Appendix: Legal and Tax Aspects of Dividend Payments in India The payment of dividends in India is governed by Section 205

of the Companies Act 1956. The key requirements of the Companies Act 1956 are summarized below: Companies Act 1956 Procedure Dividend can be paid by a company for any financial year only out of the profits of the company for that year arrived at after providing for depreciation or out of the profits of the company for any previous financial year or years and remaining undistributed or out of both or out of moneys provided by the Central or a State Government for the payment of the dividend in pursuance of a guarantee given by such Government. Dividend declared by a company must be paid within 30 days. If it remains unpaid or unclaimed after 30 days, the company needs to transfer the unpaid or unclaimed amount to a special account to be opened by the company in this behalf in any scheduled bank, to be called "Unpaid Dividend Account of ... Company Limited/Company (Private) Limited". If the dividend amount remains unclaimed for a period of seven years from the date of deposit, it is transferred to a separate fund known as Investor Education and Protection Fund maintained by the Central Government. Transfer to Reserve In accordance with Companies (Transfer of Profits to Reserves) Rules, 1975, a company is required to compulsory transfer a certain percentage of its profit to reserves before declaring dividend. The prescribed percentage to be transferred to reserve is set out below: Dividend Rate Exceeds 10% but not 12.5% of paid up capital Exceeds 12.5% but not 15% of paid up capital Exceeds 15% but not 20% of paid up capital Exceeds 20% of paid up capital Declaration of Dividend out of Reserves If due to inadequacy or absence of profits in any year, a company wants to declare dividend out of the accumulated profits earned by it in previous years and transferred by it to the reserves, the followings conditions as prescribed by Companies (Declaration of Dividends out of Reserves) Rules 1975 need to be followed: Transfer to reserves Not less than 2.5% of Current Profits Not less than 5% of Current profits Not less that 7.5% of current profits Not less that 10% of the current profits

the effective dividend distribution tax rate comes to 16. . In accordance with Section 10 (38) of the Income Tax Act 1961. Considering 7.i.5% surcharge and 3% education cess. the company is required to pay a tax on the amount of dividend paid at the prescribed rate. capital gain on shares is classified into long term capital gain and short term capital gain depending on the period of holding. long term capital gain arising from sale of equity shares on a stock exchange is tax exempt. any dividend paid by the company is not a tax deductible expense. If the shares are sold within 12 months of acquisition.0125% of the transaction value. the gain on sale will be termed as short term capital gain. The STT at present is levied @ 0.61% of the dividend paid. the balance of reserves after such drawal shall not fall below fifteen per cent of its paidup share capital. iii. Tax implication of Capital Gains For the purposes of taxation. the gain arising on sales is termed as long term capital gain. whichever is less. the rate of the dividend declared shall not exceed the average of the rates at which dividend was declared by it in the five years immediately preceding that year or ten per cent of its paid-up capital. Further as per Section 115 O of the Income Tax Act 1961. any income received by way of dividend from a domestic company is tax exempt in the hands of the recipient. the total amount to be drawn from the accumulated profits earned in previous years and transferred to the reserves shall not exceed an amount equal to one-tenth of the sum of its paid up capital and free reserves and the amount so drawn shall first be utilized to set off the losses incurred in the financial year before any dividend in respect of preference or equity shares is declared. then the short term capital gain arising from such sale will be chargeable to tax @ 15%. The dividend distribution tax at present is charged @15% of the dividend amount. 1961 The income tax implications on dividend as per Income Tax Act 1961 are summarized below: Tax implication of Dividend As dividend is an appropriation of profit and not an expense. Though the transaction value would attract a tax called Securities Transaction Tax (STT). If equity shares are sold after holding them for a period of 12 months or more. Income Tax Act. 1961. ii. In accordance with Section 10 (34) of the Income Tax Act. Section 111A of the Income tax Act provides that if equity shares are sold in a stock exchange and securities transaction tax is chargeable on such transaction.

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The dividend rate is kept constant notwithstanding changes in the earnings.Apollo Tyres (Stable Dividend Rate Policy) The company is pursuing a stable dividend rate policy. There is no target dividend payout ratio. As a result the dividend payout ratio is fluctuating. Million) 1200 184 704 195 674 197 782 197 1134 238 2193 295 1081 265 Dividend Payout Dividend Rate Ratio 14% 45% 25% 45% 26% 45% 22% 45% 18% 45% 12% 59% 25% 45% Source: Annual Reports of the company . Year 2003 2004 2005 2006 2007 2008 2009 Profit After Tax Dividend (INR Million) (INR.

