CHAPTER: 1 INTRODUCTION

1.1 INTRODUCTION:

The present study deals with a crucial issue of dividend and its relevance with share
price. As the title of the study “Impact of Dividend on Share Price Volatility With
Reference To Power Industry in India”, also points towards this mammoth issue. What
makes the ongoing research by the researcher more relevant, is the fact that the inquiry
about the relationship between share price and dividend is carried out in one of the most
crucial sector of economy namely power sector. For the purpose of conducting this
research, researcher has predominantly relied on the secondary data; however a wise use
of primary data is also carried out by the researcher. The power industry of India is quite
big in size considering the vast dimensions of Indian Economy in terms of its huge
industrial base and demand of power. To give a sufficient representation of the
population researcher included the following companies in her study. The names of these
companies are NTPC, NHPC, NLC, Tata Power, Power Grid Corporation. These
companies are among the top five in terms of market share of the power industry in India.
Power industry being a core industry, which impacts every sector of the economy, the
fluctuation in share price, here is bound to have repercussion on other sectors too.

The share price volatility has been an area of concern for policy makers and researcher
alike. The volatility in share price refers to the rapid changes of share price which is not
considered good for any sector or industry the same also form the core area of analysis of
this study. In a sense volatility is concerned with the risk related to the returns from a
share. The researcher has attempted to analysis main issue of her study with the help of
some statistical tools, correlation and chi square. In this chapter researcher plans to
present an outlook of her study, particularly from a point of view of the conceptual
understanding of the theme related to the research topic.

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1.2. DIVIDEND: A CONCEPTUAL FRAMEWORK

Dividend had always been a debatable issue among the thinkers in the area of financial
and investment management. There are many factors which make dividend decisions
quite complex and challenging. A company cannot afford to overlook the nature of its
investors because it is the prime issue which a company must consider between the tug of
war between dividend and capital gain. The issue of growing or decline firm, of course,
will have also seen and consider. In the same continuation, researcher presents some
theoretical and conceptual background related issues.

A dividend is an allotment of the amount of a company's earnings, decided by the board

of directors, to a class of its shareholders there are various ways and forms in which
dividends can be issued these forms includes cash payments, as shares of stock, or other
property. On one hand, of dividend policy is concerned with deciding whether to share
all the profits in the form of dividends or to distribute a component of the profits and
retain the remaining. At the same time finance manager must have a concern about the
investment opportunities available to the firm, plans for expansion and growth, and the
related Policies. The same has already been hinted by the researcher in this section
earlier.

Another crucial area of concern of the dividend decision includes dividend stability, form
of dividends, i.e., cash dividends or stock dividends. As per companies Act 1956
Dividend is paid only out of the profit of the Financial year (after depreciation), Profits of
the previous financial year (after depreciation), out of both and out of money‟s provided
by the Government or a State Government for the payment of dividend. As far as the
different versions of dividend are concerned, one division is on the basis of final and
interim dividend the main aspects of these types of dividend are mentioned below.

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Final Dividend: The main features of Final dividend are as follows:

 It is paid at the end of the financial year.

 The dividend is decided in Annual General Meeting.
 It is recommended by the Board of Director.
 Final Dividend cannot be cancelled.
Interim dividend:
 Interim can be paid or distributed in between the financial year.
 Interim dividend is recommended by the Board of Directors and permitted by
Shareholders.
 It can be cancelled by the mutual consent of the shareholders.
1.2.1. Forms of Dividend
The classification mentioned in the above section is based on the administration part of
the dividend. In the next section researcher provides different forms of dividend popular
in corporate business. The general mode of distribution of dividend is cash; however,
other modes are also in vogue. The same is presented in the following table.
Table 1.1 Forms of Dividend
Forms Of Dividend Distributed As Effects
Cash Dividend Cash On Firm Liquidity
Property Dividend Assets Assets
Bonus Shares Shares Capital
Scrip Dividend Promissory Notes Maintain Shareholders
Satisfaction
The various forms of dividend mention in the above table are being presented below in a
nutshell.

