tax rate.

On the first point, a corporation is an entity apart from its shareholders for reasons that have historically been quite important. The law has, in effect, recognized corporations as legal entities that are distinct from the individuals who happen to own its stock. This is an important privilege granted by the government for many reasons. First, the limited liability provided to shareholders means that a corporation might end up imposing damage to others in pursuit of profit without the individual shareholders being held accountable. Without the privilege of limited liability granted by the government, every shareholder could be held fully responsible for all claims against the company.

A second important benefit associated with the corporate form is that the corporation can act as a legal individual without directly involving its owners. This can be advantageous to individuals who may wish to earn profit from activities that they would prefer not to be publicly associated with such as manufacturing guns, selling tobacco, etc. The corporate form allows individuals to profit from actions that may be viewed by some as otherwise questionable while preserving their anonymity.
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There are other benefits associated with the legal privilege of incorporation but the best evidence of the value to the individual shareholders of having corporations as separate

entities is the fact that corporations exist. Individuals choose to set up corporations (with
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full knowledge of the tax laws) because they view the benefits as outweighing the costs. The shareholders who feel that the corporate tax is too great a burden have the option of choosing a partnership or a sole proprietary form of business set-up. In this case, their income would only be subject to personal income tax. The decision to create a corporation is a proof of the fact that the benefits associated with this status outweigh the costs in having corporate income subject to taxation.

Since the corporation is legally and logically a separate legal entity from its shareholders, there is no logic in the claim that the taxation of dividends amounts to double taxation. The corporation is subject to taxation in exchange for the privileges granted to it by the government. The shareholders are subject to tax on their dividend income just as employees are subject to tax on their salary income. The same income— that is, income to the same people or entity — is not being taxed twice. Beyond this logical point on double taxation, there is the obvious practical point that while setting the corporate tax rate, the government has been well aware of the fact that dividends are subject to taxation. In other words, the corporate tax rate was set at its current level with the expectation that the portion of profits paid out as dividends would also be subject to taxation. If there is a concern now that the taxation of dividends is an inappropriate form of double taxation, then the remedy should include raising the corporate tax rate. If the purpose of a cut in the tax rate on dividends was simply to eliminate the ‘double taxation’ of dividends, then it would be coupled with an increase in the corporate tax rate. If there is no accompanying increase in the corporate tax rate, then the intention must be to increase the amount of money going to the relatively small number of families who have a significant dividend income.

Thus, the claim that dividends are subject to double taxation is questionable. In the Indian context, the imposition of corporate dividend tax on companies making payment of dividends has in a way resulted in the increase of the corporate tax rate on that portion of the corporate profit which is distributed among the shareholders. In other words, corporate
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profits which are retained are subjected to a lower rate of corporate tax as compared to the corporate profits that are distributed.

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Historical Background On Dividend Taxation
Till the year 1958-59, an imputation system of taxation was followed in India with respect to dividends. According to this system, the dividend received by the shareholders was included in their income after being grossed up and the shareholders were granted credit with respect to the amount deemed to have been paid by the company on their behalf. In other words, shareholders had to pay tax on dividend at the rate applicable to them but the government credited the tax paid by the company on this part of income to the investors. Thus, that part of the corporate earnings, which was declared as dividend, was taxed only in the hands of investors. This system of single taxation on dividend was abolished in 1959-601 and dividends were taxed for the second time separately in the hands of shareholders. Over the years, the investors and the corporate sector complained to the government against double taxation of income and the government eventually provided a partial relief to shareholders having low amount of dividend income in the form of deduction under Section 80L from the year 1968-69. As per Section 80L2 of the Income Tax Act, 1961, non-corporate individual shareholders were granted relief on dividend and certain other income like interest received from government securities, bank deposits, etc., subject to a ceiling. The limit, which was increased from time to time, stood at Rs. 12,000 in 1997. In this way, small investors whose income included income from different eligible savings including investments in shares were not required to pay any tax on their income if the total income from all such savings was below Rs. 12,000. Dividend income in excess of this limit was taxed under the normal rate applicable to the investors. The rate of tax ranged from 15 per cent to 40 per cent as of 1997 (10% to 30% from 1998 to 2004) depending on the tax bracket in which the income of the investor fell.3 Companies having dividend income also enjoyed relief in the form of Section 80M from the financial year 1968-69. According to this section, in case a company received dividend income from another company and also declared dividend to its shareholders, the positive difference between the dividend inflow and the dividend outflow alone was recognized as an income for the company. In other words, if the amount of dividends paid by a company exceeded its dividend income, the
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dividend income was exempted from tax. To summarize, till 1997, dividend income was taxed in the hands of the shareholders subject to a small relief available to the small investors.
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Introduction of Corporate Dividend Tax
Both the investors and the corporate sector were expecting the abolition of double taxation on dividend income ever since the Government of India had initiated financial reforms in 1991. In the budget of 1997, the Finance Minister announced the abolition of tax on dividend income in the hands of the shareholders. However, the budget proposed a new tax on the companies when they declared, distributed or paid dividend. While proposing this new ‘corporate dividend tax,’ or dividend distribution tax, the government had stated that the objective of this tax was to discourage companies from increasing the dividend outflow significantly leading to lower capital formation. While the new tax system exempted the investors from direct payment of any tax on dividend, it required an indirect payment of tax on dividend at a prescribed rate. It is difficult to determine whether the tax department collected a higher amount from dividend distribution tax compared to the earlier regime. There is no published data available on the amount raised by the government through tax on dividend income when the recipient shareholders paid tax on it. But, because of the exemption limits for tax payers in the lower income levels and poor personal tax administration, the revenue under the earlier system of taxation would be lower than that collected under the new system. Since the new tax system shifted the responsibility of paying tax to the companies, administration of the tax on dividend has now become more efficient and effective. While double taxation of dividends is pervasive, partial to full relief from this is prevalent in some countries. In most countries, the shareholders have to pay taxes on the dividends received. The corporate dividend tax aimed to improve economic growth and flexibility by eliminating the tax bias against equity-financed investments thereby promoting saving and investment. The new system aimed at reducing the tax bias against capital gains in the earlier tax system encouraging investment and enhancing the long term growth potential of the Indian economy. Dividend exclusion, combined with the elimination of the double taxation of retained earnings, 5 provides an important step toward reducing tax-based distortions of economic decisions. The change in dividend
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taxation has implications for dividend payout policy, debt versus equity financing, organizational form (including corporate governance), and current versus future consumption (i.e., saving). A neutral tax policy toward dividends would also provide
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important benefits for corporate governance. Reducing tax barriers to dividend payments would help provide investors with improved information about the corporate prospects and reduce the tax-motivated build-up of cash left to the managers’ discretion. Recognition of the desirability of providing relief from double tax on corporate income is not new. The impetus behind the past proposals to integrate the individual and the corporate taxes was to reduce the economic distortions created by the double tax on corporate income.

