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1.1. Background of the Study

Dividend policy is one of the major decisions in corporate finance. Dividend is an
appropriation or distribution of profit to shareholders. Corporate dividend policy has
been the concern of financial managers, and firms at large. Firms are faced with
dilemma of sharing dividend to stockholders and retaining their earning with the view
to reinvesting it back into the business so as to promote further growth of the
business. As the business grows, then earning flow of the stockholders grows over
time. The decision of the firm regarding how much earnings could be paid out as
dividend and how much could be retained is the concern of dividend policy decision.

Researchers have asserted that firms use dividends as mechanism for financial
signaling to the outsiders regarding the stability and growth prospects of the firm.
Paying out more cash dividends will tend to increase the price of the stock. However,
increasing cash dividends means that less money is available for reinvestment.
Reinvesting back fewer earnings into the business will lower the expected growth
rate. Alternatively, earnings retained are the most important internal sources of
financing the growth of the firm. In practice every firm follows some kind of dividend
policy, which retains a portion of the net earning in such a manner that it will not
constitute a threat to dividend payment (Chigazie 2010).

History of Nepalese non life insurance is Sixty five years and life insurance is Forty
years old. The first general insurance company named "Nepal Insurance and
Transport Company" established in 1947 which is currently known as Nepal
Insurance Company. Rastriya Beema Sansthan is only composite of both life and
non life insurance company which was established in 1968 and started non life
insurance business in same years but started life insurance business from 1972. Now,
numbers of insurance company has been reached to 25 ( 1 composite, 8 life and 16
non life). Before 1947, large amount of premium was collected by Indian insurance
companies for long times. After establishment of life insurance company by
Government of Nepal, Indian companies stopped to collect their premium and phased
out their business in Nepal. Before restoration of multiparty democracy in 1990, there
were only five insurance companies existed whereas, during 17 years period (1991 to
2008), additional 20 insurance companies have been established. Post liberalization
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period is found fertile for insurance business. In this article, attempt has been made to
explore the growth of insurance business during last Eight years period. It is
experienced that insurance industries has been gradually expanded its intensity of
work vertically and horizontally. The expansion of insurance market during last two
decades is found satisfactory comparing to the previous four decades growth rate.

Even though many research conducted by a number of researchers, the issue of

dividend policy determinants still remains unresolved. Researchers have primarily
focused on developed markets; however, additional insight into the dividend policy
debate can be gained by an examination of developing countries, like Nepalese which
is currently lacking in the literature. To this end, this study examines the determinants
of divided policy of insurance companies in Nepalese. This will not only add to
existing literature but also it will serve as a guide to directors of insurance companies
when fixing dividends.

1.1.1. Profile of Sagarmatha Insurace Company Limited

Sagarmatha Insurance Company Limited has been providing insurance services since
July 1996 duly approved by Controller of Insurance, Ministry of Finance. It has been
jointly promoted by the prominent and leading industrialist of Nepal under the joint
venture with Ceylinco Insurance PLC, Sri Lanka. The MOU with Ceylinco Insurance,
PLC was signed in November 1997 and two senior officials were deputed to develop
new products and train the marketing personals.

The joint venture agreement was signed between Sagarmatha Insurance Co. Ltd. and
Ceylinco Insurance PLC in May 1999 after the investment of 20% equity on share
capital. Mr. Ajith R. Gunawardena, Managing Director, and Mr. Patrick Alwis, Dy.
Chief Executive Director of Ceylinco Insurance PLC was representing the Board.

Sagarmatha Insurance Co. Ltd believes in attaining the trust of its customers by
providing variant insurance services that match the needs of existing customers and
potential prospects. The company works to provide dedicated service to its customers
through qualitative and innovative solutions. The company is rendering the services
under the management and supervision of our highly experienced professionals. The
main objective of the Company is to provide the wide range of security against
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physical loss and best insurance related services to its clients. Sagarmatha Insurance
has been regularly promoted by the prominent entrepreneurs and leading industrial
groups and the workflow is managed by a team of dedicated experts and persistence
employees. There are 81 branches of Sagarmatha Insurance Company Limited. The
capital structure of Sagarmatha Insurance Company Limited is as follows:

Table 1
Capital Structure of Sagarmatha Insurance Company Limited.
Particular Amount
Authorized Capital 2 Billion
Paid up Capital 1.001 Billion

Table 2
The board of director of Sagarmatha Insurance Company Limited is presented below:
Name Designation
 Mr. Ram Krishna Manandhar Chairman
Mr. Lokmanya Golchha, Director
Mr. Siddhartha Mani Rajbhandari, Director
Mr. Ajith R. Gunawardena Director
Kirti Kumar Joshi Public Director
Mr. GajendraLal Shrestha Public Director
 Ms. Nirmala Manandhar, Independent Director,

1.1.2. Profile of Siddhartha Insurance Company Limited

Siddhartha Insurance Limited (SIL) is one of the renowned non-life (general)
insurance companies in Nepal with a strong presence in the form of 78 Branches &
Corporate at Siddhartha Insurance Bhawan, Babarmahal, Kathmandu.

