Dividend Project - Type by Paresh

8/3/2019 Dividend Project - Type by Paresh

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A

PROJECT REPORT ON

DIVIDEND POLICY AND ITS IMPACT ON SHARE

PRICES OF THE COMPANY

Submitted to

In requirement of partial fulfillment of Master of

Business Administration (MBA)

Submitted on

Submitted by


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PREFACE

As a part of the curriculum of the MBA Program of the _________________, the

students are required to undergo project work in addition to their theoretical study

so as to enable them to have the knowledge of the practical aspect of the Business

Administration.

As students of management it is learning experience to analyze an industry. It is

the most essentials tools for us to expose our skill as a future responsiblemanagerial post. So, I decided to take a project on dividend policy and its impact

on share prices. It helps us to develop our skill & confidence to do better in all

respect in management fields.

The knowledge of management is incomplete without knowing the practical

application of the theories studied. This grand project provides golden opportunity

for all students especially when the management students do not have perfect

understanding of the working of unit. The report contains the detail information

about dividend policy and its different types, dividend models, legal and

procedural aspect and analytical study of different companies.

I have tried my best to get the necessary information for project which includes

secondary as well as primary data.


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ACKOWLEDGEMENT

This report has been submitting in partial fulfillment of the requirement of the

award of M.B.A. from _____________________________________

It is a universal fact that for study of a project in depth, I need the support of many

people right from the stage of conceiving the idea to completion of report. It is

difficult for a single person to do the job efficiently without interaction &

involvement of others.

I take this opportunity to thank ________________________our director

____________ and our inspiration our guides, _______________________ For

giving me Valuable Guidance and providing facilities to successfully complete my

Grand Project.

I am grateful to other faculty members of ___________for their support whenever

required. Discussions with friends also have served to provide sought after

information. I am thankful to all our batch mates.

Finally I am thankful to my parents and Lord Almighty without whose blessings

tasks are incomplete.


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CONTENTS

1.0Introduction1.1The Study 51.2Objectives of the Project 61.3Hypothesis 71.4Methodology 81.5Limitations of the Study 12

2.0Theoretical Aspects2.1Terms of Dividend 142.2Dividend and Retained Earnings. 172.3Forms of Dividend 192.4Dividend Policy & its different types 222.5Considerations in Dividend Policy 252.6Legal, Contractual and internal constraints 272.7Dividends Models 292.8Legal and Procedural aspects. 372.9Factors affecting share prices 39

3.0 Analytical study of selected companies

3.1 Shipping Corporation of India 43

3.2 ONGC 48

3.3 Infosys Technologies Ltd 54

3.4 Reliance Industries Ltd 63

3.5 State Bank of India 79

3.0Conclusion 914.0Bibliography 92


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1.1 INTRODUCTION

One of the major objectives of any firm is to earn profits and to the extent possible try

to maximize profits. Having earned sufficient profits the firm may decide to go for

distribution of profits among the owners i.e. the shareholders, if the firm is a corporate

entity. In companys shareholders are real entrepreneurs so distributing earnings must

compensate them. Different types of investors expect investing their savings with

different objectives. But majority of profit takes various forms such as payment of

cash dividend, giving of bonus shares to the existing shareholders, issuing right shares

at a considerably lower than the market price to the shareholders, issuing convertible

debentures etc.. The firm or a corporate entity may take decision regarding

distribution of profit in the context of various considerations like preferences of

shareholders and the potential growth of the company in future. Various firms are

working under different situations and therefore their distribution of dividend differs

widely. It is therefore to study how corporate entities take such decisions.

The Indian Economy consists of wide variety of industrial sectors like steel, chemical,

cement, automobiles, pharmaceutical, FMCGS, textile etc.. It was not possible to take

a very big size of sample for study, as data would not be available for all of them for

comparison. Hence, five companies were selected and an attempt is made to study

their dividend policies and their impact on their share prices.


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1.2 OBJECTIVES OF THE STUDY

The division of net earnings of a firm between dividend payments and retained

earnings is a major financial decision. If the principal objective of a corporate

financial management is to maximize the market value of equity shares, the question

that naturally arises is: what is the relationship between dividend policy and market

price of equity shares? This is one of the most controversial and unresolved questions

in corporate finance.

The present study is basically focused on the following:

y Nature and types of dividend policesy Determinants of dividend policyy Implementation of Dividend Models in the units concernedy Analytical study of the unitsy Impact of dividend policies on the share prices of the units concerned


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1.3 HYPOTHESIS

On the basis of above mentioned objective the following Hypothesis have been

framed.

1) The dividend policies of companies of the same level and belonging to thesame industry or sector tend to be the same.

2) There is no particular or common factor or see of factors that significantlyhave an impact on the dividend policy of all companies belonging to the same

industry in the same direction or proportion.

3) There is no relationship between earnings and dividend per share and there isno proportionality between earnings and dividend payouts.

4) Dividend has no influence on the market price of stocks i.e. dividend isirrelevant and has no effect on the price of a firm.


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1.4 SCOPE OF THE STUDY AND METHODOLOGY

To test the above mentioned hypothesis of dividend policy and to understand the

dividend behaviors of the firms under study various statistical tools have been used in

addition to ratio analysis.

The study has examined individually the various theoretical determinates of dividend

policy such as profitability, size of the firm, leverage, growth and stability of earrings,

liquidity, taxation, pattern of shareholding etc.

1. Sample

The methodology of the study was fairly simple. I have selected different five

companies from different sectors. Some of them have shown excellent results and

some other has moderate ones.

The selected companies are as follow

y STATE BANK OF INDIAy SHIPPING CORPORATION OF INDIAy RIL INDUSTRIESy ONGC.y INFOSYS.


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2. Selection of Models:

For the study of dividend and its impact on share prices four models have been

selected. Analysis of data has been done on the basis of this model. The selected

models are as follows:

y Yield Value Methody Intrinsic value Methody Walter Modely Gordan Modely Traditional Model

For the calculation purposes following arithmetic formulas are taken into

consideration:

1) Yield Value Method

Yield value = Rate of Dividend (%) X Paid up value of equity share

Expected Rate of Dividend

Here, Expected rate of Dividend = Interest Rate on Bank Loans

Rate of Dividend = Divisible Profit (PAT) X 100

Total Paid up capital

2) Intrinsic Value Method

Intrinsic Value = Net Assents

No. of equity shares


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3) Walter Model

Po = D + (E D) r/k

k

where,

Po = Expected Market Price as perWalter Model

D = Dividend per share

E = Earnings per share

R = Rate of return (Average Growth Rate )

K = Cost of Capital (Interest Rate on Bank Loans )

4) Gordon Model

Po = d0 (1 + g)

K g

Where,

Po = Expected Market Prices as per Gordon Model

D0 = Dividend per share

G = Growth Rate (Average Dividends)

K = Cost of capital (Interest Rate on Bank Loans)

5). Traditional Model

Po = m ( D + E / 3)

Where,

Po = Expected Market Price according to Traditional Model

M = multiplier


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D = Dividend per share

E = Earning per share

3. Collection of Data

There are two main sources of data collection:

y Primary sourcey Secondary source


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1.5 LIMITATIONS OF THE STUDY

The study has several limitations.

Firstly, the sample is small as only four cement companies are selected for analysis

and interpretation of data.

Secondly, I had not the fullest exposure to the various research methodologies

available and hence the available handy methodology was chosen.