In addition, higher investment due to the lower tax on capital income would promote higher wages in the long run. The proposal would also be expected to enhance near-term economic growth. While the earlier policy called for tax payments to be made by investors based on the marginal tax rates applicable to them, the new policy taxed the dividends of the companies at a uniform rate. The investors now received their dividends ‘tax-free’ in the sense that they need not declare their income from dividends in their tax returns or pay a tax on them. In fact, the investors are implicitly paying a tax since the company pays the dividend tax and this reduces the amount of funds available for dividend payment by the company.

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Main Provisions Relating to Corporate Dividend Tax
The following are the salient features of corporate dividend tax as per Section 115-0 of the Income Tax Act, 1961:  Corporate dividend tax is in addition to the corporate tax paid by the company on its profits.  Such taxes are levied on any amount declared, distributed or paid by the domestic company (in India by way of dividends in cash).  The dividend may be declared out of current or accumulated profits.  Corporate dividend tax is payable even if no corporate tax is payable by a company or its income.  The principal officer of the domestic company and the company shall be liable to pay the tax on distributed profits to the credit of the central government within 14 days from the date of declaration, distribution or payment of any dividend whichever is the earliest.  The tax on distributed profits so paid by the company shall be treated as the final payment of tax in respect of the amount declared, distributed or paid as dividends and no further credit, therefore, shall be claimed by the company or by any other person in respect of the amount of tax so paid.  No deduction under any other provision of Income Tax Act, 1961, shall be allowed to the company or a shareholder in respect of the amount which has been charged to tax or the tax thereon.

Thus, the above provisions are mandatory and binding on the companies in order to avoid payment of penal interest and other stringent aspects of law.

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Review of Literature
There are variations in the tax codes across countries. In many countries, the corporate source of income (dividend and capital gains) is subjected to double taxation. The double taxation of corporate income has been criticized on the following grounds: • It distorts the allocation of capital and other resources between corporate and noncorporate forms of business (Harberger, 1962; Ballentine and McLure, 1980). • It encourages high profit retention and thus avoids the test of marketplace (Poterba, 1987). • It encourages debt over equity financing (Litzenberger and Van Horne, 1978). • It increases the cost of equity financing and thus reduces investment and capital formation (Poterba and Summers, 1985). There are primarily two views on dividend taxation. As per one view, the dividend policy including the tax factor is irrelevant, i.e., it has no influence on the value of the company. The alternate view holds that dividend decision is, in fact, relevant and does affect the shareholders’ wealth.

Irrelevance of Dividends
In a world with no taxes, the Miller and Modigliani (1961) proposition suggests that dividend policy is irrelevant to the value of the company. However, when personal taxes are introduced with a capital gains rate, which is less than the rate on ordinary income, the picture changed. Friend and Puckett (1964) use cross section data to test the effect of dividend payout on share value and find that the value of the company is independent of dividend yield. The Black and Scholes (1974) study presents strong empirical evidence that the before tax returns on common stocks are unrelated to corporate dividend payout policy. They adjust for risks by using the capital asset pricing model (CAPM) and come up with a strong conclusion that it is not possible to demonstrate, even by using the best empirical
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methods that the expected returns on high yield common stocks differ from the expected returns on low yield common stocks either before or after taxes.

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Miller and Scholes (1977) argue that even with the existing laws (where the tax on ordinary personal income is greater than the capital gains tax), there is no need for the individuals ever to pay more than the capital gains rate on dividends. The implication is that individuals could be indifferent towards payments in the form of dividends or capital gains (if the company decides to repurchase shares). Thus, the companies’ value will be unrelated to its dividend policy. Both the Friend and Puckett (1964) and Black and Scholes (1974) studies tend to support the conclusion that the value of the company is independent of the dividend yield.

Relevance of Dividends
Before 1997, there was double taxation of profit earned by the companies once in the hands of the company through corporate tax and then in the hands of the investors in the form of income tax. In such a case, the investor should prefer to get less dividend paid and the earnings to be retained by the company as they can always get the amount by selling the shares in the equity market in the form of ‘home made dividend’ (Black, 1976). Taking this argument, the taxation policy is considered a key determinant of dividend payout in the developed countries and the dividend decision is a relevant decision (Short, Keasey and Duxbury, 2002).

Three important studies (Bhattacharya, 1979; Miller and Rock, 1985; and John and William, 1985) focusing on the relationship between dividend payout and corporate tax questioned the rationale of the old view that dividend taxation affects the shareholders’ optimal dividend payout ratios. Dividend results in an immediate tax liability for shareholders. These studies emphasized the need to distribute dividend even if it leads to higher tax liabilities for shareholders. The primary explanation for this was that dividend sends a signal to the shareholders about the future prospects of the company. Another study (Hakansson, 1982) strengthened the view that “the raising and lowering of dividends communicates
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information (to shareholders) over and beyond what is provided by earnings reports, forecasts, and other announcements.” However, no study seems to have any explanation as to why dividends are better (and more expensive!) signals regarding future prospects (Black
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and Scholes, 1974; Black, 1976; and Ambarish, et al., 1987). Another rationale behind dividend distribution in spite of tax implication is provided by the view that shareholders are not sufficiently well informed about whether or not management is acting in their best interests (Crockett and Friend, 1988). Dividend distribution is further justified in the study by Easterbrook (1984). He observed that dividend payouts ensure that companies go to the capital markets to seek funds for new capital requirements. Market mechanisms ensure that managers are acting in the best interests of shareholders. Ofer and Thakor (1987) offer another explanation for dividend distribution: If managers are shareholders, they personally prefer dividends to share repurchases since most companies forbid managers from tendering their shares. Thus, the only way managers can get cash disbursement from their shares is through dividends and they may be willing to impose a tax cost on other shareholders (and themselves) to get the cash. Perhaps the most widely tested explanation of dividends is known as the clientele hypothesis (Gordon and Bradford, 1980). Some important groups of shareholders may prefer dividends to capital gains because dividends provide cash flow and, for these shareholders, there is little or no tax advantage from capital gains. The most important group comprises the non-taxable institutions but individuals with low marginal tax rates and other corporate shareholders are also in the ‘low-tax clientele.’ These shareholders will own stocks in the companies with high dividend payout ratios while other shareholders (the ‘high-tax clientele’) will invest in companies with low payout ratios. Empirical evidence regarding the clientele hypothesis has been mixed. Studies that find clientele effects include Pettit (1977), Gordon and Bradford (1980), and Scholz (1989). The studies providing contradictory evidence include Long (1978), Litzenberger and Ramaswamy (1979, 1982), Hess (1982), Auerbach (1983), Poterba and Summers (1984), Poterba (1987), and Blume and Friend (1987). The contemporary literature on dividend policy offers evidence of irrelevance of dividend tax in dividend policy. It is argued that dividend taxes get capitalized into the value of the company (King, 1977 and Bradford, 1981). The major drawback in this theory is that it fails to deal adequately with the possibility of periodic share repurchases. However, contradictory empirical evidence is provided by the study of Poterba and Summers (1985). The controversy between these
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views continues to be the main focus of research on dividend taxation. In India, this issue has not received adequate attention of researchers so far. It is Lintner’s model (1956) which