Cash Dividend:

The most common form of the dividend is cash dividend. This is paid as cash per share of
the dividend. The dividend is declared by the board of directors, are allotted on the date
of record of the shareholders of the companies, it is distributed after considering the bank
balance position and effective cash budget for the payment of dividends. The cash

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account and the reserve account will be reduced when cash dividend is paid. So it reduces
total net worth and assets of the company. When a company follows a stable dividend
policy, it should remain prepared for the necessary funds for the purpose. It will be wise
if following points be considered before distribution of cash dividends: These are
 Availability of cash
 Requirements of cash
 Liabilities of the firm

Property Dividend

The property dividend is also paid by firms in terms of assets. The asset could be any of
the equipment, motor vehicle, furniture or any other asset. It is a form of non-monetary
dividend distributed by the companies to the shareholders, in place of a cash or stock as
payment. This distribution takes place at the fair market value of the assets. The value of
the asset has to be revalued at the fair value while issuing a property dividend.
Bonus share (Stock dividend)

An issue of bonus shares is the division of shares which are not paid by cost to the
existing shareholders. In India, bonus shares are issued as supplementary to cash dividend
rather than paying cash dividend. The companies in India may pay bonus shares as
additional cash dividend. The bonus shares are distributed on the basis of the existing
shareholdings. Companies having inefficient liquidity, but sufficient retained earnings
may elect stock dividends or bonus share. The following are the main effects of
distribution of bonus shares
 Number of equity shares increases
 There is no inflow or outflow of cash involved in it
 EPS will decrease in the future
 Price of the share decreases
 The Capital base of the companies increases

Scrip dividend

It is a promissory note which is a kind of assurance to pay dividends to the shareholders

later. This dividend form exists due to lack of sufficient funds and keeps the

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shareholder‟s confidence intact. When a company does not have adequate funds to issue
dividends in the near future, in its place it issues a scrip dividend, which is essentially a
promissory note to pay shareholders at a later date. We can also say that this is the written
document to pay dividend in future.
After having discussed various ways and forms of dividend distribution, researcher
present an overview about various forms of dividend policy popular in literature as well
in practice researcher has drawn some insights from these policies to frame a
questionnaire which is utilized by her as a supplementary tool to further augment her
research work.
1.3. VARIOUS DIVIDEND POLICIES IN USE.

Dividend policy is an extremely crucial issue and no one can undermine its significance
in comparison to other business policies. All intelligent firms design, frame, and act
cleverly on their dividend policies. The Dividend has a lot to do with earning per share of
a share and researcher finds it appropriate to present a brief overview of different
dividend policy popular in practice. Though various factors influence dividend policies,
however regularity and stability are among the most significant one. Below is being
presented the relevant discussion.

1.3.1. Regular dividend policy:

In this type of dividend policy investors are benefited with continuous dividend at normal
rate. Senior citizens or weakest sections of the society prefer this type of dividend as they
want to get a regular income. This type of dividend reimbursement can be maintained
only if the company has regularity of earning.
1.3.2. Stable dividend policy:

The Stable dividend policy is considered desirable by the management of most

companies in practice. The payment of a certain sum of money is on a regular basis to the
shareholders. Even though the amount of the dividend may fluctuate over the years, may
or may not relate with earnings it is known as stable dividend policy. In this type of
policy, stockholders are confident of fixed dividends per share. In such type of dividend
policy companies withhold all extra-ordinary income of the business in boom phase and
use it to maintain the dividend amount during the years. Stability of dividend policy does

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not represent stagnation in the dividend payout ratio. It includes slow but steady change
is the prime feature of the stable dividend policy. When the firm‟s earnings tend to rise
frequently and the management feels pleased that increased earnings are sustainable,
stable amount of dividend per share is increased. The main merits of the stable dividend
policies are as follows:
 The shareholder confidence is increased by this policy.
 It stabilizes the market value of shares.
 It helps in maintaining the goodwill of the company.

Stable dividend policies are of three types:

a. Constant dividend per share:

Companies announce dividend as a percent of the paid-up capital per share, this is
known as dividend per share. Companies go over the policy of paying a fixed amount
per share or a fixed rate on paid-up capital as dividend every year. Here the reserve
fund is created to pay a fixed amount of dividend in the year. It is difficult to maintain
with fluctuating earnings. So surpluses are maintained by the companies to provide
constant dividend per share. For example on a face value of Rs 1000, a firm
distributes a fixed amount of Rs 100 as a dividend. Irrespective of the level of
earnings, this amount would be paid every year. The same is graphically explained
below:

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 Constant Dividend Per Share
20 21 20.2
16.5 16 17

10 10.5 11
EPS
DPS
10 10 10
7 7 7
4 4 4
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9

Fig.1.1 Constant Dividend Per Share

b. Constant payout ratio:

The dividend Payout ratio means the ratio of dividend to earnings. It is represented by
the payment of a fixed percentage of earning as dividend every year. This approach
makes dividend directly proportional to earnings. This policy is in tune with
companies availability of fund to pay dividends. The same is explained graphically
below:

