CORPORATE FINANCE/

FINANCIAL MANAGEMENT

Dividend Policy

- Dr. Sandeep Goel

 Legal restrictions
1. Indian Companies Act, 2013 & 1956
(a) Dividends can only be paid out of (i) the current profits of
the company, (ii) the past accumulated profits.
 Payment of dividend out of capital is illegal.

(b) A company is not entitled to pay dividends unless (i) it has

provided for present as well as arrears of depreciation, (ii) a
certain percentage of net profits of that year as prescribed by
the Central Government not exceeding 10% has been
transferred to the reserves of the company.
 TYPES OF DIVIDEND POLICY
• Constant dividend per share or Dividend rate
- As a per cent of the paid-up capital)

• Constant percentage (constant payout ratio)

- Constant percentage of the net profits is paid.

• Constant dividend per share plus extra dividend

 ‘Stability of dividends’ is emphasized in a dividend policy.

Stability - Regularity of dividends

 APOLLO TYRES
Constant dividend per share
35. 00

30. 00

25. 00

20. 00
EPS

DP S
15. 00

10. 00

5. 00

0. 00
2003 2004 2005 2006 2007

EPS 33. 05 18. 37 17. 64 20. 39 27. 14

DP S 4. 50 4. 50 4. 50 4. 50 4. 5
 BEL
Constant payout

120.00
100.00
80.00

60.00
40.00

20.00
0.00
March,05 March,06 March,07 March,08 March,09
EPS 55.80 72.88 89.86 103.34 93.23
DPS 11.20 14.60 18.00 20.70 18.70
D/P Ratio (%) 20.07 20.03 20.03 20.03 20.06
 BONUS SHARES
XYZ Ltd. declares a ‘1:1 bonus issue’, i.e. for every 1 share held,
the shareholders receive 1 additional share. PAT = Rs. 20 mn.
Promoters’ Holding: 4 million shares, 40%.
Pre and Post Bonus Issue Balance Sheet (in Rs. million)
Liabilities Assets Liabilities Assets
Share capital 100 - Share capital 200 -
(10 million (20 million
shares of shares of
Rs. 10 each) Rs. 10 each)

Reserves 200 - Reserves 100 -

300 300
 STOCK SPLIT
XYZ Ltd. declares a ‘‘5 for 1 stock split’, i.e. 1 old share will be

split into 5 new shares of Rs. 2. PAT = Rs. 20 mn.

Promoters’ Holding: 4 million shares, 40%.
Pre and Post Stock Split Balance Sheet (in Rs. million)
Liabilities Assets Liabilities Assets
Share capital 100 - Share capital 100 -
(10 million (50 million
shares of shares of
Rs. 10 each) Rs. 2 each)

Reserves 200 - Reserves 200 -

300 300
 REVERSE SPLIT/CONSOLIDATION OF
SHARES
XYZ Ltd. declares a ‘‘1:2 reverse split’, i.e. 2 old shares will be

consolidated into 1 new shares of Rs. 20. PAT = Rs. 20 mn.

Promoters’ Holding: 4 million shares, 40%.
Pre and Post Reverse Split Balance Sheet (in Rs. million)
Liabilities Assets Liabilities Assets
Share capital 100 - Share capital 100 -
(10 million (5 million
shares of shares of
Rs. 10 each) Rs. 20 each)

Reserves 200 - Reserves 200 -

300 300
 BUY BACK OF SHARES
XYZ Ltd. decides to buyback a ‘‘1 million shares’@ Rs. 14 per
Share. PAT = Rs. 20 mn.
Promoters’ Holding: 4 million shares, 40%.
Pre and Post Buyback Balance Sheet (in Rs. million)
Liabilities Assets Liabilities Assets
Share capital 100 - Share capital 90 (100-10) 14 (Cash)
(10 million (9 million
shares of shares of
Rs. 10 each) Rs. 10 each)

Reserves 200 - Reserves 196 (200-4) -

300 286