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has been the focus of empirical studies in the Indian context. Much work does not seem to have been carried out on other aspects of dividend policy in India.

However, a few studies have been carried out including those of Majumdar (1959), Nigam and Joshi (1961), Purnanandam (1966), Rao and Sharma (1971), Gupta (1973), Krishnamurthy and Shastry (1975), Dhameja (1976), Murty (1976), Bhat and Pandey (1994), Ojha (1978), Khurana (1980), and Mishra and Narender (1996). Most of these studies have primarily focused on identifying the factors influencing dividend payouts in the Indian corporate sector and only indirect references have been made to the impact of tax on dividend policy. However, Narasimhan and Asha (1997) discuss the impact of dividend tax on dividend policy of companies. They observe that the uniform tax rate of 10 per cent on dividend as proposed by the Union Budget, 1997-98, alters the demand of investors in favour of high payouts rather than low payouts as the capital gains are taxed at 20 per cent in the said period. A study by Reddy (2002) has shown that the trade-off or tax preference theory does not appear to hold true in the Indian context. Another study by Narasimhan and Krishnamurti (2004) finds no clear evidence that companies altered their dividend payout policy in response to the introduction of corporate dividend tax in India. Being able to precisely spell out the relation between corporate tax and dividend policy would be advantageous to most of the diverse groups which are likely to be affected in the process. For instance, the shareholders may be able to understand the dividend behaviour of a company in response to any proposed change in corporate taxation. In addition, the shareholders may be able to anticipate the amount which they are likely to receive as dividend. It will also help the management in identifying and evaluating potential growth strategies, expansion opportunities or prepare a defence against possible future adverse developments. As far as the policy-makers are concerned, the study may provide the much needed respite that introduction of corporate dividend tax in India in 1997 has contributed positively towards the declaration of dividends. The change in tax policy with respect to dividends can be considered as an interesting experiment in corporate finance with few parallels. The policy change may have a bearing on the wealth of investors on the one hand
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and the cost of equity of the companies on the other. This may, in turn, influence dividend payout policy and capital structure of the companies.

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Payout Trend of Each Sector
Of the total 211 Companies selected for the study, these have been divided into 12 sectors, namely Auto, Capital Goods, Consumer Durables, Finance, FMCG, Health care, IT, Metal and Mining, Oil and Gas, Others, Power and Realty. The composition of each sector is as follows

Sector Composition
Power, 6 Realty, 9 Auto, 15 Capital Goods, 31 Finance, 34 IT, 9 Oil & Gas, 11 Metal & Mining, 12 FMCG, 14

Others, 50

Consumer Durables, 6

Healthcare, 14

The “Others” Sector has 50 companies because many sectors are clubbed into that. The details of clubbing are provided in appendix.

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Auto
50% 40% 30% 20% 10% 0% 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 DPR(%)

The average Dividend payout ratio in this sector is between 25% and 40%. Since there are many capital expenses and also availability of growth opportunities, payment of dividend is low which minimises the DPR. There has been a steep rise in average DPR of the sector in the year 2002 because Escorts Ltd, which was a non payer earlier, started paying dividends and also Maruti Suzuki, which used to pay around 8% DPR, has now moved to 40%. The steep increase in the year 2002 and minor fall in the 2003 could be due to Abolishment of DDT in 2002 and reintroduction of the same in 2003.

Capital Goods
50% 40% 30% 20% 10% 0% DPR(%)

1996

1995

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

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One of the basic features of capital goods sector is that it has large growth opportunities. Thus The DPR seems to be in a range of 18% to maximum of 47% in year 2002. The steep increase is due to special dividends declared by Shree Cements. This has lead to increase in DPR to 644%. This implies the company has paid 6.44 times the earnings it has actually made, as dividends to its shareholders. This signifies that there was no investment opportunity, so the management decided to go for huge dividends. Also abolishment of DDT could also be the reason.

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2009

Consumer Durables
70% 60% 50% 40% 30% 20% 10% 0% 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 DPR(%)

The DPR trend has been more or less constant. The increase in the year 2001 is because of recession. During the recession, the companies go for dividends payout so that the interest of shareholders can be retained and the morale can be boosted. Also the absence of investment opportunities makes the management to go for dividend payout. In the year 2002 Tata Communications had the DPR of 209% further leading to increase in median DPR.

Finance
140% 120% 100% 80% 60% 40% 20% 0% 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

DPR-Large DPR-Medium DPR-Small

The average DPR in all the three sectors is more or less consistent at 20%. There has been steep increase in Large Companies DPR; this is because of IFCI paying out 557% as its DPR. Also in the case of Medium companies, the steep increase in DPR in the year 2003 is
21

because of JM Financials paying 1037% of its earnings as dividends.

