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Dividend Policy

Dividend Policy. Dividend is proposed by the Board of Directors and declared by the Shareholders at the Annual General Meeting. AGM cannot increase the dividend but can reduce the dividend. Interim dividend can be declared and paid

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Dividend Policy

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  1. Dividend Policy

  2. Dividend is proposed by the Board of Directors and declared by the Shareholders at the Annual General Meeting. • AGM cannot increase the dividend but • can reduce the dividend. • Interim dividend can be declared and paid by the Board of Directors.

  3. Legal Provisions • Section 205 of the Companies act: - • Only out of the profits after providing for Depreciation (as per section 350 of the Companies Act / Schedule XIV) or out of past profits after providing for Depreciation or out of both or out of monies provided by the Central / State Govt. for payment of dividend pursuant to a guarantee given by the Govt. • The amount of dividend must be deposited in a separate Bank Account within five days from the date of declaration of dividend. • No dividend shall be paid except after transfer to Reserves (not exceeding 10 % of the profits)as may be prescribed. Voluntary transfer of higher percentage is allowed. • No dividend shall be paid except in CASH.(Cheque / Warrant)

  4. Legal Provisions (Continued) • Company can issue fully paid Bonus shares by capitalizing past profits or Reserves. • Section 205 A of the Companies act: - • Where dividend declared has not been paid or claimed within 30 days from the date of declaration of dividend, then the company shall transfer such unpaid / unclaimed dividend to a special account called “Unpaid Dividend Account” within seven days from the expiry of 30 days as aforesaid. • Any unpaid dividend remaining unpaid / unclaimed for a period of seven years shall be transferred to “Investor Education and Protection Fund” • In case of loss, company can pay dividend out of past profits / reserves as per Companies (Declaration of Dividend out of Reserves)Rules, 1975.

  5. Companies (Transfer of Profits to Reserves) Rules, 1975.

  6. Minimum Dividend when higher amount transferred to Reserves • If Company proposes to transfer higher amount to Reserves than prescribed, then minimum dividend has to be declared as under: - • Dividend Rate equal to Average Rate of Dividend declared in preceding three years • If Bonus Shares issued in the preceding three years, then the quantum of Dividend should be Average Quantum of Dividend declared in the preceding three years. (Here, the Rate will be lower) • If the Profits are lower by 20% or more than the Average Profit of the preceding two years, then the requirement of Minimum Dividend does not apply.(Higher amount can be transferred to Reserves without declaring Minimum Dividend)

  7. Companies (Declaration of Dividend • out of Reserves) Rules, 1975 • In the case of losses, following rules will apply: - • Rate of Dividend not to exceed average of the previous 5 years’ dividends or 10 % of paid up Capital, whichever is less. • Amount to be drawn from the Reserves not to exceed 10 % of the Paid- up Capital and Free reserves and to be utilised first to set off losses of the year • Residual Reserves not to fall below 15 % of the Paid-up Share Capital.

  8. SEBI Guidelines for Issue of Bonus Shares • Only out of free reserves and share premium • No revaluation reserve can be used. • Residual reserves after Bonus Issue shall be • at least 40 % of the increased Paid-up Capital. • 30 % of the Average PBT for the previous three • years should yield a dividend rate of 10 % of • expanded capital • 5. Revaluation reserve not considered for • Residual reserve • 6. Bonus Shares cannot be issued in lieu of Dividend • Company has not defaulted in payment of • Interest or Principal on FDs or Debentures, • statutory dues of employees • 8. No bonus issue shall be made within 12 months of • any public or right issue.

  9. Calculate the Maximum Bonus Ratio (Rs in Lacs)

  10. Determinants of Dividend Policy • 1. Earnings of the Company • 2. Trend of Earnings • 3. Desire of the shareholders • 4. Management considerations • 5. Nature of the industry • 6. Age of the Company • 7. Liquidity Position/Fund raising Capacity • 8. Taxation Policy of the Govt.. • 9. Inflation • Future plans of the Company • Negative Covenants in Loan Agreements • Legal Restrictions

  11. Types of dividend Policy • Constant Payout Ratio Policy • Constant Dividend Rate Policy • Regular dividend + Extra Dividend Policy • Uniform Cash Dividend + Bonus Shares Policy

  12. Comparison --- Bonus Issue and Stock Split

  13. Provisions pertaining to Buyback of Shares • Special Resolution • Completed within 12 months from shareholders’ approval • Post Buyback Debt:Equity Ratio not to exceed 2 : 1 • Buyback not tot exceed 25 % of Total Paid-up Capital and Free Reserves • 5 No further issue of Equity within 24 months except • by way of Bonus Issue,Conversion of Debentures etc,Stock Option, Sweat Equity • 6 Funding may be by – Free reserves and Share Premium, Cash from disposal of Capital Assets, Public Issue for this specific purpose and Debenture Issue • Cannot be done through Negotiated Deals (Few Shareholders) • 8 Process handled by qualified Merchant Banker

  14. Walter’s Model R D + (E—D)x ------ K P = ---------------------------------- K Where, P = Price per share D = Dividend per share E = Earning per share R = Rate of return on investments K = Cost of capital or Shareholders expectations

  15. Conclusions from Walter’s Model • Where R > K, Market Price increases as the Payout Ratio decreases • Where R = K, Market Price does not vary • Where R < K, Market Price increases as the Payout Ratio increases • Therefore, Optimal Payout Ratio for • Growth Company is NIL • Normal Company is IRRELEVANT • Declining Company is 100 %

  16. EPS = Rs 4 Rate of return on Investments = 18 % Shareholders’ Expectations = 15 % What will be the Market Price if the Payout Ratio is 40 %, 50 % and 60 % ?

  17. Income Tax on Distributed Profits Dividend is Tax-free at the hands of the receiver u/s 10(34) of the Income Tax Act. However, Company has to pay Dividend Distribution Tax within 14 days from the date of declaration of dividend. W.E.F. 1st April 2005, Dividend Distribution Tax is 12.5% plus surcharge of 1.25% plus Education Cess @ 2% on (Tax Plus Surcharge) i.e. 14.025%

  18. Impact of Dividend Tax on After – Tax Return to Shareholders Alternative A ----- No Dividend Tax

  19. Impact of Dividend Tax on After – Tax Return to Shareholders Alternative B ----- Dividend Tax @ 10 %

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