Thirdly, the analysis is conduced in terms of only a few models and the conclusions

arrived at were evaluated wit the data collected from various sources. As a result there

are certain discrepancies in the predictions of the models and the actual data collected.

I would like to pursue the subject later for the in depth study.


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THEORITICAL ASPECTS


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2.1 WHAT IS DIVIDEND

If you have ever owned stock and most of us have, in the present economic boom

you are probably familiar with the basic concept of a dividend. Companies pay

dividend on their stocks as a means of sharing profits with shareholders. Without

dividends, the only way to receive income from the stock is to sell them at a profit.

Dividends are payments made to stockholders from a firms earnings, whether those

earnings were in the current period or in previous periods.

The factors that companies may consider before declaring dividends includes: future

expansion plans and capital requirements, profit earned during the financial year,

overall financial condition as well as cost of raising funds from alternative sources,

liquidity, applicable taxes (including tax on dividend), exemptions under tax laws

available to various categories of investors from time, and money market conditions.

A major decision of financial management is the dividend decision in the sense that

the firm has to choose between distributing the profits to the shareholders and

ploughing them back into the business.

The Dividend decision, in corporate finance, is a decision made by the directors of a

company. It relates to the amount and timing of any cash payments made to the

companys stockholders. The decision is an important one for the firm as it may

influence its capital structure and stock prices. In addition, the decision may

determine the amount of taxation that stockholders pay.


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Ex-Dividend: The date on or after which a security is traded without a previously

declared dividend or distribution. After the ex-date, a stock is said to trade ex-

dividend.

Interim Dividend : A dividend payment made before a companys AGM and final

financial statements. This declared dividend usually accompanies the companys

interim financial statements.

Final Dividend : The final dividend is declared at a companys Annual General

Meeting (AGM) for any given year. This amount is calculated after statements are

recorded and the directors are aware of the companys profitability and financial

health.

IMPORTANT DATES TO REMEMBER FOR DIVIDEND

Declaration Date : The declaration date is the day the Board of Directors announces

their intention to pay a dividend. On this day, the company creates a liability on its

books. It now owes the money to the stockholders. On the declaration date, the Board

will also announce a date of record and a payment date.

Date of record: Shareholders who properly register their ownership on or before this

date will receive the dividend. Shareholders who are not registered as of this date will

not receive the dividend. Registration in most countries is essentially automatic for

shares purchased before the ex-dividend date.


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Ex-dividend date: Is set by the exchange where the stock is traded, several days

(Usually two) before the date of record, so that all trades made on previous dates can

be properly settled and the shareholder list on the date of record will accurately reflect

the current owners. Purchasers buying before the ex-dividend date will receive the

dividend. The stock is said to trade cum dividend on these dates. The stock trades ex-

dividend on these dates.

Payment Date: The date when the dividend checks will actually be mailed to the

shareholders of a company.


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2.2 DIVIDEND PAYOUT AND RETAINED EARNING

Dividend is paid out of the funds available with the firm. An important aspect of

dividend policy is to determine the amount of earnings to be distributed to

shareholders in the form of dividend and the amount to be retained for future growth.

Retained earnings are a significant internal source of financing the growth of the firm.

There is an inverse relationship between retained earnings and cash dividends. Larger

the retention, lesser the dividends. Smaller the retention, larger the dividends.

The major decision of financial management is regarding the dividend decision. The

firm has to choose between distributing the profits among the shareholders and

ploughing them back into the business. The effect of the decision will be on

shareholders wealth. The firm should consider which alternative is consistent with the

goal of wealth maximization of the shareholders.

Whether dividends are paid out or earnings are retained, will depend upon the

availability investment opportunities to the firm. If a firm has sufficient investment

opportunities, it will retain the earnings to finance them and if acceptable investment

opportunities are not adequate, the earning would be distributed to the shareholders.

The investment opportunities are related to return on investment.

The relationship between the return on the investment ( r) and the cost of capital (k)

will influence investment opportunities. If r exceeds k, a firm has acceptable

investment opportunities, so firm will retain the earnings to finance the project. If

retained were more than requirements, the excess earnings would be distributed to the


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shareholders in the form of cash dividends. Thus, the amount of dividend will

fluctuate from year to year depending upon the investment opportunities.

With abundant opportunities, the dividend payout ratio (D/P ratio, i.e. the ratio of the

dividends to net earnings) would be zero. When there are no profitable opportunities,

the D/P ratio will be 100. So long as the firm is able to earn more than the cost of

capital (ke) the investors would be satisfied with the firm retaining the earnings. In

contrast, if the return were less than the ke, the investors would prefer to receive

earnings in the form of dividends.


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2.3 FORMS OF DIVIDEND

1. Cash Dividend

Cash dividends are those paid out in form of real cash. It is a form of investment

income or investment interest and is taxable in the year it is paid. It is the most

common method of sharing corporate profits.

Reasons why companies avoid paying cash dividends:

Companies have often avoided paying cash dividends for two reasons:

1) Management and the board may believe that the money is best re-invest intothe company for the purpose of research and development, capital investment,

expansions, etc.

2) At times when dividend are paid, shareholders suffer from double taxationof those dividends i.e. firstly the company pays income tax to the government

when it earns any income, and then when the dividend is paid, the individual

shareholder pays income tax on the dividend payment.

Both the above situations are often used as justification retaining earnings, or for

performing a stock buyback.

If we take a look globally, Microsoft is an example of a company that has historically

been a proponent of retaining earnings. It did so right its IPO in 1986 until the year

2003, when it declared it would start paying dividends. By this point Microsoft had

accumulated over US$ 43 billion in cash. And there had been increasing irritation


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from stockholders who believed this large pile of cash should lie in their hands and

not in the companys originally, the official reason to amass this large sum was to

create a reserve for Microsofts legal battles: Since then, Microsoft appears to have

changed tactics such that the reserve is not as necessary.

2.. Stock dividends or Scrip dividends:

y Stock dividends are those paid out in the forms of additional stock shares ofthe issuing corporation, or other corporation ( for example, its subsidiary

corporation )

y They are usually in proportion to shares owned. For instance, for every 100shares of stock owned, 5% stock dividend will yield 5 extra shares. This is

very similar to a stock split in that it increases the total number of shares

while lowering the price of each share and does not change the market

capitalization.

A practical example of stock dividends.

Suppose Reliance Industries Ltd has 1,00,000 shares. The company has five investors

who each own 20,000 shares. The stock currently trades at Rs. 100 per share, giving

the business a market capitalization of Rs. 1 crore.

Management now decided to issue a 20% stock dividend. It prints up an additional

2000 shares of the stock (20% of1 lac) and sends these to the shareholders based on

their current ownership. All of the investors own 20,000 or 1/5 of the company, so

they receive 4000 of the new shares (1/5 of the 20000 new shares issued )


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Now, the company has 1,20,000 shares outstanding and each investor owns 24000

shares of the stock. The 20% dilution in value of each share, however, results in the

stock price falling to rs. 83.33. heres the important part: the company and the

investors are still in the exact same position. Instead of owning 20,000 shares at Rs.

100, the now own 24,000 shares at Rs. 83.33. The companys market capitalization is

still Rs. 1 crore.

3. Property dividends or dividends in kind:

y Property dividends are those paid out in form of assets from the issuingcorporation, or other corporation (e.g. its subsidiary corporation )

y This form of dividend is rarely paid, but whenever they are paid, they are paidin the form of products or services provided by the corporation.