Established in the year 2006, SIL is a financially sound and professionally managed
organization. SIL has been promoted by leading Business houses, Industrial
conglomerate & Institutions. The company practices true customer-focused service by
underwriting all types of risks in General and Health Insurance, often based on
specific customer needs. SIL provides a complete range of insurance solutions from
Property, Marine, Motor, Engineering, Miscellaneous, Aviation, Micro, Medihealth,
Travellers Mediclaim Policy. Miscellaneous Accident Risk, to cover for medium to
large industries, commercial enterprises as well as Individuals. To achieve this end, it
has employed qualified and experienced professionals. SIL is a customer-centric
company, with a single-minded focus on service. It’s priority is to build long term
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client relationships, with complete customer satisfaction as the most important non-
negotiable objectives. The capital structure of Siddhartha Insurance Company Limited
is presented below:

Table 3
Capital Structure of Siddhartha Insurance Company Limited
Particular Amount
Authorized Capital 1,000,000,000
Issued Capital 865,918,350
Subscribed and Subscribed and paid up capital 8,659,183

Table 3
The board of director of Siddhartha Insurance Company Limited
Name Designation
Ratan Lal Kedia Chairman
Pawan Kumar Agrawal Director
Rahul Agrawal Director
Rameshwor P.Bashyal (Siddhartha Bank Ltd), Director
Sumit Kumar Kedia Director (Public)
Nidhan Raj Lamichhane Independent Director

1.2. Statement of Problem

Dividend policy is controversial. Many doubtful reasons are given for why dividend
policy might be important, and many of the claims made about dividend policy are
economically illogical. Even so, in the real world of corporate finance, determining
the most appropriate dividend policy is considered an important issue (Ross 2003,
p.633). The statement of problem of this study are as under:
 What is the overall dividend payout of Sagarmatha Insurance Company
Limited and Sidddhartha Insurance Limited ?
 Which Company is paying more dividends to its Shareholder ?
 What is the relationship between profitability and dividend of Sagarmatha
Insurance Company Limited and Sidddhartha Insurance Limited ?

1.3. Objectives of the Study

In light of the problems stated in the preceding discussion, the intent of this
concurrent mixed methods study is to examine possible factors that could influence
the dividend policy of insurance companies in Nepalese. In the study, a structured
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record review was adopted to gather quantitative data. At the same time, the view of
company officials about the determinants of dividend policy was explored by using
unstructured face to-face interviews with financial managers of insurance companies
in Nepalese.
 To analyze the overall dividend payout of Sagarmatha Insurance Company
Limited and Sidddhartha Insurance Limited
 To evaluate which company is paying more dividends to its Shareholder
 To examine the relationship between profitability and dividend of
Sagarmatha Insurance Company Limited and Sidddhartha Insurance Limited

1.4. Significance of the Study

The main reason for this study is that the previous researches were based on
profitability analysis of bank only not on insurance company as well as some focused
on only analysis of financial performance. Customer interested in knowing the ability
of Sagarmtha Insurance Company Limited to pay their obligations based on the
indicator of success of the companies. Accordingly government, management,
investor and customer benefit from the result that emerged from this study. Moreover,
the research also contributes that this study can potentially serve as a stepping stone
for further research in the area. The significance of this study are:
1. To management
This study will help the management in evaluation of the policy structure of
their company.
2. Investors
Investors will get knowledge about the policy structure and performance of
this company through this study.

3. Further research
This study will serve as a basic for the future researcher who are interest to
know about the dividend policy of Sagarmatha Insurance Company Limited.

1.5. Review of previous studies

Smith et al. (2008) examine the relationship between corporate governance and
dividend policy by extending a modified version of Rozeff’s (1982) model to include
proxies for good corporate governance. Their findings indicate that firms with
stronger corporate governance pay lower dividends. However, their study excluded
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highly regulated firms, like insurance organizations, that already have an external
monitoring source.

The effect of dividend policy on market share value in the banking industry has been
researched by Mokaya and et.al (2013) and the result of statistical analysis indicates
that formal dividend policy gives shareholders the assurance of predictable dividend
payments, and considers payment of dividends as a major element in the value of
shares. The study also reveals that dividend payments are better signals of
confidential information than other media forms, thus raising share value. The result
further indicates that payment of dividends is a demonstration that the firm is strong
enough and can pass up profitable investments.