Constant Payout Ratio

20 6
5.5
5
4.5
15 4

10 12 Series EPS
11
10 Series DPS
9
5 8

0
year 1 Year 2 Year 3 Year 4 Year 5

Fig. 1.2 Constant Payout Ratio

Reference: IM Pandey Financial Management

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c) Stable rupee dividend plus extra dividend:

Most of the companies having fluctuating earnings adopt such policy to disburse a
minimum dividend per share with additional dividend. The extra dividend given by
the companies is known as Interim dividend which is followed by regular dividend. In
this type of policy companies pay a constant amount of dividend regularly and perm
it elasticity in the interim dividend. It means the payment of low dividend per share
constantly plus extra dividend in the year when the company earns a sufficient profit.
The main features of this policy are as follows:
 This policy helps in creating confidence among the shareholders.
 It avoid to the market price of shares‟ fluctuations.
 It helps in formation of company goodwill.
 It helps in distribution of regular income to the investors.

1.3.3. Irregular dividend:

When companies are not in the position of paying regular dividends to the shareholders,
they resort to irregular dividend. The company deploys this practice due to following
practical reasons:
 Unstable profits of the company.
 Poor liquidity position of the company.
 When the company doesn‟t want to create a dividend paying image.
 When business is not growing or company is not in the position of progress.

1.3.4. No dividend:

The Company may use such type of dividend policy due to poor financial conditions and
high requirement of funds for the growing opportunities of the company or for the
working capital necessity. Generally growing firms resort to a policy of paying less or no
dividend and reinvest the profit in them as they are having enough growth opportunities.
The main features and instances of this policy are as follows:

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  Introducing a new and rapidly growing organization require quantity of funds to
finance the development programs.
 When external financing seems costlier than internal funds.
 Where shareholders are agreed for future benefits or they prefer for long-term
capital gains in place of short-term dividend income.

1.4. FACTORS EFFECTING DIVIDEND POLICY

To have a better understanding related to theoretical and conceptual aspects related to

dividend and share price movement, it will be worthwhile to through light on the factors
affecting dividend policy. In the same pursuit, the researcher presents a brief description
about the factors affecting dividend policy which is being presented below.
1.4.1. Type of industry
The nature of the industry plays an important role while formation of dividend policies.
The Industries, where earnings are regular, may distribute a consistent dividend as
opposite to the industries where earnings are not certain and uneven. In such
circumstances, it is better at having a conservative approach to dividend payout. India
power industry plays a vital role in the economic development of the country. Power
Finance Corporation of India provides financing facility to develop the power sector in
India.
1.4.2. Ownership structure

The ownership structure of a company reflects debt and equity ratio of the company,
which is recognized as capital structure of the company. A low dividend payout is
preferred by the companies having advance promoter‟s holding.

Debt and equity are two important components of capital structure the interplay between
these two can be visualized from the context of both dividend policies as well capital
structure high debt will prompt equity share holders to ask the management to reduce it
due to the fear of financial risk on the other hand, from the point of view of dividend
distribution debt holders are not entitled to dividend and therefore with huge debt portion
in capital structure, dividend distribution amount of the firm reduces. The table below
further summarizes the discussion.

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Table 1.2 Ownership Structure Vs Dividend
Type of owner Ship Effect on dividend Distribution
Internal Financing The Dividend is not paid
Debt Financing The Dividend is not paid
Preference Shares The Dividend is paid in fixed proportions
Equity Shares Dividend fluctuates according the dividend policies
and determinants of dividend

1.4.3 Stage of firm in life cycle

Dividend policy of a firm has lots to do with the stage of firm in it life cycle. A different
phase of a firm life cycle supports different types of dividend policy. The same is
explained here. A major fraction of their earnings for further enlargement and growth is
maintained by recently formed companies or newly introduced companies. So, they
should follow a conservative policy, unlike standard companies, which can pay higher
dividend payout. The ongoing discussion can be summarily presented in the form of the
figure below.

• High Financial Requirements

New
• Low Dividend Payout
Companies

Mature • Limited Financial requirements

• High Dividend Payout
Companies

Fig. 1.3 Dividend Policy with respect to stage of life cycle in the firm

Reference: PC Tulsian Financial Management

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1.4.4. Earning pattern.

It is quite obvious that dividend is intricately related to the earnings of a company as it is

a earning which forms the basis of dividend distributions. The dividend pattern of the
companies is directly related to the earnings of the companies. The companies having the
stability of earnings may formulate a more steady dividend policy than those having an
uneven flow of incomes because they can easily estimate their savings and earnings. The
companies with stable earning can afford constant payout ratio on a regular basis,
however those with fluctuating earning may resort to increasing or decreasing dividend in
tune increase and decrease in earning respectively.