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2.4 DIVIDEND POLICY AND ITS DIFFERENT TYPES

In simple terms dividend policy can be termed as a Win-Win policy

Dividend policy of a firm has implications for investors, lenders as well as other

stockholders. For investors, dividends whether declared todays or accumulated and

provided at a later date are not only a means of regular income, but also dependent

on the amount of dividend that they can offer to shareholder because more dividends

may also have interest in the amount of dividend a firm declares because, more

dividend paid would result into less amount available for servicing and redemption of

their claims.

A firm can choose from three different dividends policies :

A. Constant Dividend per shareB. Constant payout ratioC. Constant dividend per share plus extra dividend

A). Constant Dividend per share.

In case of constant dividend per share, a company follows a policy of paying a certain

fixed amount per share as dividend. For instance, on a share of face value of rs. 100 a

firm may pay a fixed amount of Rs. 15 as dividend. This amount would be paid year,

irrespective of the level of earnings of the firm. In fact, when a company follows such

a dividend policy, it will pay dividends to the shareholders ever when it suffers losses.


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From the table it can be observed that while the earnings may fluctuate from year to

year, the DPS remains constant. To be able to pursue such a policy a firm whose

earnings are not stable would have to make provisions in years when earnings are

higher for payment of dividend in lean years. Such firms usually create a reserve for

dividends equalization. The balance standing in this fund is normally invested in such

assets as can be readily converted into cash.

B) Constant Pay Out Ratio

When a company applies constant payout ratio, it pays a constant percentage of net

earnings as dividends to the shareholders. In other words, constant dividend payout

ratio implies that percentage of earnings paid out each year is fixed. Accordingly,

when the earnings of a firm decline substantially or there is a loss in the given period,

the dividends would also be lower.

C) Constant dividend per share plus extra dividends:

Under this policy, a firm usually pays a fixed dividend to the shareholders and in

years of marked propensity, additional or extra dividend is paid over and above the

regular dividend. As soon as normal conditions return, the firm cuts the extra dividend

and pays the normal dividend per share.

Dividend Payout (D/P) Ratio :

The percentage of net income that is paid out in the form of dividend is known as the

dividend payout ratio. A dividend policy involves the decision of either to pay out the


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earning in form of dividend or retain it in the business. The payment of dividend

results in the reduction of cash and is therefore a depletion of the total asset. Thus,

dividend imply outflow of cash and lower future growth. The optimum dividend

policy should strike a balance between current dividends and future growth of

company because its inverse, the retention ratio is important in projecting the growth

of company because its inverse, the retention ratio ( the amount not paid out to

shareholders in the form of dividends ), can help project a companys growth.

Calculating Dividend Payout Ratio:

Suppose the cash flow statement of Reliance Industries Ltd shows that the company

paid Rs 1 crore in dividends to shareholders, in the year 2004. The income statement

for the same year shows the business had reported a net income of Rs. 3 crore. To

calculate the dividend payout ratio, the investor would do the following:

Rs. 1 crore dividend paid

---------- (divided by ) -----------------

Rs 3 crore reported net income

The answer, 33.33% tells the investors that Reliance Industries Ltd. Paid out nearly

thirty four percent of its profit to shareholders over the course of the year.


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2.5 CONSIDERATIONS IN DIVIDEND POLICY

Dividend policy is affected by various owner and capital Market considerations.

Owners considerations :

1) Tax Status of the shareholders:

If a firm has a large percentage of owners who are in the high tax brackets, its

dividend policy should seek to have higher retentions. Such a policy will provided its

owners with income in the form of capital gains as against the individuals in a high

tax bracket. On the other hand, if a firm has a majority of low income shareholders

who are in a lower tax bracket they would probably favor a higher payout of the

earnings because of the need for current income and the greater certainty associated

with receiving the dividend now, instead of less certain capital gains later.

2) Opportunities:

The firm should not retain funds if the rate of return earned by it would be less than

one, which could have been earned by the investors themselves from external

investments of funds. Such a policy would obviously be detrimental to the interests of

shareholders. It is difficult to ascertain the alternative investment opportunities of

each of its shareholders and therefore the alternative investment opportunity rate.

Therefore, in formulating dividend policy the evaluation of the external investment

opportunities of owners is very important.


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3) Dilution of Ownership

The financial manager should recognize that a high dividend payout ratio may result

in the dilution of both control and earnings for the existing equity holders. Dilution in

earnings results because low retentions may necessitate the issue of new equity shares

in the future, causing an increase in the number of equity shares outstanding and

ultimately lowering earnings per share and their price in the market.

Capital Market Considerations:

In case a firm has easy access to the capital market, either because it is financially

strong or large in size, it can follow a liberal dividend policy. However if the firm has

only limited access to capital markets, it is likely to adopt low dividend payout ratios.

Such firms are likely to rely more heavily on retained earnings as a source of

financing their investments.

Firms which lean heavily on financial institutions from procuring funds, declare a

minimum dividend so that they can remain on the eligible list of these institutions. It

is because in general most financial institutions are prohibited from buying shares in

companies, which pay no dividends a company should be paying dividends at a

certain minimum rate for at least some specified number of year. Since such

institutions are significant buyers of corporate securities some firms that would

otherwise have not paid any amount of dividend, would pay some dividend so that

remain in the eligibility list.


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2.6 LEGAL, CONTRACTUAL AND INTERNAL CONSTRAINTS

AND RESTRICTIONS:

Legal requirements pertain to capital impairment, net profits and insolvency. In case

of the capital impairment rules there is a limit to the amount of cash dividend that a

firm can pay. A firm cannot pay dividends out of its paid up capital, otherwise there

would be a reduction in the capital which would adversely affect the security of its

lenders. In case of net profits, there is a restriction to the dividend to be paid out of the

firms current profits plus past accumulated retained earnings. Alternately, a firm

cannot pay cash dividend greater than the amount of current profits plus the

accumulated balance of retained earnings. In case of solvency, a firm is said to be

insolvent in two cases: first, when its liabilities exceed the assents and second, when it

is unable to pay its bills. It the firm is currently insolvent in either case, it is prohibited

from paying dividends. Similarly, a firm would not pay dividend if such a payment

leads to insolvency of other type. The rule is to protect the creditors by prohibiting the

liquidation of near bankrupt firms through cash dividend payments to the equity

owners.

Under contractual requirements, important restrictions on the payment of dividend

may be accepted by a company when obtaining external capital either by a loan

agreement a debenture, a preference share agreement or a least contract.

Internal constraints would include liquid assets, growth prospects, and financial

requirements, availability of funds, earnings stability and control.


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In case of liquid assets once the payments of dividend is permissible on legal and

contractual grounds, the next step is to ascertain whether the firm has sufficient cash

funds to pay cash dividends. It may well be possible that the firms earnings are

substantial but the firm may be short of funds.


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2.7 DIVIDEND MODELS

There are four models regarding dividends impact on share prices. They are as

follows:

1. Traditional Model2. Walter Model3. Gordon Model4. Modigliani & Miller Model

1) Traditional Model :

The traditional position expounded eloquently by Graham and Dodd holds that the

stock market places Considerably more weight on dividends than on retained

earnings.

According to them :

the considered and continuous verdict of the stock market is overwhelmingly in

favor of liberal Dividends as against niggardly ones. The common stock investor must

take this judgment into account in the valuation of stock for purchase. It is now

becoming standard practice to evaluate common stock by applying one multiplier to

that portion of earnings paid out in dividends and a much smaller multiplier to the

undistributed balance.

