A study on dividend policy and its effect on market price of share of

ONGC Ltd

Synopsis submitted in partial fulfillment of the requirements for the

Award of the degree of

MASTER OF BUSINESS
ADMINISTRATION OF
BANGALORE UNIVERSITY

Tejashwini

P03AA21M0104

Under The Guidance Of

Dr. CMA Alagesan. M. V
Associate Professor

ACHARYA BANGALORE B
SCHOOL
Bangalore
University 2023
Introduction:
Dividend policy is concerned with financial policies regarding paying cash dividend in the
present or paying an increased dividend at a later stage. Whether to issue dividends, and
what amount, is determined mainly on the basis of the company's unappropriated profit
(excess cash) and influenced by the company's long-term earning power. When cash surplus
exists and is not needed by the firm, then management is expected to pay out some or all of
those surplus earnings in the form of cash dividends or to repurchase the company's stock
through a share buyback program.

If there are no NPV positive opportunities, i.e., projects where returns exceed the hurdle
rate, and excess cash surplus is not needed, then – finance theory suggests – management
should return some or all of the excess cash to shareholders as dividends. This is the general
case, however there are exceptions. For example, shareholders of a "growth stock", expect
that the company will, almost by definition, retain most of the excess earnings so as to fund
future growth internally. By withholding current dividend payments to shareholders,
managers of growth companies are hoping that dividend payments will be increased
proportionality higher in the future, to offset the retainment of current earnings and the
internal financing of present investment projects.

Management must also choose the form of the dividend distribution, generally as

cash dividends or via a share buyback. Various factors may be taken into consideration:
where shareholders must pay tax on dividend, firms may elect to retain earnings or to
perform a stock buyback, in both cases increasing the value of shares outstanding.
Alternatively, some companies will pay "dividends" from stock rather than in cash;
see corporate action. Financial theory suggests that the dividend policy should be set based
upon the type of company and what management determines is the best use of those
dividend resources for the firm to its shareholders. As a general rule, shareholders of growth
companies would prefer managers to have a share buyback program, whereas shareholders
of value or secondary stocks would prefer the management of these companies to pay out
surplus earnings in the form of cash dividends.

Description:

After paying its creditors, a company can use part or whole of the residual profits to reward
its shareholders as dividends. However, when firms face cash shortage or when it needs cash
 for reinvestments, it can also skip paying dividends. When a company announces dividend,
it also fixes a record date and all shareholders who are registered as of that date become
eligible to get dividend pay-out in proportion to their shareholding. The company usually
mails the cheques to shareholders within in a week or so. Stocks are normally bought or sold
with dividend until two business days ahead of the record date and then they turn ex-
dividend. A recent study found that dividend-paying firms in India fell from 24 per cent in
2001 to almost 16 per cent in 2009

In the US, some of the companies like Sun Microsystems, Cisco and Oracle do not pay
dividends and reinvest their total profit in the business itself. Dividend payment usually does
not affect the fundamental value of a company’s share price. Companies with high growth
rate and at an early stage of their ventures rarely pay dividends as they prefer to reinvest
most of their profit to help sustain the higher growth and expansion. On the other hand,
established companies try to offer regular dividends to reward loyal investors.

 Dividends represent the distribution of corporate profits to shareholders, based upon the
number of shares held in the company.
 Shareholders expect the companies that they invest in to return profits to them, but not all
companies pay dividends.
 Some companies keep profits as retained earnings that are earmarked for re-investment in the
company and its growth, giving investors capital gains.

 Often, growth companies retain earnings while more mature companies resort to dividend
pay-outs.

Need for The Study:

Why Your Company Should Have a Dividend Policy. Establishing a dividend policy is one
of the most important things you can do when it comes to your company's finances. It
communicates your company's financial strength and value, creates goodwill among
shareholders, and drives demand for stocks.
 Statement of Problem:
The primary drawback of the stable dividend policy is that investors may not see a dividend
increase in boom years. Under the constant dividend policy, a company pays a percentage of
its earnings as dividends every year. In this way, investors experience the full volatility of
company earnings.

Literature Review:
1. Robinson, 2006
The bird in hand theory was developed by Myron Goldoni (1959) and John Lintner
(1962) and argues that there is a relationship between dividend payments and a
firm’s value. Since investors value dividends less risky compared to capital gains,
firms have to set a higher dividend pay-out ratio to maximize the share price. In
other words, high dividends increase the stock price.