Table 1.3 Earning Pattern and Dividend

When earnings are stable Constant Payout On regular basis is

When earnings are fluctuating
preferred
1.High Dividend at the time of high
earnings is distributed.
2. Low Dividend at the time of low earning
is distributed.

1.4.5. Growth of company

A growing company is favorably poised, if it supports indirect relation with dividend

distribution. On the other hand, well established company can formulate a clear cut and
more consistent policy regarding dividend rather than growing companies. In case
growing company the rate of return is more than the cost of capital and here low payout
ratio is preferable where as in case of the declining company rate of return is less than
cost of capital here high payout ratio is preferable.

1.4.6. Liquidity of funds.

Generally the dividend is paid in cash and therefore it results in lower liquidity position
of the company paying dividend. However the availability of cash & current assets and
sound financial position supports sound dividend decisions. A dividend is termed as an
expenditure of companies, the greater the availability of funds and the liquidity of the

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firm the better the ability to pay dividends.

1.4.7. Needs for additional capital.

New companies and fast growing companies do not pay dividends generally. The income
may be preserved for fulfilling the increased financial needs of future expansion. Small
companies cannot get easy or cheap external financing, these companies have no choice
for dividend payout for expansion program, they ploughed back the profits. Such
Companies pay dividend at low rate and retain a big part of the profits.

1.4.8. Business cycle.

Out of four main components of time series one component is a cyclic component which
is popularly known as business cycle these cycles can be as long as 24- 30 years.
Different dividend policies can be adopted in different stages of the business cycle. In
case of boom earnings are high and companies can look for investment in other
opportunities as there is booming all around and go for low dividend payout. In case of
recession earnings are limited and it is better to adopt the policy of higher payout ratio, so
that future prospective e shareholder can be made to remain intact in case of depression,
the situation is worst there is no earning therefore no dividend payout and no any other
investment activity. Finally, in case of recovery firms stars, earning again and as it is
growing again; it prefers low dividend payout and retaining the earnings.

1.4.9. Government policies.

Government policies can also influence dividend policy in certain circumstances. It can
be explained by the fact that the income of the company gets widely affected by the
transformation in, fiscal, labor, control, industrial and other government policies.
Sometimes government controls the distribution of dividend ahead of an assured fraction
in an industry or in every one spheres of business deed as was done in an emergency.
1.4.10. Taxation policy

Tax is also a factor effecting dividend policy. Higher corporate tax will tend to reduce
after tax earnings of a company and there are all chances that its adverse impact on
dividend distribution may be felt. Dividends are in actual fact taxed twice -- once at the

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corporate level, and again when they are paid out to shareholders. High taxation reduces
the income of the companies and as a result the rate of dividend is lowered down.
Sometimes government levies dividend-tax of distribution of dividend beyond a certain
limit. The dividend income is tax free so it is preferred by the investor.

1.4.11. Legal requirements.

The legal requirements are also considered before the declaration of dividend. Certain
guidelines are prescribed by the companies Act 1956 for the distribution and payment of
dividend. The Indian company Act directs that dividend shall be paid only out of the
current profits or past profits after duly accounting for depreciation. If the government
deems fit in the interest of the public can allow any company to pay dividend for any
financial year out of the profits of the company without providing for the depreciation.
1.4.12. Restrictions in loan agreements

Sometimes large institutional investors put constraints on dividend payments to secure

their interests. For example, loan, contract may exclude payment of dividends as long as
the firm‟s debt –equity ratio is in surplus of certain benchmark. Such heavy loan
providers to the company are obviously concerned about the interest coverage ratio, so
that they may get their interest and principal back in time.
Dividend and related debates are so wide that the theories emerged over the years look
poles apart in terms of their orientation. Interestingly, these theories are often classified
on the basis of dividend relevance and irrelevance. A brief account of these theories is
being presented in the next section.

1.5. DIVIDEND THEORIES: DIVIDEND RELEVANCE – DIVIDEND

IRRELEVANCE

The dividend theories are basically categories in two parts, which is based on the
relevance of dividend of with a firm‟s value and share price and vice versa.