Their view is expressed quantitatively in the following valuation model advances by

them :

P = m (D + E / 3)


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Where,

P = Market price per share

D = dividend per share

E = earnings per share

M = multiplier

According to this model, in the valuation of shares the weight attached to dividends is

equal to four times the weight attached to retained earnings. This is clear from the

following version of e.q. (21.4) in which E is replaced by (D + R)

P = m (D + D + R / 3)

The weight provided by Graham and Dodd are based on their subjective judgment and

not derived from objective, empirical analysis. Notwithstanding the subjectivity of

these weights, the major contention of the traditional position is that a liberal payout

policy has a favorable impact on stock price.

Empirical Evidence

Advocates of the traditional position cite the results of cross-section regression

analyses like the following

Price = a + b Dividend + c Retained Earnings

Typically, in such a regression analysis the dividend coefficient, b, is much higher

than the retained earnings coefficient, c. so the advocates of traditional position claim


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that their hypothesis is empirically vindicated. However, a careful look at the above

regression suggests that the conclusion reached by the traditionalists is unjustified for

the following reasons:

1. Equation (21.6) is misspecified because, inter alia, it omits risk which is an

important determinant of price. A better specified regression equation is :

Price = a + b dividend + c Retained Earnings + d Risk

In this equation b and c are expected to be positive whereas d is expected to be

negative. Because risk and dividend are inversely correlated the higher the level of

risk the smaller the dividend and vice versa-the dividend variable in Eq. (21.6) will

capture the effect of risk as well. Thus the omissions of risk will impart an upward

bias to b, the coefficient of dividend.

2. Measurement error distorts the results. It is well known that the measurement of

earnings almost invariably subject to error. The dividend figure, however, is given

precisely. So the measurement error in earnings is fully transmitted to retained

earnings which are simply earnings minus dividends.

To sum up, omission of risk imparts an upward bias to b, the coefficient of dividend

are measurement error characterizing retained earnings imparts a down-ward bias to c,

the coefficient of retained earnings. Hence the claim of traditionalists that b > c

implies that a high payout ratio increases stock value cannot be vindicated.


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2) Walter Model :

James Walter has proposed a model of share valuation which supports the view that

the dividend policy of the firm has a bearing on share valuation. His model is based

on the following assumptions:

The firm is an all-equity financed entity. Further, it will rely only on retained

earnings finance its future investments. This means that the investment decision is

dependent on the dividend decision. The rate of return on investment is constant. The

firm has an infinite life.

Valuation Formula : Based on the above assumption, Walter put forward the

following valuation formula :

P = D + E D) r / k

K

Where,

P = price per equity share

D = dividend per share

E = earnings per share

R = internal rate of return of investments

K = cost of capital

The first component is the present value of an infinite stream of dividends: the second

component the present value of an infinite stream of returns from retained earnings.


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Thus, as perWalter Model :

A)When the rate of return is greater than the cost of capital (r > k), the price pershare increase as the dividend payout ratio decreases.

B)When the rate of return is equal to the cost of capital ( r = k), the price pershare does not va with changes in dividend payout ratio.

C)When the rate of return is lesser than the cost of capital (r < k), the price pershare increase and the dividend payout ratio increases.

Thus,Walter Model implies that:

A) The optimal payout ratio for a growth firm (r > k) is nil.B) The optimal payout ratio for a normal firm ( r = k) is irrelevant.C) The optimal payout ratio for a declining firm ( r< k) is 100 percent.

3) Gordon Model :

Myron Gordon proposed a model of stock valuation using the dividend capitalization

approach. Here model is based on the following assumptions:

A) Retained earnings represent the only source of financing for the firm.B) The rate of return on the firms investment is constant.C) The growth rate of the firm is the product of its retention ratio and its rate of

return

D) The cost of capital for the firm remains constant and it is greater than thegrowth rate.

E) The firm has a perpetual life.F) Tax does not exist.


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Valuation Formula :

P 0 = E1 ( 1 b)

K br

Where,

P0 = price per share at the end of year 0,

E1 = earnings per share at the end of year1,

(1 b ) = fraction of earnings the firm distributed by way of dividends,

B = fraction of earnings the firm retains,

K = the rate of return required by the shareholders.

R = rate of return earned on investments made by the firm

Br = the growth rate of earnings and dividends.

Implications:

1. When the rate of return is greater than the cost of capital (r > k) theprice per share increases as the dividend payout ratio decreases.

2. When the rate of return is equal to the cost of capital ( r = k), the priceper share does not vary with changes in dividend payout ratio.

3. When the rate of return is lesser than the cost of capital ( r < k), theprice per share increases as the dividend payout ratio increases.

Thus,Walter Model implies that:

A) The optimal payout ratio for a growth firm (r > k) is nilB) The optimal payout ration for a normal firm ( r = k) is irrelevant.C) The optimal payout ratio for a declining firm ( r < k) is 100 percent.


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4) Modigliani & Miller Model :

Modigliani & Miller have advanced the view that the value of a firm depends solely

on its earnings power and is not influenced by the manner in which its earnings are

split between dividends are retained earnings.

Assumptions :

A. Capital markets are perfect and investors are rational; information is freelyavailable, transactions are instantaneous and costless, securities are divisible

and no investor can influence market price.

B. Floatation costs are nil.C. There are no taxes.D. Investment opportunities and future profits of firms are known with certain.

The substance of MM argument may be stated as follow:

If a company retains earnings instead of giving out as dividends, the shareholder

enjoys capital appreciation equal to the amount of earnings retained.

If it distributes earnings by way of dividends instead of retained it, the shareholder

enjoys dividend equal in value to the amount by which his capital would have

appreciated had the company chose to retain its earnings.

Hence the division of earnings between dividends and retained earnings is

irrelevant from the poi of view of shareholders.


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P = [ D + P ] / [ 1 + k ]

Where,

P = market price per share at time 0

D = dividend per share at time 1

P = market price per share at time 1

K = discount rate applicable to the risk class to which the firm belongs


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2.8 LEGAL AND PROCEDURAL ASPECT

Legal Aspects

The important provisions of company law pertaining to dividends are described

below:

1). Companies can pay only cash dividends (with the exception of the bonus share)

2). Dividends can be paid only out of the profits earned during the financial year after

providing for depreciation and after transferring to reserves such percentages of

profits are prescribed by law.

3). Due to inadequacy or absence of profits in any year, dividend may be paid out of

the accumulated profits of previous year.

4). Dividends cannot be declared for past yeas for which the account has been closed.

Procedural Aspects.

The important events and dates in the dividends payment procedure are:

1) Board Resolution:

The dividend decision is the prerogative of the board of the Directors. Hence, BOD

should in formal meeting resolve to pay the dividend.

2) Shareholder Approval:

The resolution of the BOD to pay the dividend has to be approved by the shareholders

in the annual General Meeting.


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3) Record Date

The dividend is payable to shareholder whose name appear in the Register of

Members as on the record date.

4) Dividend Payment:

Once the dividend declaration has been made, dividend warrants must be posted

within 42 day. Within a period of 7 days after the expiry of 42 days. Unpaid dividend

must be transfer to a special account opened with a scheduled bank.


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2.9 FACTORS AFFECTING SHARE PRICES

The factors that affect the market price of share are discussed under:

1. Demand and Supply

The forces of demand and supply have a direct bearing on the prices of various

securities on the stock exchange. When the demand for the particular security exceeds

its supply, its prices tend to rise. But when the supply is more than the demand, the

prices of the securities is likely to fall.