Corporate Finance II END Term Project

| Group 3- FMG 18A

If Inter-size comparison is made, in the year 1997, when the DDT i.e. Dividend Distribution Tax was implemented making dividends taxable for companies paying them, the payment of dividend fell for medium and small companies. But this trend was not visible in dividend payout ratio of large companies. But in the year 2003 and 2007, where the DDT was reintroduced at 12.5% and further 15%, respectively, there has been no influence in payout ratio and the trend.

FMCG
60% 50% 40% 30% 20% 10% 0% 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 DPR(%)

The average DPR of this sector, unlike other sectors like Capital goods, Auto etc, is high. The reason is simple that, the FMCG is not a growth sector and also the capital investment requirement is low. Thus the average DPR is in range of 37% to 57%. In the year 2001, FMCG firms were regarded as the top dividend paying firms. Companies like Nestle India Ltd, Colgate Palmolive (India) Ltd. paid DPR of as high as 118% and 219% respectively.

22

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Healthcare
45% 40% 35% 30% 25% 20% 15% 10% 5% 0% 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

DPR(%)

The average DPR for Healthcare sector is ranging between 20% and 40%. It is observable that the dividends are very much fluctuating, which implies that the industry takes dividend as passive, and the dividends are paid only when there is no investment opportunities. Thus the DPR ranges from as high as 114% to as low as 6%. The continuous fall after 2007 may be because of increase in DDT to 15% and also investment opportunities in R&D.

IT
250% 200% 150% 100% 50% 0% DPR(%)

2004

1995

1996

1997

1998

1999

2000

2001

2002

2003

2005

2006

2007

2008

Information Technology, which is regarded as one of the growing sector with very attractive investment opportunities, has a very low average DPR. This is also visible from the DPR of
23

the companies. It is in the range of 6% to 34%. In the year 2006, there has been steep increase in the DPR. This is because Moser Bear had DPR of 359%, GTL had 486% and TechMahindra also had a DPR of 500%. Thus, leading to an overall sector average of 200%.
Corporate Finance II END Term Project | Group 3- FMG 18A

2009

Metal and Mining
30% 25% 20% 15% 10% 5% 0%

DPR(%)

1996

1995

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

There have been no steep increases or falls. The DPR has been consistent and ranging from 15% to 25%. This signifies that the fixed dividend payout policy is in practice. But the implementation of DDT has no impact on the sector. In fact no other sector has the impact. The fall in the year 2003 could be credited to the fact that the DDT after its abolishment in 2002 was re-introduced by Finance Act, 2003.

Oil&Gas
35% 30% 25% 20% 15% 10% 5% 0% 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 DPR(%)

No steep increases in this sector. The range of DPR is 13% to 28%. Since there is necessity to
24

maintain reserves for unseen uncertainties, these companies prefer paying low dividends and have a high retention ratio.

Corporate Finance II END Term Project

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2009

Others
70% 60% 50% 40% 30% 20% 10% 0% 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 DPR(%)

Since many sectors like Textile, Agriculture, Plastic goods, Diversified are part of this sector, no conclusion can be made out of this DPR trend. But the DPR had risen in the year 1999 because of Century Textiles which had payout of 1037% and in the year 1999, the increase is credited to Kesoram cements which paid 1700% of its EPS as DPS.

Power
40% 35% 30% 25% 20% 15% 10% 5% 0% 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 DPR(%)

Being a high growth sector, the DPR of this sector is ranging between 18% and 36%. But in
25

this sector too there has been no impact of either implementation of DDT and increase in DDT rate.

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Realty
40% 35% 30% 25% 20% 15% 10% 5% 0% 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 DPR(%)

The realty sector saw a transition from low growth sector to a very high growth sector. The DPR trend too depicts the same. The DPR in the year 1995 was at 34% and then it kept on falling and reached to 10% in the year 2009. The companies in this sector retain the earnings and reinvest the same in the business instead of paying it out. The actual rate of return on investments is more than the opportunities cost to the shareholder.

26

Corporate Finance II END Term Project

| Group 3- FMG 18A

Empirical Findings (using T-Test)
For 1997(Introduction of DDT) To determine the impact of the introduction of the Dividend Distribution Tax in the Union Budget of 1997, the paired sample T-test was conducted on 211 firms categorized in 12 sectors. On the basis the comparison between the calculated and the critical T-values, any significant impact of Dividend Distribution Tax on the Dividend Payout Ratio (DPR) can be seen. Significance Level is 90%. Accordingly, α = 0.10 General rule: If P-value>α; Accept the null hypothesis If P-value<α; Reject the null hypothesis
Pvalue 0.426 0.312 0.162 0.076* 0.882 0.145 0.654 0.079* 0.101 0.464 0.559 0.474

Sector Auto Capital Goods Consumer Durables Finance FMCG Healthcare IT Metal n Mining O&G Others Power 27 Realty

1997 Before After Before After Before After Before After Before After Before After Before After Before After Before After Before After Before After Before After

N 15 15 31 31 6 6 34 34 14 14 14 14 9 9 12 12 11 11 50 50 6 6 9 9

Mean 25.63 29.09 24.31 30.04 23.6 34.3 17.82 27.56 39.29 39.91 22 33.96 22.44 18.74 16.55 20.72 15.1 18.94 36.6 47.2 25.03 21.89 29.51 23.74

SD 13.54 20.6 13.15 29.28 21.6 36.9 15.37 31.85 23.18 26.86 13.49 25.5 18.96 25.1 9.12 11.76 11.47 10.03 50.6 86.4 8.47 16.6 21.7 10.73

T-value -0.82 -1.03 -1.64 -1.83* -0.15 -1.55 0.73 -1.94* -1.81 -0.74 0.63 0.75

T-value(critical) -1.761 to +1.761 -1.697 to +1.697 -2.015 to +2.015 -1.694 to +1.694 -1.771 to +1.771 -1.771 to +1.771 -1.860 to +1.860 -1.796 to +1.796 -1.812 to +1.812 -1.676 to +1.676 -2.015 to +2.015 -1.860 to +1.860