1.5.1. Relevance Theories. As pointed above, there is dividend theories which advocate
value of the firm as well as share price are influenced by dividend decisions. The main
theories in this category are as follows:

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 a. Walter‟s Model
b. Gordon's Model

a. Walter‟s Model
The credit of Walter‟s Model goes to Prof J E Walter, the model suggests that dividend
policy almost always affects the value of the firm. His work may be counted among the
earliest theoretical works highlighting the importance between the firm rate of return and
its cost of capital k.
Table 1.4 Walter‟s Model of Dividend

Case Relationship between r & k Preferred dividend payout

Growing Firm r is greater than k Low
Decline Firm r is lesser than k High
Ref: PC Tulsian

Assumptions of Walter‟s Model:

The main assumptions of Walter‟s model are as follows:

1. Firm finances all investments through retained earning it means debt or new equity are
not issued.
2. The r and k are constant. Where r = rate of return, k = cost of capital.
3. The firm follows the policies of either 100 % payout or 100% retention.
4. The Earnings Per Share and beginning dividend remains constant.
5. The firm has infinite life.
Market Price of a Share
P = Div/k + r (EPS-D) /k /k

Where P=Market Price of Shares

EPS = Earnings Per Share
Div = Dividend Per Share
k = capitalization Rate /cost of Capital
r = Internal Rate of return

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Walter‟s model suggests that growing; prefer low dividend payout, whereas declining
firms prefers high dividend payout.

In above formula Div/k represents the present value of the infinite stream of constant
dividend where as r (EPS-D) /k /k represents the present value of infinite streams of
capital gains.

b. Gordon‟s Model

The model presented by Myron Gordon is an extremely popular model in the literature
for the presentation of dividend theories. According to this model the market value of a
share is equal to the present of infinite streams of dividend received by the shareholders
the same is captured in the formula in the simplified manner:

Price of share = EPS (1-b)

K-br
Where P= Price of the share
k= Cost of capital
g= Growth Rate
b= retention ratio
r= internal rate of return
Assumptions: The main assumptions of the model are as follows:

1. The firm is all equity firms, there is no debt.

2. There is no external financing.
3. The value of r for the firms remains constant.
4. Similarly the cost of capital k is also constant.
5. The firm as well as its earning streams is perpetual
6. The retention ratio be once decided remains constant
7. The cost of capital is greater than the growth rate ( k> g).
It will be better to discuss a special case of bird in hand argument related to Gordon‟s
model which provides an explanation to the case where r= k and dividend become
irrelevant. However, if all the things are viewed in close consideration of reality Gordon

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says that dividend policies do effect when the value of the share even when r=k .The
basic philosophy about this is that investors prefer earlier dividend than distant (capital
gains) returns. The bird in hand argument also reflects same which means that a bird in
hand is better than two in the bush. The bird in hand argument, first of all put forward by
Krishman.

1.5.2. Irrelevance Theory

Modigliani and Miller approach:

According to this approach given by MM, under perfect market conditions, the dividend
policy of the firm is irrelevant or does not influence the value of the firm. The major
argument put forward in this theory is that the value of the firm depends on the firm‟s
earnings. It means that when investment decisions of the firm are given dividend decision
is given dividend decisions is no significance as far as the value of the firm concern.
Assumptions of Modigliani and Miller approach: The main assumptions of MM
hypothesis are as follows:
1. The perfect capital market is there where investors behave rationally, and information
is free to all at the same time, no single investor is large enough to affect the market price
of the share.
2. There are no taxes or there is no difference in tax rates applicable to capital gains and
dividend. In other words, we can say that investors value a rupee of dividend as much as
a rupee of capital gain.
3. The investment policy of the firm is fixed
4. There is no risk of uncertainty. It means that investors are in a position to forecast
future prices and dividend with certainty.

1.6. SHARE PRICE VOLATILITY: AN UNDERSTANDING: The word volatility

though drawn from physics and chemistry, is extensively used as business and economic
jargon, it connotes change in value particularly sharp changes in value over time. We
know that share market is known for its ever changing nature in terms of the movement
of the index value and share prices, etc. It is in this sense; volatility term is extensively
used to describe the behavior of share market. Now the question arises what is in the

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background of these changes or the governing forces behind these changes the answer
lies in the concept of risk and uncertainty, particularly related with the returns from
different shares. A higher volatility refers that a security's value can potentially be spread
out over a larger range of values. It reflects that the price of the security can change
dramatically over a short time period in either direction. A lower volatility means that a
security's value does not alter dramatically, but changes in value at a steady pace over a
period of time.

One popular measure of the relative volatility of a particular stock with respect to market
is known as beta. Generally beta is calculated for a particular stock; however sector
specific beta can also be calculated for different purposes. A beta approximates the
overall volatility of a security's returns against the returns of a relevant benchmark, for
example a stock with a beta value of 1.1 has historically moved 110% for every 100%
move in the benchmark, based on the price level. Conversely, a stock with a beta of .9
has historically moved 90% for every 100% move in the underlying index. The present
research focuses on share price volatility in the power sector as a central theme.