2. Al-Malawi, 2008
As corporate finance reminds us, there are two operational decisions that a
finance manager is faced with: capital budgeting and financing decisions.
Capital budgeting decisions are those which are concerned with the assets that a
firm must acquire, while financing decisions focus on how to finance these assets.
When a company starts generating profits, another decision may be raised:
whether to distribute a portion of the earnings to the shareholders or reinvest in
the business

Brief about the Company (ONGC):

Pursuant to Regulation 43A of the Securities and Exchange Board of India (Listing
Obligations
and Disclosure Requirements) (Second Amendment) Regulations, 2016 (the “Listing
Regulations”) dated 8th July, 2016, the Board of Directors (Board) of Oil and Natural Gas
Corporation Ltd (ONGC) has adopted the Dividend Distribution Policy.
This policy shall be known as ONGC Dividend Distribution Policy (the “Policy”).
 The Securities and Exchange Board of India (“SEBI”) vide its Notification dated July 08,
2016 has amended the Listing Regulations by inserting Regulation 43A in order to make it
mandatory to have a Dividend Distribution Policy in place by the top five hundred listed
companies based on their market capitalization calculated as on the 31st day of March of
every year.
Considering the provisions of the aforesaid Regulation 43A, the “Board” of ONGC
recognizes the need to lay down a broad framework with regard to decision for distribution
of dividend to its shareholders and/ or retaining or ploughing back of profits. The Policy
also sets out the at the time of taking such decision of distribution or of retention of profits,
in the interest of providing transparency to the shareholders.
The Policy is not an alternative to the decision of the Board for recommending dividend,
which is made every year after taking into consideration all the relevant circumstances
enumerated hereunder or other factors as may be decided as relevant by the Board.
However, declaration of dividend on the basis of parameters in addition to the elements of
this Policy or resulting in amendment of any element of the Policy, in the interest of the
Company, will be disclosed in the Annual Report as well as on the website of the Company.
The Policy reflects the intent of the Company to reward its shareholders by sharing a portion
of its profits after retaining sufficient funds for growth of the Company. The Company shall
pursue this Policy, to pay, subject to the circumstances and factors enlisted hereon,
progressive dividend, which shall be consistent with the performance of the Company over
the years.
The Board shall comply with the following statutory requirements while taking decision of a
dividend pay-out during a particular year.
 Companies Act 2013 and rules applicable thereon including those with respect to
mandatory transfer of a certain portion of profits to any specific reserve which may be
applicable to the Company at the time of taking decision with regard to dividend declaration
or retention of profit.
 Guidelines or directives issued by the Government of India
 Any other laws

Objective of the Study:

 To study the dividend policy of ONGC ltd
 To analyze the impact of dividend policy on the market price of share with respect
to ONGC Ltd.,
  To suggest improvements in dividend policy if required.

Scope of the Study:

The purpose of the Policy Scope Statement is to guide the development of a policy, provide
a summary of a proposed policy, and ensure that those who might be affected by a policy
are identified, considered, and consulted. As you complete the statement, delete the
italicized guiding language. Dividend policy determines the amount of earnings to be
distributed amongst the shareholders and the amount of earnings to be retained. Retained
earnings are that portion of earnings which is to be ploughed back in the firm as
reinvestment. Dividend is important to equity shareholders as it increases their current
income.

Research Methodology:

Research methodology is defined as a high intellectual human activity used in the

investigation of nature and deals specifically with the manner in which data is collected,
analysed and interpreted. The process used to collect information and data for the purpose of
decision making in business. The methodology may include publication research, interview,
survey and other research techniques, and could include both present and historical
information. The research methodology used here is Primary research method. When
research is conducted to unearth original data, it is called Primary research. To this an
original research plan must be devised which will encompass, data collection, data input and
then the production and analysis of the subsequent result.

Sources of Data:

Data serves as the basic raw materials for any analysis, without data no research can be
conducted. Without an analysis of factual data, no specific inferences can be drawn on the
questions understudy. Inferences based on imagination or guess work cannot provide correct
answer to the questions. There are two type of Data they are Primary data and secondary
data.

Sources of data may be classified into:

Secondary Data:
The data for this study will be collected from Secondary data from the information obtained
magazines, newspapers, websites, journals, fact sheets etc.

Plan of analysis:
An analysis plan helps you think through the data you will collect, what you will use it for,
and how you will analyze it. Creating an analysis plan is an important way to ensure that
you collect all the data you need and that you use all the data you collect. Analysis planning
can be an invaluable investment of time.

Limitations of the Study:

1. The analysis and findings are from secondary data of a company, hence the suggestions
are only to the company under study.
2. The time and cost involved is limited.

Reference:
Dividend policy - Wikipedia
source of data of dividend policy - Search (bing.com)
scope of study of dividend policy - Search (bing.com)
www.ongcindia.com