Atal Bihari Vajpayee 

Indian Institute of Information Technology &

Management, Gwalior

Financial Management
ASSIGNMENT - 1

(IPG-MBA, SEMESTER VIII)

Submitted To:
Dr. Vishal Vyas
GREAT EASTERN SHIPPING COMPANY LIMITED:

CASE INSIGHTS

● The case is all about the current dividend policy of the GESCO.
● The case Shows the breakdown of operating income and revenues by division.
● As the year 1993–94 had been a good year for the company with income increasing by
18 per cent and profit after tax by 25 per cent. So, the Chairman and MD of GESCO,
was trying to decide on the dividend that they should recommend for the consideration of
the Board for the year 1993–94.
● In the financial year 1992–93, about 53 per cent of the division’s revenue from
operations was from Government of India controlled cargo fixed through TRANSCHART.
● The company plans to expand by acquiring 35,000–65,000 dwt vessels

ABOUT GESCO

GESCO is one of the biggest private area delivering organizations in India as far as the total dry
weight (dwt) of vessels. It was established in 1948 and recorded on the Bombay Stock
Exchange in 1954. The organization presently works its transportation exercises through its
Bulk Transporter, Tanker and Offshore Divisions. It works 19 dry mass transporters, 11 big
haulers and nine seaward stockpile vessels. The Great Eastern Shipping Co. London Ltd.
(GESCO London), a completely possessed auxiliary of GESCO situated in London, works five
mass transporters. GAL Offshore Services Ltd. (GAL), an auxiliary of GESCO London, works
two offshore penetrating rigs and a development barge. GESCO possesses 33.9 percent of
Prime Securities Limited which embraces venture banking exercises. The organization-initiated
land improvement as a different business in 1989 and the exchanging division was shaped in
November, 1993.

Business sectors Operates by GESCO:

● Dry bulk Sector
● Liquid Sector
● Containerized cargo sectors.

GESCO GOAL

Their goal is to own, operate and manage efficient ships without any maritime spills, zero
incidents, zero tolerance of drugs and alcoholic beverages while maintaining professional
excellence in all areas of activity involving marine bulk transport services including, quality,
health, security, environmental and social responsibility. To provide highly efficient and
competitive marine bulk transportation services of quality, cost, reliability, delivery and
security.To achieve excellence through constant improvement in our management systems and
standards through the implementation of good practises through efficient, responsive
management and a strong and motivated employee. Increase their shareholder value and the
value of other parties involved.

1. How has GESCO performed in the past? What is its financial structure
and how has it changed over the years? Examine the current dividend
policy of the GESCO. How does this compare with the dividend policies of
Varun Shipping Company and Chowgule Steamship?

GESCO’s Past Performance

The Baltic Dry Index (BDI) is a composite index and a measure of the correlation between the
supply of large bulk cargo ships, and the demand to utilize the ships and their trade routes,
thereby helping to assess freight costs on various routes throughout the globe. As per Exhibit 1,
the years 1985-1987 and 1992-1993, the BDI dropped uncharacteristically showing an early
warning sign to investors that GESCO might be seeing an upcoming downturn.
The sales and profit of the company has increased massively in the mentioned 4 years. The
profit in 93-94 is almost 15 times the base year. The sales also increased from Rs. 53.82 to
74.10 Cr. GESCO started to retain funds for investment in capital like buying and modernizing
ships. The company was first to acquire a tanker and start overseas tramp trade on a large
scale. It also entered the real estate division. These funds were raised by offering equity shares
and by borrowings. The operating expenses in all business verticals saw an upward trend from
1990-1993, however, in 1994, the expenses were considerably reduced. In those years,
dividends were retained to invest in new businesses and increase the capital.

GESCO’s Capital Structure

GESCO’s Current Dividend Policy vs Previous Dividend Policy

Since the shipping industry is a capital-intensive sector, GESCO always tries to maintain low
dividend payout. In 1992, despite an income increase of 18% over the previous year, it decided
to pay less dividend to the shareholders to invest in capital. The investors, who expected a
higher return in the future, were in favor of the decision.

If we were to compare GESCO’s today’s dividend i.e (2015-2020), the dividend paid is higher
compared to the years in the case study (1989-1993). The reason behind this may be to attract
investors and regarding the interests of current shareholders. It is also incurring losses in
foreign freights recently. According to the annual report of 2020-2021 of GESCO, their
normalised profit for the year ended March 2020 is Rs. 614 crores which turns out to be the best
year operationally, since 2015-16. Consequently, they have increased the dividend from Rs. 5.4
per share last year to Rs. 8.1 per share this year.

Comparative Analysis of GESCO’s, Varun’s and Chowgule’s Dividend Policy

The dividend policy of Varun shipping is to give more dividends to attract investors. Their
retention ratio is very low compared to that of GESCO and Chowgule shipping. Chowgule and
GESCO have high retention ratios. This is to invest further in the capital as shipping is a very
capital-intensive sector. The dividend per share provided to shareholders is highest in GESCO
in terms of value but lowest compared to as a percentage of total earnings. In 1993, as a part of
its expansion program, the company proposed to buy one new Handymax Dry Bulk Carrier of
about 40,000 DWT each during the next 3 to 5 years.