1.7. POWER SECTOR IN INDIA: AN OVERVIEW

As the present hovers around the power sector of India, it is worthwhile to present the
basic scenario of the sector in the country. As far as operational aspects of power sectors
are concerned, there are three main areas are concerned which are listed below:

 Power Generation
 Transmission
 Distributions

Power generation is concerned with the generation of electric power from sources of
primary energy. This is the first step of consumers of electricity in the electric power
industry. Power is not available in ready-made form in nature and it has to be generated
or in other words it has to be formed. The place where this generation takes place are
known as power plants. Electricity is frequently generated at a power station by
electromechanical generators mainly determined by heat engines fueled by combustion or
nuclear fission, but also by other means such as the kinetic energy of flowing water and

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wind, solar energy. Once power generation is complete now the question of its
transmission and distribution arises. The same is taken into consideration by two different
types of electric lines for the carrying of electricity.

Transmission lines are meant for transmitting power for long distances. Here the voltage
is kept higher to avoid transmission losses. Electric power transmission is the mass
association of electrical energy from a generating location, such as a power plant, to an
electrical substation.
Distribution lines are meant for short distances, here voltage is lower, to facilitate
transport of electricity nearby. You can see them on the side of the street.

1.7.1. Energy classification on the basis of their sources.

Power is among the most debatable and crucial sector of the world economy and India is
not an exception to it. In fact, considering the vast dimensions of Indian economy, this
issue become more complex and contextual. In the same context researcher presents a
brief account of renewable and non renewable energy sources. The source of renewable
energy is as the name suggests, is renewable in nature, it means that the source gets
restored to an original level and situation after the generation of energy. Solar energy,
wind energy, Hydro energy are the examples of renewable energy. Contrary to it,
renewable energy sources are those which cannot be reformed as original, for example
coal, Petroleum, Natural Gas like coal, petroleum gas, etc. on the other hand non
conventional energy resources are those where the source of energy is renewable and
they are not suppose to be exhausted on time. Moreover, they are less expensive and Eco
friendly.

One aspect of great concern cannot be overlooked and it relates to environmental

concern. Conventional sources of energy are generally more Eco friendly or harm to the
environment on the other hand non conventional sources are Eco friendly it is because of
these reasons, non conventional energy resources is being promoted.

There is one more version of the ongoing classification of energy which draws its
categorization on the basis of becoming the position of an organism. On this basis energy
is classified into two forms, the first is based on the fossil fuel, which is fuel generated by

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natural process like anaerobic decomposition of dead organisms. The peculiar feature of
such fuel is the presence of a large percentage of carbon, petroleum, natural gases in
them. The second is based on non fossil fuel where energy resources are not
decomposition of organic, for example, solar, wind, water energy.

1.8. POWER SECTOR IN INDIA: A PANORAMA OF SELECTED COMPANIES:

After having elaborated the operational aspects in the power sector in the country, its
mammoth dimensions and ongoing debates on conventional versus non conventional
energy sources in this section researcher plans to focus the power sector scenario through
actual quantitative data from selected companies in this sector. The data relevant to the
theme of the study mostly presented and confine to meaningful tables and charts the main
idea here is to capture the trend in this regards which will help in further analyzing the
data in coming chapters in the study. Through finally leading companies are selected for
the study based on the criteria of market share of these companies. However, in this
section, the relevant information about five companies are being presented. The data is
drawn from their websites. The relevant information is followed:

1.8.1. NTPC

NTPC was formed on November 7, 1975 under the Companies Act. In 2005-Company
has altered its name from National Thermal Power Corporation Ltd. to NTPC Ltd. NTPC
is India‟s largest energy corporation which was incorporated in 1975. The main
background under which NTPC was to speed up power expansion in India. Ever since, its
incorporation NTPC has gained a reputation of being the dominant in Indian power
sector. It started its journey of power generation with the help of fossil fuels, but later it
forayed into generation electricity via hydro, nuclear and renewable energy sources. It is
a public limited company. The significance of NTPC is huge which is recognized as a
Maharatana company in 2010. Only few companies come under the umbrella of
Maharatana companies. Moreover NTPC awarded as Maharatna company in May 2010,
it is one of the few companies to be awarded this status. NTPC performs both the
functions power generation and distribution. Other areas of involvement of NTPC include
Natural gas exploration, production, distribution and transportation. The size of NTPC

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can be judged from the fact. NTPC actively works from 55 locations in India, one
position in Sri Lanka and 2 locations in Bangladesh.