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For all the 10 sectors we find that the P-value>α. Therefore, we accept the null hypothesis that there is no significant change in the average DPR Before due to the change in the tax regime policy in 1997. For the 2 sectors namely, “Metal and Mining” and “Finance” the P-value<α. Therefore, we reject the null hypothesis and accept the alternate hypothesis i.e. there is significant difference in the average DPR before and after the 1997 tax regime change. The above conclusion is also corroborated by comparing the calculated T- value with the critical T- value. For “Metal and Mining” the calculated value (-1.94) is outside the permissible range (-1.796 to +1.796) at significance level of 90%. Similarly for, “Finance” the calculated value (-1.83) lies outside the critical range (-1.694 to +1.694). For 2007(Increase in DDT to 15%)
Sector Auto Capital Goods Consumer Durables Finance FMCG Healthcare IT Metal n Mining O&G Others 28 Power Realty 2007 Before After Before After Before After Before After Before After Before After Before After Before After Before After Before After Before After Before After N 15 15 31 31 6 6 34 34 14 14 14 14 9 9 12 12 11 11 50 50 6 6 9 9 Mean 25.65 27.92 22.98 21.82 24.31 25.09 22.42 22.44 49.46 51.5 33.57 23.68 106.8 27.4 19.36 15.44 26.82 20.13 29.76 31.12 32.7 35.6 14 10.65 SD 14.91 21.25 14.71 11.32 17.58 16.05 10.08 15.26 24.29 26.99 33.22 14.28 105.3 16.4 11.81 8.21 13.68 12.71 21.64 34.44 30.2 37.7 9.01 10.65 T-value -0.75 0.51 -0.38 -0.01 -0.49 1.2 2.31* 1.36 2.36* -0.39 -0.82 1.3 Tvalue(critical) -1.761 to +1.761 -1.697 to +1.697 -2.015 to +2.015 -1.694 to +1.694 -1.771 to +1.771 -1.771 to +1.771 -1.860 to +1.860 -1.796 to +1.796 -1.812 to +1.812 -1.676 to +1.676 -2.015 to +2.015 -1.860 to +1.860 P-value 0.464 0.611 0.723 0.988 0.629 0.25 0.05* 0.202 0.04* 0.7 0.448 0.23

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For 10 sectors where the P-value > alpha, we can say that the null hypothesis is accepted, i.e. there is no significant change in the average DPR after the introduction of dividend distribution tax. But, in IT and O&G sector, we see that P-value< alpha, so we reject the null hypothesis, i.e. there is significant difference in the average DPR after the introduction DDT. IT sector: The Return on equity of IT sector is very high compared to other sectors of Indian economy. Before 2003 the profitability of the IT firms was scanty and consequently this sector was at the bottom of the list in terms of dividend payment. The average payout of the IT sector during this period was 21.53%.This can be attributed two factors .Firstly, the industry presented immense growth opportunities for the companies hence the managers were of opinion that they can provide the investors better returns if they plough back the earnings into business. Secondly, most firms in Industry were facing volatile earnings stream which deterred them from paying more dividends. After 2003, there was a substantial spurt in dividend payout ratios of the IT companies. Infosys Technologies, Wipro Technologies, HCL Technologies were among the highest dividend paying companies. Infosys Technologies paid as high dividend as 2590% in the year 2004.This surge in dividend can be attributed to high profitability and subsequently high liquidity of IT companies. IT sector is a human intensive sector and do not require huge capital asset base like manufacturing companies for their operations. The major asset of this sector is manpower. Therefore the funds required for recruitment and retention of manpower is comparatively less than funds required for purchasing capital assets. So these firms can easily release funds for payment of dividends. Thus, we can conclude that IT firms in India have high liquidity and it is an important determinant of dividend payout ratio. Since the profitability of the companies is also very high so even if there is year to year variability in the earnings of the firms they can easily pay huge dividends.

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Payout Trend – Size Wise

Size-wise Composition
Large, 41

Small, 113

Medium, 57

The shortlisted companies which are further divided into large sized segment, medium sized segment and small sized segment based the Market capitalization criteria. The companies with less than Rs 5000 Crs. were sorted as Small size, with market capitalization of Rs. 20000 Crs as large size and rest into medium size.

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Large
40% 35% 30% 25% 20% 15% 10% 5% 0% 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Large

The Companies in this sector have the market capitalisation of more than Rs. 20000 Crores. The DPR of these is more or less constant in between the range of 19% to 37%. There has been increase in Dividends payment and DPR in the year 2001. This is because of downturn faced during that time. The companies prefer paying the dividends because of lack of investment opportunities and also to boost up the morale of investors. The DPR is also high because of low denominator in the form of Earnings but the numerator in form of dividends is either constant or increases. Also there has been no impact of Introduction of DDT in the year 1997 and increase in DDT rate in the year 2007. In fact there has been increase in payout in the year 1997 and onwards. The Increase in DPR Trend in the year 2002 is because of abolishment of DDT i.e. Dividends are taxable in hands of investors and not the company. There is fall in Payout trend in the year 2003; this could be due to re-introduction of DDT by Finance Act 2003.

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Medium
60% 50% 40% 30% 20% 10% 0% 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Medium

The range of Dividend Payout ratio for this sector, which has companies with market capitalisation in between Rs. 5000 Crores and Rs.20000 Crores, is between 25% and 48%.

Small
40% 35% 30% 25% 20% 15% 10% 5% 0% Small

1996

1995

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

32

The companies with market capitalization less than Rs. 5000 crores are comprised in this segment. The Payout trend of these firms is very much fluctuating. This is because the companies are characterised by low cash reserves and there is high co-relation between Cash profits and dividends of the companies. Thus this leads to fluctuating payout ratio. In the year 1997, the fall can be credited to the account of introduction of Dividend Distribution Tax, making the dividends taxable in the hands of companies paying them. In the year 2001, where large and medium sized firms preferred paying dividends, the small firms paid low dividends because of non availability of cash profits.

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2009

Empirical Findings (using T-Test)
For 1997(Introduction of DDT)

1997 Before Large After Before Medium After Before Small After

Sector

N 41 41 57 57 113 113

Mean 20.67 26.85 26.74 32.53 27.88 29.02

SD 14.83 19.87 18.58 25.23 36.22 62.79

T-value -2.97* -2.14* -0.16

P-value 0.005* 0.036* 0.87

From the results of t-Test it is clearly visible that there has been no influence in Payout ratio of Small sized companies due to introduction of DDT. Since the p-Value of large sized and Medium sized companies are less than α (0.1), this implies that the null hypothesis of there is no significant influence of DDT on DPR is rejected. Thus we can infer that there has been significant influence of DDT on the Payout trend of these companies.