2. Market Trend and Speculative Preferences

Different trends come and go in the share market. Speculators generally make trends.

Like now day InfoTech Companies shares prices are rising and it is trend now. The

activities of speculator often lead to wide fluctuations insecurity prices.

3. Political Developments

Political event has a quick impact on stock exchange operations. A change in

government and outbreak of civil war, an announcement of a general election and

such other disturbances in the country may bring about fluctuations in the prices of

securities.

4. Rumors

Sometimes to bring liveliness brokers or speculators start spreading rumors.

Sometimes there are rumors that some very important personality of a company or of

a government had died.


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5. Financial Position of the Company

When the financial results of a company are good in a particular year the demand for

its securities goes up. It is vice versa when financial position is bad. Dividend paid on

security depends upon the financial position.

6. Management of the Company

Changes in the board of directors or Chief Executive of the Company also influence

prices of it securities. When a very prominent person joins as a director of a company

the faith of investors the company increases, and the prices of its shares tends to rise.

On the other hand, when a high reputed director resigns or retires from Board of

Directors of a company, it will have an adverse effect on its share prices.

7. Activities of Financial Institution

Operations of financial institutions including the foreign institutions have a significant

impact on the securities, when these institutions buy or sell a particular security in

large numbers, the prices security goes up or down.

8. Government policy

Changes in taxation and other economic policies of the Government have an

important bearing of the prices of securities. For instance increase or decrease in

excise duty on a product is likely bring down or push up the prices of shares of

concerned company.


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9. Miscellaneous Factors

Stock exchange is such a sensitive barometer that it responses to various types of

factors. Change in weather, industrial combinations, trade cycles, budget, and changes

in bank rates may have considerable influence on the market prices of various

securities.


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ANALYTICAL STUDY

OF

SELECTED COMPANIES


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3.1 Company History Shipping Corporation of India

The company was incorporated at Mumbai in 1961. The company was formed on 2nd

October 1961 when by virtue of the Shipping Corporation Amalgamation Order,

1961, the Undertaking of theWestern Shipping Corporation Ltd., was merged into the

eastern Shipping Corporation Ltd., which was renamed The Shipping Corporation of

India Ltd.. the corporation is an autonomous body working under the administrative

superintendent of the Govt. of India in the Ministry of Transport and

Communications.

The companys object is Corporation operates cargo passenger cum-cargo and tanker

services.

1962

The entire capital is held by the Govt. of India.

1971

4,49,844 shares issued to Govt. against acquisition of shares of Jayanti shipping Co.

Ltd.

1972

100 shares issued to Govt. without payment in cash.

1993

The Russian Federation was expected to designate Port of Novorossisk for handling

Indo-Russian Cargoes. The Rupee-Rouble inter-se settlement reached advances stage


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and was expected to give an impetus to revival of Indo-Russian trade. Equity shares

subdivided. 17689540 shares issued for consideration. Other than cash 2366,63,430

No. of equity shares issued to Govt. of India.

1994

During October, the Govt. further disinvested 38,64,600 shares representing 1.37% of

paid up capital of the company. Earlier, 5,22,45,900 shares i.e. 18.51% and with this

disinvestment, Govt. holding in the Company was reduced to 80.12%. The remaining

19.88% is held by Financial Institutions, banks, Mutual Funds, FIIS.

1997

Shipping Corporation of India Ltd, has signed a MOU with the Union surface

transport ministry for the next financial year1997-98.

1998

SCI and OCC had signed a Memorandum of Understanding (MOU) recently as a

precursor to renew the contract for the transportation of crude.

2000

The state-owned Shipping Corporation of India is considering a proposal by

Consultancy major PricewaterhouseCoopers (PWC) to hive off its three divisions bulk

carrier and tanker, passenger and liner and technical offshore services into three

separate companies.


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The company will consider the restructuring of SCI by way of a three-way split as

recommended by PricewaterhouseCooper (PWC), enabling it to derive a better

valuation than it currently does.

The government currently holds 80% in SCIL. About 18% is spread among financial

institutions and mutual funds. Floating stock in the company is a miniscule one %.

The plans for disinvestment.

2002

Government decides on strategic sale of 51% of SCIs equity and has fixed Rs. 800 cr

of net worth criterion to SCI.

SCI paid all its debt of Rs. 255cr to government before its disinvestment.

SCI records 82% dip in the net profit.

2003

SCI declared interim dividend of 30% for the financial year 03.

Cabinet committee on disinvestment decides to invite fresh expression of interest

(EOL) for disinvestment of 51%.

The disinvestment of Shipping Corporation of India (SCI) has been postponed

indefinitely though the government continues to be firm on its divestment policies.

2007.

SCI is now certified as ISO 9001-2000 compliant by Indian Register of Quality

Services (IRQS) from 08.05.2007


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2008.

The Government of India, conferred Navratna status to SCI on 01.08.2008, leading

to further enhanced autonomy and delegation of powers to the Company towards

capital expenditure, formation of Joint Ventures, mergers, etc.

SHIPPING CORPORATION OF INDIA:

CORELATION BETWEEN MARKET PRICE AND DEVIDEND PER SHARE

YEARS X (MARKET

PRICE )

Y (DPS) (x-x-) (y-y-) (x-x-)2 (y-y-

)2

(x-x-)(y-y-)

2005 60 17 -40 8 1600 64 -320

2006 93 4 -7 -5 49 25 35

2007 107 11 7 2 49 4 14

2008 115 0 15 0 225 0 0

2009 125 13 25 4 625 16 100

500 45 0 9 2548 109 -171

R= -0.35


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As per our calculations, the correlation between Market value and dividend per share

for the last 5 year is negative. But our observation says that market value of shares

increasing in the last 5 years which indicates, company is a growth firm. And thus

Walter Model applies.


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3.2 Company History Oil and Natural Gas Corporation

Oil and Natural Gas Corporation (ONGC) was set up in 1956 with significant

contribution in industrial and economic growth of the country.

1959

In October the Commission was converted into a statutory body by the Oil and

Natural Gas Commission Act, 1959. The main objectives of the Commission were to

plan, promote, organize and implement programs for the development of oil and

natural gas resources and the production and sale of oil and natural gas products.

ONGC functions as the primary arm of the Government as regards exploration for and

exploitation of Indias petroleum resources.

The Companys revenues are derived primarily from the sale of its production of

crude oil, natural gas, liquefied petroleum gas (LPG), C2-C3 (ethane-propane) and

natural gasoline (NGL).

To strengthen reserves accretion portfolio and open up areas of future exploration.

ONGC has undertaken an accelerated Program of Exploration with an outlay of Rs.

3958 crores.

1993

Oil and Natural Gas Corporation Limited (ONGC) was incorporated by the

Government of India as a public Limited Company under the Companies Act 1956 on

23rd

June. The company is engaged in the exploration, development and exploitation

of hydrocarbons i.e. Crude oil and natural gas.

The company was subsequently converted into a public limited company in June-93

following new liberalized economic policy adopted by the Government of India in


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July. 1991 sought to deregulate and delicense the core sector (including petroleum

sector) with partial disinvestment of Govt. equity in Public sector undertakings and

other measures.

1994

The company acquired the undertaking, business, assents and liabilities of the

erstwhile Oil and Natural Gas Commission (the Commission) on 1st February.

1996

The company embarked upon exploration in the deep sea basing on the east and west

coast of the country

ONGC Videsh Ltd is a wholly owned subsidiary of the company.