Habib and et al. (2012) examine the relationship between dividend policy measure i.e.
dividend yield and pay-out ratio and share price volatility in Pakistani stock market.
The findings of regression analysis showed the positive relationship of share price
volatility with dividend yield, but negative with pay-out ratio.

Hashemijoo and et al. (2012) also conducted similar research in Malaysian stock
market and the findings of research showed significant negative relationship between
share price volatility with two main measurements of dividend policy, which are
dividend yield and dividend pay-out.

Smith et al. (2008) examine the relationship between corporate governance and
dividend policy by extending a modified version of Rozeff’s (1982) model to include
proxies for good corporate governance. Their findings indicate that firms with
stronger corporate governance pay lower dividends. However, their study excluded
highly regulated firms, like insurance organizations, that already have an external
monitoring source. Highly regulated firms already have an external monitoring source
that should improve corporate governance.

1.6. Research Methodology

Research methodology is a systematic way to solve a problem. It is a science of
studying how research is to be carried out. Essentially, the procedures by which
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researchers go about their work of describing, explaining and predicting phenomena

are called research methodology. It is also defined as the study of methods by which
knowledge is gained. Its aim is to give the work plan of research.

1.6.1. Research Design

Research design is the plan, structure and strategy of investigation conceived. So as to
obtain answers to research question and to control variances to achieve of the study,
description and analytical research design will be used.

1.6.2. Population and Sample

The term “Population” means all the members of research study in which the research
is based. Here the population of the study comprises of 7 life insurance companies
and 15 non- life insurance company (Shareshansar, January, 2020) . In this study,
Sagarmatha Insurance Company Limited and Siddhartha Insurance Limited are taken
as convenience sample for the study.

1.6.3. Sources of data

There are mainly two sources of data. They are primary source and secondary source.
Secondary data

Data collected by someone else for some other purpose (but being utilized by the
investigator for another purpose).. Secondary data is data gathered from studies,
surveys, or experiments that have been run by other people or for other research.

Mainly the study is conducted on the basis of secondary data. All the secondary data
are complied processed and tabulated in the time series as per the need and objectives.
In other to judge the reliability of data provided by the National Life Insurance
Company and other sources, they were complied with the annual reports’ of auditor.
Similarly, various data and information are collected from the economic journal,
periodicals, bulletins, magazines and other published reports and documents from
various sources.

1.5.4. Data analysis tools

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To achieve the objectives of the study, various financial and statistical tools have been
used in this study. The analysis of data will be done according to pattern of data
available. Because of limited time and resources, simple analytical statistical tools
such as graph, percentage, Karl Pearson’s co-efficient of variation will be used in this
study. Some strong accounting or financial tools such as ratio analysis will also be
used.
A. Financial Tools
i. Book Value Per Share
ii. Earning Per Share
iii. Dividend Per Share
iv. Market Price Per Share

B. Statistical tools
Various statistical tools related to this study will be drawn out to make the conclusion
more reliable according to the available financial data. For this following statistical
tools are used.

1. Arithmetic Mean ( Χ ) of Book Value per share, earning per share, dividend per
share and market price per share.
2. Standard Deviation (S.D.) of Book Value per share, earning per share, dividend
per share and market price per share.
3. Coefficient of Variation of of Book Value per share, earning per share, dividend
per share and market price per share.

1.6. Limitation of the Study

Even though there are other formal, semiformal and informal financial institution, the
study focused only on dividend policy of Siddhartha Insurance Company Limited and
Sagarmatha Insurance Company Limited. Besides the limitation of the study are as
under:
 This study covers 3 financial years i.e 2016/17 to 2018/19
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 This study is based on secondary data.

 This study concentrates mainly on profitability position of Siddhartha
Insurance Company Limited and Sagarmatha Insurance Company Limited
only.
 Only limited financial and statistical tool will be used as per the need of the
study.
1.7. Organization of the study
The research study is divided into three chapters, including bibliography and appendix
Chapter I : Introduction
Chapter one deals with the background of the study, statement of problem, objective
of the study, significance of the study, literature review, methodology, research
design, data collection, data analysis tools, population and sample and report
structure.

Chapter II : Result and Analysis

Results and findings of data is the second chapter of the study. Here data collected
are presented and analyzed in a logical manner.

Chapter III : Summary and Conclusion

Summary and Conclusions is the last chapter. It is based on analysis of data and study
done in previous chapters. At the end, Bibliography and Appendix are added.