For 2007(Increase in DDT to 15%)
2007 Before Large After Before Medium After Before Small After Sector N 41 41 57 57 113 113 Mean 29.79 28.75 36.85 28.64 27.2 23.56 SD 19.15 22.44 37.66 19.71 33.89 26.33 T-value 1.03 1.81* 1.07 P-value 0.311 0.076* 0.288

From the Table of results of T-test, it is clearly noticeable that the p-value of Medium sized companies is less than 0.1 (α). This entails that there was significant influence of increase in DDT to 15% on the payout trend of these companies. Also there was no impact of the same
33

on payout trend of large and small sized companies.

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| Group 3- FMG 18A

Conclusion
Successive Finance Ministers have realised that measured spraying of DDT - Dividend Distribution Tax - in Budgets is like providing a huge tax net over an entire corporate sector.
DDT is a tax on distributed dividend and not exactly on income. Since its introduction in

1997, DDT has been in the thick of controversy. After exempting dividend income in the hands of shareholders, the loss in revenue is being made good by collecting DDT from companies. A shareholder would prefer his overall tax liability computed after taking all aspects into account rather than be taxed under the thumb-rule, that is, DDT. Otherwise, one sector which is perennially cash-strapped is made to pay DDT, when, in fact, it need not pay. The profit-making government-owned companies declare dividends and pay the same to the Government. As the Government is not a taxable entity, no tax is deducted at source when dividend income is distributed (when dividend income was taxable). Since DDT is a measure consequent to the exemption of dividend income from taxation, to offset the revenue loss, the measure should have been confined to dividend distributed among taxable shareholders. To make the public sector pay, DDT on dividend distributed to the Government is unreasonable and illogical. Public sectors companies, such as Bank of India, Canara Bank, State Bank of India, ONGC, VSNL, MTNL, IOC and HAL, have been made to shell out huge sums as DDT. For obvious reasons, these companies will not protest. Moreover, after the amendments introduced by the Finance (No.2) Act, 2004, as far as a shareholder is concerned, he is indifferent between equity dividend income and long-term capital gains on equity shares as both are exempt in his hands. However, from the company’s point of view, retentions are still better as in such a scenario the company can avoid payment of Corporate Dividend Tax. One of the strongest arguments in the favour of DDT is that it doesn’t let shareholders having huge stakes in the company go off without paying taxes on their incomes.
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Corporate Finance II END Term Project

| Group 3- FMG 18A

Thus we can conclude that, though the Dividends were made taxable in the hands of companies paying the dividends, thus has no impact on the payout trend of the companies. Only few sectors had the impact of the same. Thus the tax-Preference theory which states that companies and also share holders prefer to have capital gain instead of dividends. Because the capital gains on equity shares are exempted from Taxes whereas dividends are taxable at 15%. The argument extended against DDT is that it leads to double taxation. First, as income tax on the profits earned by the companies, then secondly, as DDT on dividends which is paid out of profits lest after paying the income tax. The profits of a company are supposed to be the income of shareholders. This way they, as part owners i.e. the shareholders, have already been taxed. Under the current Taxation system, when a subsidiary company pays dividend to its parent company, it pays dividend distribution tax. When the parent company pays dividend to its shareholders, probably utilizing all of its dividend receipts, it further pays dividend distribution tax again on the same funds. This leads to double taxation, which should have been resolved by taxing dividend in the hands of the shareholder. The worst hit is the group companies or the chain investment companies, which will be subject to DDT more than once to distribute its profits to the ultimate shareholders. It is important that shareholders get fair returns on their equity holdings in a company. Otherwise they would prefer to choose investing through other alternative means. Moreover, it creates a bias in favor of undistributed profits against distributed profits. India needs to reduce the overall incidence so as to make Indian companies competitive in the international market. DDT encourages retention of profits in the hands of the company. It severely effects the capital formation and development in a country where capital is scarce and liquidity is one of the essential requirements of an economy. But it is equally important that shareholders get fair return on their equity holdings. Also keeping in mind the present policy of globalization, high corporate tax and less investment will make Indian companies suffer in the international
35

market.

Corporate Finance II END Term Project

| Group 3- FMG 18A

Endnotes
1. Sections 67 and 68 of Part B of the Union Budget 1959-60 of the Government of India. 2. Section 80L was inserted by the Finance (No.) 2 Act, 1967 with effect from assessment year 1968-69. 3. Even if the dividend income along with other qualified income exceeds Rs. 12,000, for individual investors, whose income from all sources including dividend income is equal to or below Rs. 60,000, no tax is levied and these small investors thus escape from any tax on dividend income.

References
1. Monica Singhania (2006), “Taxation and Corporate Payout Policy”, Vikalpa (Volume 31 No. 4). 2. Monica Singhania (2005),”Trends in Dividend Payout, Journal of Management Research (Volume 5, No. 3). 3. Bhat, R and Pandey, I M (1994). “Dividend Decision: A Study of Managers’ Perceptions,” Decision, 21(1/2), 67-86. 4. Hindustan Times (2003). “Dividend Taxation Slows Corporate Growth,” January 20. 5. The Economic Times (2010). “Should dividends be taxed in investors' hands?” January 28. 6. Business Standard (2010), “A case for withdrawal of dividend distribution tax” February 25. 7. Baker, H. Kent, E.T. Veit and G.E. Powell (2001), Factors Influencing Dividend Policy Decisions of Nasdaq Firms, The Financial 8. Review 36(3): 19-38. 9. Narasimhan, M S and Krishnamurti (2004). “The Role of Personal Taxes and
36

Ownership Structure on Corporate Dividend Policy,” unpublished paper. 10. Reddy, Y Subba (2002). “Dividend Policy of Indian Corporate Firms: An Analysis of Trends and Determinants,” NSE Research Initiative, Serial No.19. 11. Dividend Tax, “Wikipedia.com”
Corporate Finance II END Term Project | Group 3- FMG 18A

12. Ebscohost.com 13. Capitaline.com 14. http://www.thehindubusinessline.com/2007/03/09/stories/2007030901060900.htm 15. http://www.thehindubusinessline.com/2000/04/01/stories/120164su.htm 16. http://www.legalserviceindia.com/article/l187-Does-Dividend-Distribution-Taxamount-to-Double-taxation.html