Dividend pattern:

NTPC has adopted the policy of paying both final and interim, both types of dividend,
with stable dividend and additional interim dividend. Interim dividend has been more
fluctuating as it moves between 7.5 to 40 but final dividend moves only between 5 to
17.5. The NTPC has also paid special dividend in 2013 only once.

Table 1.5. NTPC Dividend Distribution

Announcement Date Dividend Type Dividend (%)

01-06-2017 Final 21.7
31-01-2017 Interim 26.1
31-05-2016 Final 17.5
18-01-2016 Interim 16
29-05-2015 Final 17.5
20-01-2015 Interim 7.5
15-05-2014 Final 17.5
17-01-2014 Interim 40
10-05-2013 Final 20
18-02-2013 Interim 37.5
10-05-2012 Final 5
12-01-2012 Interim 35
10-05-2011 Final 8
18-01-2011 Interim 30
17-05-2010 Final 8
26-02-2010 Interim 30
22-05-2009 Final 8
14-01-2009 Interim 28
29-05-2008 Final 8
16-01-2008 Interim 27

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 Fig. 1.4 NTPC Dividend Pattern

Ref: Corporate action of NTPC available at moneycontrol.com.

NTPC is following stable, plus extra dividend policy by distributing interim dividend as
extra dividend, as they also declare a special dividend once out of ten observing years.

1.8.2. NHPC Limited

NHPC Limited came into being in the year 1975. It was established under company act as
a government of India enterprise & public listed company. It falls among a Mini Ratna
Category-I organizations of Indian public sector. It has played significant role in the
advancement of hydropower in the country. Not only it generates electricity, but trades as
well. During Earlier days of its inception, it contributed in the development of
hydroelectric power, however later it expanded its activities to harness sources of energy

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such as wind, solar and tidal, etc. Now it can be said that NHPC works both in the area of
conventional and unconventional.

Dividend pattern:

NHPC is quite regular in paying final dividend, but not so in paying the interim dividend.
NHPC is only paying an interim dividend only started by 2015. Moreover, this interim
dividend has grown ever since then. As far as final dividend, it has fluctuated throughout
the time window of the study.

Table1.6. NHPC dividend distribution

Announcement Dividend Dividend
Date Type (%)
31-05-17 Final 1.00
02-01-17 Interim 17.00
30-05-16 Final 5.80
10-02-16 Interim 9.20
29-05-15 Final 4.00
16-01-15 Interim 2.00
07-07-14 Final 3.00
28-05-13 Final 6.00
25-05-12 Final 7.00
30-06-11 Final 6.00
25-05-10 Final 5.50

Ref: Corporate action of NHPC available at moneycontrol.com.

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 NHPC Yearly Dividend Pattern
18
16
14
12
Dividend %

10
8 FINAL DIVIDEND
6
INTERIM DIVIDEND
4
2
0
2017 2016
2015 2014
2013 2012
2011 2010

Fig. 1.5 NHPC Dividend Pattern

1.8.3. Power Grid Corporation

It was established on 23 October 1989 as a public sector organization. In terms of total
asset base it is the third largest public sector enterprise. It holds the distinction of being
one of the world‟s biggest utilities in terms of transmission utility. It is a central
transmission utility of India. It utilizes an Interstate Transmission System (ISTS) for
transmission of electric energy. No wonder it is a “Navaratna” enterprise.

Dividend Pattern
Four years after its inception, it has started paying dividend paying since 1993. The
Power grid is found to regularly pay final as well as an interim dividend during the span
of the research. The rate of fluctuation is more than that of interim dividend is more
fluctuating rather than final dividend.

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 Table : 1.7 Power Grid Corporation Dividend Distribution

Announcement Dividend Dividend

Date Type (%)
31-05-2017 Final 33.5
27-01-2017 Interim 10
27-05-2016 Final 15.1
18-01-2016 Interim 8
01-06-2015 Final 13.1
23-02-2015 Interim 6.9
29-05-2014 Final 13.1
13-02-2014 Interim 12.7
28-05-2013 Final 11.4
30-01-2013 Interim 16.1
29-05-2012 Final 13.1
25-01-2012 Interim 8
24-05-2011 Final 12.5
25-01-2011 Interim 5
26-05-2010 Final 10
24-12-2009 Interim 5
16-06-2009 Final 7
20-01-2009 Interim 5
19-06-2008 Final 7
22-02-2008 Interim 5

Ref: Corporate action of Power Grid Corporation available at moneycontrol.com.