Bharat Electronics Limited The company has a target dividend payout ratio of 23%. Million) 2606 632 3161 903 4464 1021 5830 1332 7189 1675 8267 1937 7458 1750 Dividend Payout Dividend Rate Ratio 24% 70% 29% 100% 23% 112% 23% 146% 23% 180% 23% 207% 23% 187% Source: Author’s calculations based upon data obtained from the Annual Reports of the company for the respective years . there is proportionate decline in the dividends as well maintaining the dividend payout ratio at 23%. For the year 2009. Year 2003 2004 2005 2006 2007 2008 2009 Profit After Tax Dividend (INR Million) (INR. as PAT declined. Accordingly the dividend moves in direct proportion of earnings.

The company earned a net profit of INR 12.Case: Dividend Policy of Hero Honda Motors Limited “Hero Honda Motors. `Over the years. keeping in mind the cash-generating capacities. Hero Honda Motors Limited (HHML) is the largest manufacturer of motorcycles in India.000 per cent. 30th March 2010). the company has consistently followed a policy of paying high dividends. declared a dividend of 4. We are happy that we have been able to declare every year an increasing rate of dividend for our shareholders” (Annual Report 2003-04). The dividend policy of the company has two distinct phases – one up-to the year 2000-01 and the second from 2001-02 onwards.(Annual Report 2008-09). In less than two decades it became the World’s largest two wheelers manufacturing company.000 per cent or INR 80 per equity share of INR 2 each. the country's top two-wheeler maker.679 Million in the previous year. In the letter to the shareholders the Chairman of the company stated “We are very much aware of your unstinted support all along for this organization and its efforts. (The Economic Times. Hero Honda said in a filing to the Bombay Stock Exchange”. which are directed at creating wealth and profit.818 Million during the year 2008-09 compared to INR 9. The Board of Directors of the company recommended dividend @ 1000% on the paid up capital of INR 399 Million for the year 2008-09. the expected capital needs of the business and strategic considerations”. We do not believe in holding the surplus beyond requirement and thus have been distributing them in the form of dividend. The company was incorporated in the year 1984 as a joint venture between Hero Group of India and Honda Motors of Japan. The dividend rates and dividend payout ratios of the company are stated below: Year 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 Dividend Rate (%) 30 32 35 40 75 100 150 850 900 1000 1000 1000 850 950 1000 Dividend Payout Ratio (%) 10 24 14 11 23 23 27 75 70 62 56 47 46 46 37 . The company's board of directors at a meeting considered and declared a Silver Jubilee Special Dividend of 4.

192 1. Mumbai.905 9.066 894 0 12. About 55% of the share capital is held by the promoters. iii.2.921 399 44 2001 31.103 0 14.315 4.103 4.173 0 12.022 on 25th March 2010 at the Stock Exchange.621 1.770 0 3.815 4.221 221 125.122 4.554 510 100 6.823 248 9.832 48.679 3.472 89.395 102 2003 51. However the payout ratio has come down to 37% by the year 2008-09 due to increase in profitability in these years.613 4.140 10.173 4.025 11.461 3.696 105.409 9.336 443 124 3.996 138 13.036 918 211 52.687 351 4.575 580 149 8.398 0 12.005 27.336 3. Source: Annual Reports of the company Questions for discussions i.279 3.254 2. The financials of the company are given in Annexure.318 4.994 560 2007 99.068 8.713 3.997 12. The company is able to meet all its funding requirements from retained earnings and maintaining its zero debt status.395 577 2008 103.068 87.666 -216 59.678 15.977 32 101.424 156 15.499 7.603 0 14.818 3. Critically evaluate the dividend policy of Hero Honda Motors Limited? Do you think buy back would be a better option for HHML than cash dividends? What is the rationale behind bonus (stock dividend) and stock split? Do they really create value for shareholders? Annexure: Profit and Loss Account (INR Million) 2000 22.072 12.631 13.284 1.846 925 1.382 150 75.283 3.862 13.841 135 15.341 8.883 329 7.994 512 2005 74.105 3.244 178 13.536 309 3.722 3 10.692 230 11.381 1.The company increased its dividend payout ratio to 75% in the year 2001-02.146 0 14.820 15.462 733 7 10.994 679 Income Net Sales Other Income Stock Adjustments Total Income Total Expenses Operating Profits PBDIT Interest PBDT Depreciation Other Written Off Profit Before Tax Extra-ordinary items PBT (Post Extra-ordinary Items) Tax Net Profit Equity Dividend Corporate Dividend Tax .770 1.605 150 88.944 2.706 1.846 3.808 3.122 0 14.691 749 -58 45.946 73. ii.945 17.469 599 61 2002 44.507 200 108 22.530 19.846 0 8.301 2.441 7.629 3.594 461 2004 58.450 2.882 8.134 7.859 1.815 0 17.227 347 34 2.794 645 2009 123.816 62.020 13.163 -141 105.994 565 2006 87.579 3.944 0 6.807 0 17.461 0 12.269 1. The company split each share of face value of INR 10 into 5 shares of face value of INR 2 each in the year 2001.846 0 2.164 42.424 9.725 3.752 130 19. The company has not used buy-back as an option to return excess cash to shareholders though it did issue bonus shares in the ratio of 1:4 in the year 1994 and 1:1 in the year 1998. The equity shares of the company closed at Rs.522 13.749 74 182 32.060 1.038 5.815 19.572 11.382 37.