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Appendix
I. List of Different Sectors before clubbing
Sector No. of Companies Agriculture Agro Chem 1 2 Logistics Media and Entertainment Auto Auto Ancillary Banks Capital Goods Cement Chemicals Consumer Durables Diversified Edible Oil Fertilizers Finance FMCG Gas Distribution Healthcare Hotels Housing related IT 13 1 3 22 2 5 3 5 1 5 33 14 1 14 3 2 10 Metal Mining Misc. Oil & Gas Others Packaging Paints Petrochemicals Pharma Plastic products Power Realty Retail Shipping Steel Telecom Transport 8 4 5 10 8 1 2 1 5 1 8 8 1 1 1 3 2 Sector No. of Companies 2 4

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II. Details on Composition of Final 12 Sectors
Assigned Sector Actual Sector Assigned Sector Auto Auto Auto ancillaries-Electrical Others
Agriculture

Actual Sector

Agro Chemicals Chemicals

Capital Goods

Capital Goods Cement Housing Related Steel Transport Services

Diversified Edible Oil Fertilizers Gas Distribution Hotels Logistics

Consumer Durables

Consumer Durables

Media & Entertainment

Telecom

Miscellaneous Others

Finance

Banks Finance

Packaging Paints Petrochemicals

FMCG

FMCG

Pharma Plastic Products

Healthcare

Healthcare

Retail Shipping

IT

Information Technology Power Power

Metal & Mining

Metal Metal, Metal Products & Mining Realty Realty

Oil & Gas 39

Oil & Gas

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III. List of those 211 Companies
Sr. No 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 31 Code 523204 500002 500410 505885 532480 520077 532418 500013 508869 500877 500477 531847 506820 526991 524804 500674 532215 500032 500490 500038 532134 532149 532525 500041 506285 500048 509480 503960 500049 500493 500103 500547 500055 526853 500335 Name Aban Offshore Ltd. ABB Ltd. ACC Ltd. Alfa Laval (India) Ltd. Allahabad Bank Amtek Auto Ltd. Andhra Bank Ansal Properties & Infrastructure Ltd Apollo Hospitals Enterprises Ltd. Apollo Tyres Ltd. Ashok Leyland Ltd. Asian Star Co. Ltd. Astrazeneca Pharma Ltd. Atlas Copco (India) Ltd. Aurobindo Pharma Ltd. Aventis Pharma Ltd. AXIS Bank Ltd. Bajaj Hindustan Ltd. Bajaj Holdings & Investment Ltd. Balrampur Chini Mills Ltd. Bank of Baroda Bank Of India Bank of Maharashtra Bannari Amman Sugars Ltd. Bayer Cropscience Ltd. BEML Ltd. Berger Paints India Ltd. Bharat Bijlee Ltd. Bharat Electronics Ltd. Bharat Forge Ltd. Bharat Heavy Electricals Ltd. Bharat Petroleum Corp. Ltd. Bhushan Steel Ltd. Bilcare Ltd. Birla Corporation Ltd. Sector Oil & Gas Power Capital Goods Capital Goods Finance Auto Finance Realty Healthcare Auto Auto Others Others Capital Goods Healthcare Others Finance Others Auto Others Finance Finance Finance Others Others Capital Goods Others Capital Goods Capital Goods Auto Capital Goods Oil & Gas Capital Goods Healthcare Capital Goods

40

32 33 34 35

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Sr. No 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68

Code 526612 500067 523457 500530 500825 532483 500870 500040 500084 500085 500110 500087 500830 531344 506395 532179 500092 500093 500480 500096 532121 532868 500124 523618 500125 500840 505700 531162 532178 530323 500495 500134 500086 500469 526881 532155 509550

Name Blue Dart Express Ltd Blue Star Ltd. BOC India Ltd. Bosch Ltd. Britannia Industries Ltd. Canara Bank Castrol India Ltd. Century Textiles & Industries Ltd. CESC Ltd. Chambal Fertilisers & Chemicals Ltd. Chennai Petroleum Corporation Ltd. Cipla Ltd. Colgate Palmolive (India) Ltd. Container Corporation of India Coromandel International Ltd. Corporation Bank CRISIL Ltd. Crompton Greaves Ltd. Cummins India Ltd. Dabur India Ltd. Dena Bank DLF Ltd. Dr Reddy's Laboratories Ltd. Dredging Corporation of India E.I.D. Parry (I) Ltd. EIH Ltd. Elecon Engineering Co. Ltd. Emami Ltd. Engineers India Ltd. Era Infra Engineering Ltd. Escorts Ltd. Essar Oil Ltd Exide Industries Co. Ltd. Federal Bank Ltd. Financial Technologies (I) Ltd. Gail (India) Ltd. Gammon India Ltd.

Sector Others Consumer Durables Others Auto FMCG Finance Others Others Power Others Oil & Gas Healthcare FMCG Capital Goods Others Finance Others Power Auto FMCG Finance Realty Healthcare Capital Goods Others Others Capital Goods FMCG Others Realty Auto Oil & Gas Auto Finance IT Oil & Gas Capital Goods

41

69 70 71 72

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Sr. No 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 100 101 102 103 104 105

Code 500676 500660 500163 500164 500300 500620 500160 500173 523477 532181 500670 517354 500010 500180 500182 500183 500440 500185 500186 500104 500696 500188 500193 500710 532174 500106 530005 500850 530965 532388 532187 500116 500209 531807 524494 500875 530773

Name GlaxoSmithKline Consumer Healthcare GlaxoSmithKline Pharmaceuticals Ltd. Godfrey Phillips India Ltd Godrej Industries Ltd. Grasim Industries Ltd. Great Eastern Shipping Co. Ltd. GTL Ltd. Gujarat Fluorochemicals Ltd Gujarat Gas Company Ltd. Gujarat Mineral Development Corp. Gujarat Narmada Val Fer Co. Ltd. Havells India Ltd. HDFC HDFC Bank Ltd. Hero Honda Motors Ltd. Himachal Futuristic Comm. Hindalco Industries Ltd. Hindustan Construction Co Ltd Hindustan Oil Exploration Co. Ltd. Hindustan Petroleum Corp Ltd. Hindustan Unilever Ltd. Hindustan Zinc Ltd. Hotel Leela Venture Ltd. ICI India Ltd. ICICI Bank Ltd. IFCI Ltd. India Cements Ltd. Indian Hotels Co. Ltd. Indian Oil Corporation Ltd. Indian Overseas Bank IndusInd Bank Ltd. Industrial Dev Bank of India Infosys Technologies Ltd. ING Vysya Bank Ltd. Ipca Laboratories Ltd. ITC Ltd. IVRCL Infrastructures & Projects Ltd.