3428,53,716 shares issued to the President of India. 1076,440,366 No. of equity

shares issued as bonus shares. 66,39,910 No. of equity shears disinsted.

1997

The venture with a private foreign company would be set up with an equity

participation of 50 percent each.

ONGC Ltd and PGS Ocean Bottom Seismic, a Norwegian company, have signed a Rs

180 crore contract for a three-dimensional ocean bottom cable technique seismic

survey over the Mumbai High field.


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1998

Oil and Natural Gas Corporation (ONGC) is holding negotiations with Arco, an

American Company for setting up a 50:50 joint venture for coal bed methane (CBM)

exploration projects.

2000

Oil and Natural Gas Corporation and Oil India Ltd have signed their annual

memorandum of understanding (MOUs) with the government for performance targets

for 2000-01.

2001

Oil & Natural Gas Corporation Videsh Ltd., the overseas subsidiary of ONGC will

sign a 1.7 billion dollar deal with Russian national oil company Rosneft for taking 20

per cent stake in Russian Far East oil and gas field Sakhalin-I, in Mosocow on

February 10.

As part of its mega restructuring exercise, the Oil and Natural Gas Corporation has

introduced a voluntary retirement scheme for trimming its 40,000 strong work force

all over the country.

2002

The board of directors of Oil and Natural Gas Corporation (ONGC) has approved the

acquisition of the Aditya Birla groups stake in the joint venture Mangalore Refinery

and Petrochemicals Ltd (MRPL)

Retains top most profit making Public Sector Company (PSU) status.

ONGC strikes deal with refiners to sell crude at international prices


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ONGC ranked no. 1 among ET 500

2003

Ties up with IOC for supply of crude oil

Acquires 37.38% equity stake in Mangalore Refinery & Petrochemicals Ltd (MRPL)

ONGC Videsh Ltd. (OVL) purchases 25% stake of Canadian Talisman Energy in

Sudan oilfield for1 million.

Retains top sport in market can in ET 500

Company ranked in FT Global 500 list

Enters into an MOU with Bharat Petroleum Corporation Ltd (BPCL) for supply of

crude oil for a period of two years from April 01, 2002 to March 31, 2004.

Hikes stake in Mangalore Refinery & Petrochemicals Ltd (MRPL) to 71.49% from

51.25%

Ends its two-year training and consultancy services joint venture with oil refining

giant India Oil Corporation.

ONGC Disinvestment of10% Equity by Government of India.

2004

Market capitalizations crosses Rs. 100000 cr

The board has approved a proposal to invest Rs 900 cr in a five million tonne C2-

C3 extraction plan.

Finance Minister allows ONGC to buy Mangalore Refinery and Petrochemicals stake.

ONGC decides to offer 32 marginal fields to private operators Govt. of India divests

10% stake in the company by selling 14.26 cr shares at a cut-off price of Rs. 750 per

share.


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Awards Rs 160 cr three year order to supply oil exploration equipment for BHEL

The government on March 23 issued Rs 348.6 crore worth of fresh oil bonds to public

sector oil companies ONGC and OIL. The bonds carry a coupon rate of 5% for a five

year tenor.

Oil and Natural Gas Corporation (ONGC) has tied up with the Indian Institutes of

Foreign Trade (IIFT) for launching a special MBA course in international business for

its middle-level executives.

2006

ONGC internal audit bags ISO 9001 rating.

2007.

A Fortune-Global 500 Company, it is not only the largest E&P Company in India but

also one of the most valuable companies in India. Platts recognized it as No. 2 E&P

Company in theWorld and 23rd among leading global Energy majors in its Platts Top

250 Global Energy Company Ranking 2007


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ONGC :


YEARS X (MARKET

PRICE )

Y (DPS) (x-x-) (y-y-) (x-x-)2

(y-y-

)2

(x-x-)(y-y-)

2005 395 27 -302 -7 91204 49 2114

2006 566 30 -131 -4 17161 16 524

2007 723 45 216 11 676 121 286

2008 871 38 174 4 30276 16 686

2009 930 30 233 -4 54289 16 -932

3485 170 193606 218 2688

R = 0.41

As per our calculation, the correlation between Market value and dividend per share

for the last year is positive and it is less than 0.50. But my observation says that

market value of share is increasing in last 5 year which indicated company is a growth

firm.


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3.3 Company History Infosys Technologies

1981

On July 2nd the company was incorporated as Infosys Consultants Private Limited at

Mumbai.

INFOSYS was promoted by software professionals, Mr. S Gopalkrishnan, Mr. K

Dinesh, Nandan M Nilekani, Mr. S.D. Shibulal, Mr. N.R. Narayana Murthy & Mr.

N.S Raghvan.

The company is engaged in software development in the form of services, turnkey

projects and products for the domestic and export market. The software development

is targeted towards the distribution, banking telecommunication and manufacturing

sectors worldwide.

1992

On April 21st

the name changed in Infosys Technologies Private Limited and the

registered office was moved to Bangalore.

On June 2nd the company was converted into a Public Limited Company under the

name Infosys Technologies Ltd.

1993

The company turned up with ISO 900 certification.

19,76,100 No. of equity shares of Rs. 10 each issued, subscribed and paid-up

(15,84,000 shares to directors, promoters, 2,68,100 shares to employees of the

company and 1,24,000 shares at a prem. of Rs 70 per to shareholders on right basis. )


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68,600 shares reserves for allotment in preferential basis to employees of the

company and group company (only 10, 3000 shares taken up). Balance 3,07,200

shares along with 58,500 shares not taken up by employees were issued to the public

(all were taken up)

During the period company undertook to expand its activities by setting up a software

technology park on 100% EOU. For this purpose Co. acquired 5 acres of land at

Electronic city near Bangalore.

To part finance the companys project for setting up a software Technology Park,

company made a public issue of13,76,000 equity shares of Rs. 10 each at a premium

of Rs. 85 per share in February.

1994

During the year marketing offices were opened in San Francisco, Cincinnati, New

York and Dallas. During the year company proposed to make a preferential issue of

7,50,000 warrants convertible into shares to the Infosys Technologies Ltd. Employees

Trust to form the basis of employee stock offer plan.

33,52,100 no bonus equity shares issued in proportion 1:1

5,50,000 no. of equity shares of Rs 10 each allotted at a premium of Rs 440 per share

to FIIS, mutual Funds and other on preferential basis. Of these some shares were

forfeited.

1995

During the year the company established Yantra Corporation, a wholly owned

subsidiary in USA investing US $ 5,00,000 in the equity of the said subsidiary.


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1997

The Institute of Chartered Accountants of India awarded the Silver Shield for the Best

Presented Accounts, amongst the entries received from the non-financial, private

sector companies for the year1995.

The readers of the well-known Asia Money magazine have voted the company as

Indias best-managed Company for the year1996

Company also won several awards for export performance.

In December, the Company announced its plans for an ADR issue up to US $ 75

million.

The world economic forum selected Infosys as one of Indias most remarkable and

rapidly growing entrepreneurial companies in November.

8008,600 bonus shares issued in propr, 1:1, 1,34,500 No. of equity shares at a prem.

of Rs 90 per share allotted on conversion of warrants. 14,500 forfeited shares issued.

1998

During the year, the issued, subscribed and paid-up capital increased by Rs.

8,75,76,000 consequent to the issued of 7,49,000 shares of Rs 10 each, fully paid, to

employees of the company and Employees Welfare Trust under the ESOP, and a

bonus issue of 80,08,600 shares in the ratio of1:1 to the members as of the record

date. Of the total paid-up capital of Rs. 16,01,72,000 Rs 12,92,69,000 (81% of the

paid up capital) has been issued as bonus shares.