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 Power Grid Corporation Yearly Dividend
Dividend % Pattern

Interim Dividend
Final Dividend

2017 2016
2015 2014
2013 2012
2011 2010
2009 2008

Fig. 1.6 Power Grid Corporation Dividend Distribution Pattern

1.8.4. Tata Power

Tata power was established in 1910, as a part of Tata group, is an electricity utility
established by Dorabji Tata was the founder of Tata Power. The peculiar feature of Tata
power is it is India's largest integrated power company. Other areas of involvement in
Tata power include distribution, exploration of natural gas, transportation of power, etc.

Dividend Pattern:

Tata Power is found not paying an interim dividend during the span of research, but it is
found to pay final dividend regularly throughout the study. Tata power is following the
policy of paying very high dividend the rates vary between 95-130%. The Company
seems to follow a stable dividend policy.

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 Table: 1.8 Tata Power Dividend Distribution

Announcement Date Dividend Type Dividend (%)

19-05-2017 Final 130
24-05-2016 Final 130
19-05-2015 Final 130
29-05-2014 Final 125
30-05-2013 Final 115
22-05-2012 Final 125
19-05-2011 Final 125
25-05-2010 Final 120
28-05-2009 Final 115
23-06-2008 Final 105

Ref: Corporate action of Tata Power available at moneycontrol.com.

Tata Power Yearly Dividend Pattern

Dividend %

FINAL DIVIDEND

17 16
15 14 13 12 11 10 9 8

Fig. 1.7 Tata Power Dividend Distribution Pattern

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1.8.5. Neyveli Lignite Corporation Limited

NLC Ltd had its origins in the exploration of lignite deposits Neyveli, Tamil Nadu. Soon
after lignite deposits were located in Nayveli (NLCIL) incorporated in 1956. It is a
government enterprise and public company. It also comes under 'Navratna' companies in
the country, its main area of involvement in the mining of lignite coupled with and
generation of power through lignite based thermal power plants. Considering the growing
emphasis on non conventional energy resources in the country, NLC has expanded its
functions into the generation of renewable energy through wind power generation and
solar power generation.

Dividend Pattern:

The Neyveli Lignite Corporation India Limited is paying final dividend regularly during
the time period of research, however the same is not true about interim dividend as it has
not been so regular. Interim dividends are distributed in special case and remain
fluctuating during the course of research.

Table 1.9. Neyveli Lignite Corporation India Dividend Distribution

Announcement Dividend Dividend

Date Type (%)
05-03-2018 Interim 42.3
14-03-2017 Interim 73.4
26-05-2016 Final 12
25-02-2016 Interim 3
27-01-2016 Interim 15
29-05-2015 Final 10
12-02-2015 Interim 18
23-05-2014 Final 18
18-03-2014 Interim 10

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 28-05-2013 Final 18
27-02-2013 Final 10
27-02-2013 Interim 10
28-05-2012 Final 28
27-05-2011 Final 23
27-05-2010 Final 10
04-03-2010 Interim 10
22-06-2009 Final 20
27-05-2008 Final 10
21-01-2008 Interim 10
01-06-2007 Final 12
22-02-2006 Interim 14
23-01-2006 Interim 0

Ref: Corporate action of Neyveli Lignite Corporation available at moneycontrol.com.

NLC Yearly Dividend Pattern

Dividend %

FINAL DIVIDEND
INTERIM DIVIDEND

2017 2016 2015

2014 2013
2012 2011
2010 2009
2008

Fig. 1.8 Neyveli Lignite Corporation India Limited Dividend Distribution Pattern

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1.9. CONCLUSION:
This chapter contributes the introductory aspects of the research. It has mainly focused on
throwing light on the theoretical and the conceptual base. As the research covers the
crucial aspect of linkage between share price and dividend in power sector, it becomes
worthwhile to present the nitty- gritty of literature surrounding divided in a meaning full
manner that too in the context of research. The same has been the philosophy and flow of
this chapter. After having presented the introductory view, conceptual framework of
dividend along with forms of dividend in corporate business are discussed. It is followed
by the deliberation of various dividend policies prevalent in practice. Thereafter,
dividend theories are discussed with particular reference to their relevance or irrelevance
issues. It is followed by discussion on share price volatility, which is measured as the
standard deviation of share price. All this discussion is presented in the context of theme
of the research. After elaborated theoretical and conceptual presentation on a research
theme, details about five leading power sector companies selected for the study is
presented. This presentation is divided into two parts. The first part deals with the finer
aspects of the company and the second part focuses on their respective dividend pattern
during the window of time selected for the research.

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