882 -665 202 6.858 1.701 1.957 399 6.340 1.862 1.797 11.951 118.534 14.711 25.022 399 8.135 67.483 511 4.951 399 24.182 399 37.603 0 21.739 -6.468 0 16.576 33.951 95.688 -11.289 15.084 4.182 158.989 11.018 16.352 399 29.292 665 6.677 -459 48 4.953 57.652 26.994 399 5.930 -7.320 31.953 399 10.155 115 9.668 -10.838 0 38.452 19.093 1.858 21.388 1.934 2.Balance Sheet (INR Million) Sources of Funds Equity Share Capital Reserves Net-worth Total Debt Total Liabilities Applications of Funds Fixed Assets Investments Net Current Assets Miscellaneous Expenses Total Assets 36.792 399 4.619 -8.202 7.008 785 38.022 49.379 20.245 102 8.267 -10.610 1.404 0 13.343 9.651 -8.463 29.133 0 31.792 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Cash Flow Statement Cash Flow Statement (INR Million) Net Profit Before Tax Net Cash From Operating Activities Net Cash (used in)/from Investing Activities Net Cash (used in)/from Financing Activities Net (decrease)/increase In Cash and Cash Equivalents Opening Cash & Cash Equivalents Closing Cash & Cash Equivalents 2846 2054 -1433 -485 136 -43 93 3770 3384 -2743 -283 354 93 447 6944 6538 -4666 -1235 638 451 1089 8846 6190 -4847 -2189 -846 1090 244 10725 9729 -3764 -5836 129 243 373 12173 7468 -5629 -2035 -195 371 176 14122 9361 -3235 -4712 1414 176 1590 12461 6251 -2731 -4743 -1224 1587 363 14103 12118 -7810 -4323 -16 167 151 17815 13590 -8612 -4999 -21 152 131 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 .352 119.211 8.994 43.164 8.694 20.135 399 14.951 399 19.680 2.608 38.957 48.458 6.258 -4.857 20.747 13.941 0 26.893 6.301 24.

95% 0.20% 26.06% 1.55% Company ACC BHARTI AIRTEL BHEL DLF GRASIM INDUSTRIES HDFC HDFC BANK HERO HONDA MOTORS HINDALCO INDUSTRIES HINDUSTAN UNILEVER ICICI BANK INFOSYS TECHNOLOGIES ITC JAIPRAKASH ASSOCIATES LARSEN & TOUBRO MAHINDRA & MAHINDRA MARUTI SUZUKI NTPC ONGC RELIANCE COMMUNICATIONS RELIANCE INDUSTRIES RELIANCE INFRASTRUCTURE SUN PHARMA INDUSTRIES STATE BANK OF INDIA STERLITE INDUSTRIES TATA CONSULTANCY SERVICES TATA MOTORS TATA POWER CO.21% 34.45% 0.38% 0.59% 10.10% 0.06% 15.08% 0.73% 1.03% 0.73% 2.86% 0.76% 19.20% 43. TATA STEEL WIPRO .55% 22.17% 36.53% 31.76% 1.25% 1.74% 31.85% 2.64% 1.61% 36.69% 0.04% 76.05% Dividend Yield as on 1st April 2010 2.66% 4.66% 0. It is made up of 30 component stocks representing large.46% 12.71% 42.64% 1.65% 0.61% 27.40% 0.70% 0.15% 0.50% 16.46% 34.88% 1.52% 1.19% 0.44% 5.91% 20.61% 0.13% 27.02% 23.02% 14.03% 50. The dividend payout ratio and dividend yields for these 30 companies are given below: Dividend Payout Ratio 31.90% 23.47% 1.31% 49.74% 9.Case: Dividend payout ratio of SENSEX companies SENSEX is the oldest stock index in India.41% 1.73% 3. These 30 companies account for over 42% of the market capitalization and over 16% of the market turnover.25% 1.33% 22. well-established and financially sound companies across key sectors.16% 23.

com The dividend payout ratio has been calculated as Dividend Payout Ratio = (Equity Dividend + Tax on Dividend) (Profit After Tax less Preference Dividend) The dividend yield is equal to dividend per share divided by the current market price. ii. Questions for discussions: i. What does it indicates? How do you explain the wide variations in the dividend payout ratios of different companies? The average dividend yield is about 1%. iii. The average dividend payout for the SENSEX companies is 28%.Source: Author’s calculations based upon data obtained from the Annual Reports of the company for the respective years and the prices on the Bombay Stock Exchange on 1st April 2010 obtained from www.bseindia. Do you think dividend still matters? .

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