Sector FMCG Healthcare FMCG Others Others Others IT Others Others Metal & Mining Others Capital Goods Finance Finance Auto Consumer Durables Metal & Mining Realty Oil & Gas Oil & Gas FMCG Metal & Mining Others Others Finance Finance Capital Goods Others Oil & Gas Finance Finance Finance IT Finance Healthcare FMCG Realty

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106 107 108 109

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Sr. No 110 111 112 113 114 115 116 117 118 119 120 121 122 123 124 125 126 127 128 129 130 131 132 133 134 135 136 137 138 139 140 141 142

Code 512237 500219 500378 523405 500228 530019 513250 526209 522287 500165 532652 502937 500241 500243 500247 500252 500510 500253 500257 500260 500108 500265 500520 500109 531642 532500 500271 513377 524084 517140 517334 526299 500290 500294 500075 532234 500790

Name Jai Corp Ltd. Jain Irrigation Systems Ltd Jindal Saw Ltd. JM Financial Ltd JSW Steel Ltd Jubilant Organosys Ltd. Jyoti Structures Ltd. K.S.Oils Ltd. Kalpataru Power Transmission Kansai Nerolac Paints Ltd. Karnataka Bank Ltd. Kesoram Industries Ltd. Kirloskar Brothers Ltd. Kirloskar Oil Engines Ltd. Kotak Mahindra Bank Ltd. Lakshmi Machine Works Ltd. Larsen & Toubro Limited LIC Housing Finance Ltd Lupin Ltd. Madras Cements Ltd. Mahanagar Telephone Nigam Ltd. Maharashtra Seamless Ltd. Mahindra & Mahindra Ltd. Mangalore Refinery & Petro Ltd. Marico Limited. Maruti Suzuki India Ltd. Max India Ltd. MMTC Ltd. Monsanto India Ltd. Moser-Baer (India) Ltd. Motherson Sumi Systems Ltd. Mphasis Ltd. MRF Ltd. Nagarjuna Construction Co Ltd. Nagarjuna Fertiliser & Chem. Ltd. National Aluminium Co. Ltd. Nestle India Ltd.

Sector Metal & Mining Others Metal & Mining Finance Metal & Mining Others Capital Goods Others Capital Goods Others Finance Others Capital Goods Capital Goods Finance Capital Goods Capital Goods Finance Healthcare Capital Goods Consumer Durables Capital Goods Auto Oil & Gas FMCG Auto Others Others Others IT Auto IT Auto Realty Others Metal & Mining FMCG

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143 144 145 146

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| Group 3- FMG 18A

Sr. No 147 148 149 150 151 152 153 154 155 156 157 158 159 160 161 162 163 164 165 166 167 168 169 170 171 172 173 174 175 176 177 178 179

Code 500304 500308 526371 500672 532555 500312 532466 524372 500315 523574 531120 503031 500680 500331 500302 532898 522205 500459 532461 531500 500359 524230 523445 500325 500390 500366 500368 500295 523598 500387 532498 511218 500550 523838 502742 500472 501061

Name NIIT Ltd. Nirma Ltd. NMDC Ltd. Novartis India Ltd. NTPC Ltd. ONGC Ltd. Oracle Financial Services Software Ltd. Orchid Chemicals Pharmaceuticals Oriental Bank of Commerce Pantaloon Retail (India) Ltd. Patel Engineering Ltd. Peninsula Land Ltd. Pfizer Ltd. Pidilite Industries Ltd. Piramal Healthcare Ltd. Power Grid Corporation of India Ltd. Praj Industries Ltd. Procter & Gamble Hygiene & Health Punjab National Bank Rajesh Exports Ltd. Ranbaxy Laboratories Ltd. Rashtriya Chem & Fert. Ltd. Reliance Industrial Infrastructure Ltd. Reliance Industries Ltd. Reliance Infrastructure Ltd. Rolta India Ltd. Ruchi Soya Industries Ltd. Sesa Goa Ltd. Shipping Corp. Of India Ltd. Shree Cements Ltd. Shriram City Union Finance Ltd. Shriram Transport Fin Co. Ltd. Siemens Ltd Simplex Infrastructure Limited Sintex Industries Ltd. SKF India Ltd. State Bank of Bikaner & Jaipur

Sector IT FMCG Metal & Mining Others Power Oil & Gas IT Healthcare Finance Others Realty Realty Healthcare Others Healthcare Power Capital Goods FMCG Finance Consumer Durables Healthcare Others Capital Goods Oil & Gas Power IT FMCG Metal & Mining Capital Goods Capital Goods Finance Finance Power Realty Others Capital Goods Finance

44

180 181 182 183

Corporate Finance II END Term Project

| Group 3- FMG 18A

Sr. No 184 185 186 187 188 189 190 191 192 193 194 195 196 197 198 199 200 201 202 203 204 205 206 207 208 209 210 211

Code 500112 532200 532191 512531 500113 512299 500900 524715 500770 500483 501301 500570 500400 500470 500800 532755 532299 500411 500413 500114 500420 532477 507878 512070 517146 532401 500575 507410

Name State Bank of India State Bank of Mysore State Bank of Travancore State Trading Corporation of India Steel Authority of India Ltd. Sterling Biotech Ltd. Sterlite Industries Ltd. Sun Pharmaceutical Inds Ltd. Tata Chemicals Ltd. Tata Communications Ltd. Tata Investment Corporation Ltd. Tata Motors Ltd. Tata Power Co. Ltd. Tata Steel Ltd. Tata Tea Ltd. Tech Mahindra Ltd. Television Eighteen India Ltd. Thermax Ltd. Thomas Cook (India) Ltd. Titan Industries Ltd. Torrent Pharma Ltd. Union Bank of India Unitech Ltd. United Phosphorus Ltd. Usha Martin Ltd. Vijaya Bank Voltas Ltd. Walchandnagar Industries Ltd.

Sector Finance Finance Finance Others Metal & Mining Healthcare Metal & Mining Healthcare Others Consumer Durables Finance Auto Power Metal & Mining FMCG IT Others Capital Goods Others Consumer Durables Others Finance Realty Others Capital Goods Finance Others Capital Goods

45

Corporate Finance II END Term Project

| Group 3- FMG 18A

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