Chowgule was the closest competitor to GESCO in Indian shipping sector. Chowgule also had
an expansion plan to increase its carriers that could pose as a competition to GESCO. Overall,
GESCO was in better position to its competitors with Chowgule following them.

Q2. Despite the reasonable growth in earnings after tax, why is the
company proposing to reduce the dividends of the current year? What
constraints will the management face in drastically changing the dividend
policy of the company? What are some of the unintended consequences of
this change?

I will conceptualize this problem with Walter’s theory and the dividend payout in relation to how
(Internal Rate of Return) ‘r’ and (Cost of Capital) ‘k’ will impact the value of the firm.
Observation - We can notice that r>k for the 4 years.

This model justifies the decision of the company to reduce the dividends. This was done to
invest further in the profitable business expecting a better rate of return in the future. There is
always risk in investing more into fixed capital. The firms may not be able to make profits as
expected. Environmental factors are unpredictable and can harm the investments of the
company. Some of the investors may take this as a negative sign since companies mostly
decrease their dividend when there are declining earnings or increasing debts. Some investors
may turn away and invest in other firms with more immediate return because the future is
unpredictable.

3. Discuss the Chairman’s statement. Discuss the competitive environment

of this company and how this influences the dividend policy of the
company. What options the Chairman has listed to raise the funds?
In his statement, the chairman justified his company’s decision to not provide dividends as a
percentage of profit and about the advantages of the same for both the company and the
investors. As the shipping industry is very capitalistic, cargo rates and ship values can move
fast. He believes, therefore, that a shipping company should always be cash rich and limit its
general borrowing to its equity. In the container sector, the size of container ships has gradually
increased since the 1970s. The average ship size was 1,000 to 2,000 TEUs in the mid-1970s. In
the mid-1980s and early 1990s, when most shipping liners ordered 4 000 TEU Panamax ships.
Then, vessels with a maximum capacity of 7,000 TEUs were introduced in the mid-1990's.

Private shipowners dominate the industry, who look at medium- to long-term investment
because of the nature of their ownership structure. They do not have to worry about dividend
payment as independents, nor do they have to make immediate equity returns. You can retain
all your income for future growth within the company. The competitive nature of the industry
required GESCO to upgrade or purchase new capital to be able to remain competitive in the
market. The chairman suggests that the best way to increase the capital budget is through
retained profits. The investment, according to the chairman, will be beneficial for both the
parties. The investors will not lose a large share on tax (30% in this case) and instead will get
benefits of capital investment. Also, the dividend sacrificed will contribute to the share value.

There are 4 possible sources of funding suggested by the chairman, they are as follows: -
● Retained earnings
● Recovery of fresh capital from existing shareholders
● Capital raising outside current shareholders by investors.
● Borrowings from banks and institutions.

Q4. Analyze the Chairman’s view on disadvantages of paying dividends. Do

you agree with them? Do you agree that the distribution of dividends is an
ineffective way of maximizing the shareholders wealth?

The disadvantages of paying dividends as per the Chairman are:

● HIGH TAX RATES: If the company provides a larger dividend to shareholders, the
shareholders will have to pay the taxes which are relatively high. If they rather invest it
into capital, it can provide a higher rate of return. The company will also have to incur
some expenses in this transfer process.

● COMPETITIVE POSITION: For the dividend sacrificed by the shareholders, the value of
share increases. In the long run, the shareholders can get the benefits of the investment.
 ● STRUCTURAL CHANGE: Raising fresh capital from existing shareholders or raising
capital from new shareholders will involve the company issuing fresh capital which
means permanent change in the structure of the company.

Yes, I agree with these disadvantages of high taxes and expenditure as it involves losses on
both sides. This is a waste of resources. Shipping was a competitive field with other companies
expanding the freight capacity. If the capacity is not increased and modified, GESCO will not be
able to keep up with other competitors. Increasing the leverage will make the structure less
flexible resulting in difficulty in obtaining funds if required in the future.

The management of most companies deems the stability or regularity of dividends a desirable
policy. In addition to the fluctuating dividends, shareholders generally favour stable policies and
dividends. A dividend decrease is seen as a salary decrease. For investors with a short-term
financial target, low dividend rates are not desirable.

A business that normally makes a profit has to pay corporate tax. After tax revenues, dividends
will then be distributed. The investor is also generally liable for a dual taxation of his own. By
selling the correct amount every year, investmenters who needed income would be able to
achieve the right level of income in their portfolio. Dividends do not provide that flexibility, as
they are paid per share, and so some investors get more cash than they need.

To summarize, we can say that dividend is not a very effective method of increasing income as it
causes loss to both parties. Smart investors know the long-term benefits of lower dividend
amounts and they can also generate income by managing portfolios properly.