During the year the company received several AWARDS.

The readers of Asia Money Magazine once again voted Infosys the best in strategy

and Management from among the listed companies in India, and among the best in

Asia, for the year1996-97.


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The Bangalore Stock Exchange rated the Company as the best Regional Company for

all-round quality management and as a company which gives top priority to

shareholder interests. The company is the first to receive this award.

The Economics Times Awards for Corporate Excellence was won by Bangalore-

based software giant Infosys Technologies of the year.

1999

Alpha Data, a leading information services company in the UAE, has tied up with

Infosys Technologies to market and support banking software products from Infosys

in the UAE.

Infosys Technologies has taken the American Depositor Receipts (ADRs ) route with

the US public offering of1,800,000 ADRs at each. The ADRs will represent 9,00,000

equity shares and will go public on march 11. Infosys is the first every India register

company to be listed in the Nasdaq stock market in USA.

Infosys Technologies Ltd chairman N R Narayana Murthy has been awarded the first

ever Sir M Visvesvaraya Memorial Award, instituted by Federation of Karnataka

chambers of Commerce and industry (FKCCI) to coincide with 138th Birthday of Sir

M Visvesvaraya.

2000

The company proposes to increase its software professional strength to 2,400 from the

present 1,200.

The company has re-emerged as Indias second most valuable company, replacing the

FMCG heavyweight, HLL.


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Infosys has signed an MOU with the Sharjah Airport International Free Zone

Authority to have a base there.

Goldman Sachs has rated Infosys Technologies and HCL Technologies as market out

performers and among the best quality names in the industry.

The company issued on September 30, 667 no. of equity shares pursuant to the

exercise of stock options by certain employees.

Nortel Networks is joining hands wit the company to set up aWireless centre of

Excellence in Bangalore.

The company has allotted 460 no. of equity shares of par value of Rs 5 per share to

the Bankers Trust Company, New York.

The Company has allotted an aggregate 500 equity shares of Rs 5 each to individual

optioned pursuant to the exercise of the employees under the 1999 option plan, on

receipt of payment of the subscription monies in respect of the said shares aggregating

Rs. 20,32,525.

2001

Infosys Technologies has signed a MOU with the Andhra Pradesh Government for

establishing a software development campus at Hyderabad.

The Company is setting up its biggest software development centre in Bangalore.

The company has allotted 100 equity shares of par value of 5 per share to the Bankers

Trust Company, New York the depository to the companys ADS issue as underlying

shares in respect of 200 ADRs to be issued and allocated to the purchasers.

Infosys Technologies board has allocated 67,050 no. of equity shares at a par value of

Rs 5 par to employees of the company.


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The Board of Directors allocated an aggregate of 41,050 stock options exercisable for

equity shares of par value Rs 5 per share to employees of the company, pursuant to

the companys 1999 option plan.

The company has informed the BSE that the company has received a disclosure from

Emerging Markets Growth Fund Inc stating that they hold 34,03,880 No. of equity

shares representing 5,15 percent of the paid up capital of the company.

Infosys and TCS have emerged as the leading Indian software exporters during 2000-

01 clocking exports worth Rs. 2,870.26 and Rs. 1,852.94 cr. Respectively.

2002

Receives Motilal Oswal Award forWealth Creation for1996-2001

Tops among IT exporters with exports of Rs 1900 cr in the period April-December

2001 Airbus Industries hires Infosys for wing Design.

Records 35 per cent increase in the value of its brand to Rs. 7,257 cr as of Mrach 31,

2002

Infosys Tech bags prestigious Corporate University Exchange Excellence Award for

2002

NASDAQ selects Infosys as the best value reporter

RBI permits 100% FII purchase in Infosys.

Ties up with IB for knowledge sharing arrangement

N R Narayana Murthy receives the Ernst & Young Entrepreneur of the year award

for 2002

Company declares that it has won Most Admired Knowledge Enterprise (MAKE)

award in the Asia region for 2002.

Progeon issues, 4,375.000 shares to Citicorp.


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2003-2004

Fortune names Narayana Murthy, Nandan Nilekani as Asias Businessmen of the

year 2003 making them the first Indians to win the award.

ICRA, the credit rating agency, gives CGR1 rating8 for the companys corporate

governance practices, making it the first company in the country to get the highest

rating for corporate governance.

Launches ethics code to check financial frauds

Infosys brand valued at RS 7,488 cr

Wins Electronics & Computer Software Export Promotion Council (ESC) award for

computer software and services sector.

Business week ranks the company in the 74th place among the worlds top 100 best

performing InfoTech companies making it the only Indian company in the list.

Infosys Technologies has been allotted the highest governance and value creation

(GCV) rating of CRISIL GCV Level 1.

Signs an agreement to acquire 100% equity of Expert information Services Pty Ltd,

Australia for A$ 31.0 million (US$22.9 million)

The Board of Directors at its meeting held on December 20, 2003 have allotted

22,439 equity shares of par value of Rs 5/- to the optionees, pursuant to the exercise

of the options granted to the employees under the companys 1999 stock option plan.

2005-2008

FMR Corp. and its direct and indirect subsidiaries and Fidelity International Limited

(FIL) and its direct and indirect subsidiaries acquire 1,44,221 shares (0.22%). Their

shareholding after the said acquisition is 33,58,318 shares (5.05%),

Infosys completes five years on NASDAQ


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Infosys becomes first Indian listed IT firm to net Rs. 1000 cr

Indian Merchants Chambers (IMC) has announced that Infosys

Technologies chairman NR Narayana Murthy is the winner of the IMCs prestigious

Diamond Jubilee Award for eminent businessman of the year.

Comes out with a bonus issue in the ratio of 3:1.


YEARS X (MARKET

PRICE )

Y (DPS) (x-x-) (y-y-) (x-x-)2 (y-y-

)2

(x-x-)(y-y-)

2005 564 29 -681 -15 463761 225 -10215

2006 883 120 -362 76 131044 5776 -27512

2007 1306 13 61 -31 3721 961 -1891

2008 1751 44 506 0 256036 0 0

2009 1721 14 476 -30 226576 900 -14280

6225 220 0 0 1081138 7862 -53898

R =r -0.58


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As per our calculation, the correlation between Market value and dividend per share

for the last 5 years is negative. But my observation says that market value of share is

increasing in last 5 years which indicated company is a growth firm. And thus walter

model applies.


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3.4 Company History Reliance Textile Industries Ltd

1973

On 8th May the company was incorporated in Karnataka state as a public limited

company under the name Mynylon Ltd. to manufacture synthetic blended yarns and

fabrics, polyester filament yarn, polyester glass shells and colour TV picture tubes.

1975

On 28

th

June this company was converted into a public limited company. On 11

th

February 1966 a company by name of Reliance Textiles Industries Pvt. Ltd was

incorporated in Maharashtra. It established a synthetic fabrics mill in the same year at

Naroda in Gujarat.

On 1st July, Reliance Textile Industries Ltd. was amalgamated with Mynylon Ltd.

1977

With effect from 11th

march 1st

the name of Mynylon Ltd was changed to Reliance

Textiles Industries Ltd. The company manufactures synthetic blended yarns and

fabrics polyester filament yarn polyester staple fiber chemicals and allied products

color TV glass shells and color TV picture tubes. The Companys yarns are marketed

under various brand names such as Texalit, Textron, Texlene, Poly dyed and

Polytwist. The companys fabrics are marketed under the brand name VIMAL.

On November Dhirajlal H Ambani and Natvarlal H Ambani along with some other

existing shareholders offered for sale at par to the public. 28,20,000 equity shares of

the company in order to get the shares of the company listed on the stock Exchange at

Mumbai.


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1979

During the year Sidhpur Mills co. Ltd which has an installed capacity of 38,368

spindles and 490 looms was amalgamated with the company. In terms of the scheme

of amalgamation, the company was to issue and allot for every one equity share of Rs.

100 each of Sidhpur, 2 equity shares of Rs. 10 each and one bond of Rs 80 of the

company.

The company allotted a total of1,12,000 No. equity shares of Rs 10 each and 35,000-

11% bonds of Rs 80 each to the shareholders of Sidhpur Mills.

1982

5,50,000 13.5% Pref. shares issued as Rights to equity share holders. 19,20,000

equity shares issued to debenture holders (Series III) as per the terms of that issue.

815 No. of equity shares allotted out of the Rights issue of1981.

1983

111,56,741 Bonus equity shares issued in Propn. 3;5, 64,00,000 No. of Equity shares

of Rs. 10 each issued in part conversion of Debs. (iv series ) on 30.9.1983. Of these,

24,00,000 shares issued as additional entitlement to debenture holders (iv series) on

account of bonus issue.

1984

101,24,675 No. of Equity shares allotted conversion of non-convertible portion of

debentures of series I, II, II and IV of the total value of Rs 7231.92 lakhs in Prop. 1:4.

equity shares of Rs. 10 each for every Rs 100 of debentures (100,28,359 shares in

1984 and 96,316 shares in 1985) 53,33,333 No. of equity shares issued (Prem. Rs. 40


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per share) on part conversion of E Series debentures as on 30.4.1985. rate of

dividend on 13.5% pref. shares increased to 15% effective from 16.5.1984.

1985

The name of the company was again changed from Reliance Textiles Industries Ltd to

Reliance Industries Ltd with effect from 27th June.

On 30th September Devti Fibres Ltd became a subsidiary of the company. Trishna

Investments and leasing Ltd. Reliance Industrial Investments & Holdings Ltd,

Reliance Petro products Ltd also subsidiaries of the company.

1987

Three letters of intent were converted into industrial licenses. Subsequent to 30th June,

all these industrial licenses were transferred to reliance Peotrochemicals, Ltd., a

company incorporated as a subsidiary of the company.

689,65,480 No. of equity shares allotted (prem. Rs. 62.50) per shares) in conversion

of G series debs. Out of which 660, 30,100 shares allotted in respect of earlier

conversion of debs. 300,00,000 Rights shares than issued (prem Rs 50 per share; prop.

1:4) (all were taken up 14,60,000 additional shares were allotted to retain over

subscription for rights. Along with the Rights issue, 14.00,000 No. of equity shares

were offered to employees at a prem. Off rs 50 per share (under Employees Stock

Option Scheme ) but only 1,11,695 shares taken up. The balance 12,88,305 shares

allowed to lapse.


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1990

During the year pursuant to the policy announced by Govt. regarding minimum

economic scale, the company embarked upon expansion of PTA capacity from

1,00,000 tones to 2,00000 tones per annum. The project is being undertaken in

technical collaboration with John Brown Engineers & Constructors Ltd. UK.

During the year the company entered into a Memorandum of Understanding with

West Bengal Industrial development Corporation Ltd. For setting up a join sector

project for the manufacture of15,000 tones per annum of polyester filament yarn. In

December a joint sector agreement was entered into for setting up a new company

under the name Reliance Bengal Industries Ltd.

The technical collaborator for PFY and PSF was Dupont, US and for PTA, UOP

Processors, US and ICI, UK

1991

A technical collaboration agreement for 10 years was entered into with stone and

Webster Engineering Corporation USA for production of 4 lakh TPA of ethylene,

1,95 lakh TPA of propylene and 1.20 lakh TPA of mixed C4 stream. During the

period company commissioned its 1,00,000 TPA Ethylene Oxide and Mono Ethylene

Glycol plant at Hazira.

In series H Debentures, 304,00,000 12.5% secured redeemable partly

convertible debentures of Rs 150 each offered on Rights basis in the proportion 1

debenture: 5 equity shares held. Additional 45,60,000 debentures were allotted to

retain over subscription. 15,20,000 debentures were offered to employees on an

equitable basis. Only 15,00,000 debentures were taken up. The unsubscribed portion

of 20,000 debentures was allowed to lapse. Rs. 55 of the face value of each debenture


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was to be converted into 1 equity shares of Rs 10 each at a premium of Rs 45 per

share at the end of18 months from the date of allotment. Remaining Rs. 95 of the

face value of each debenture was to be redeemed at par on the expiry of10 years from

the data of allotment.

In series J Debentures 76,00,000 14% secured redeemable non-convertible

debentures of Rs 150 aggregating to rs 114 cr attached with a detachable warrant, to

the equity shareholders on rights basis in the proportion of one debenture for every 20

equity shares held. Additional 11,40,000 debentures were allotted to retain over

subscription. The debentures of Rs 150 would be redeemed on the expiry of10 years

from the date of allotment.

In Series K debentures 265,50,000 17.5% secured redeemable non-convertible

debentures of Rs. 100 aggregating Rs 265.50 cr to the equity shareholders on Rights

basis in the proportion of1 debenture for every 6 equity shares held. These debentures

would be redeemed on the expiry of10 years from the date of allotment.

1992

With effect from 1st March Reliance Petrochemicals Ltd. was merged with the Co. as

per the scheme of amalgamation, 1 equity shares of RIL was issued against 10 equity

shares held in Reliance Petro Chemicals Ltd.

13% Pref. shares fully paid-up 183,99,935 No. of Equity shares allotted till date as

again 92,00,000 Global depository shares 749,40,440 No. of equity shares allotted

shareholders of erstwhile Reliance Petroleum Ltd, under Scheme of Amalgamation.


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1993

On May 27th the company offered 92,00,000 GDS representing 184,00,000 shares.

The company was awarded the medium sized discovered oil and gas fields for

exploration and production.

364,60,000 No. of equity shares allotted on part conversion of H series debenture

100,05,586 No. of equity shares allotted again warrants issued.

3,16,667 shares allotted to SCICI on conversion of loans 103,16,027 shares allotted

underlying, 127,66,000 GDS issued on 15th FEB 1994 of which 81,66,571 shares

were yet to be allotted.

1994

Company issued 60,00,000 18% non convertible secured redeemable debentures of

Rs 100 each on private placement basis with financial institutions.

1995

On January the company issued 82,50,000 14% secured redeemable non convertible

debentures of Rs. 100 each on a private placement basis with financial institutions,

banks / bodies corporate.

On 23rd January the company allotted 600,00,000 14% secured redeemable non-

convertible debentures with detachableWarrants of Rs. 12.50 each.

During June, the company allotted 995,75,915 No. of equity shares of Rs. 10 each to

the erstwhile shareholders of Reliance Polypropylene Ltd (RPPL) and Reliance

Polythylene Ltd (RPEL) in the ratio of 30 equity shares of Rs 10 each for every 100

equity shares of Rs 10 each held in RPPL and 25 equity shares of Rs 10 each of the

company for every 100 equity shares of Rs 10 each held in RPPL.


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Reliance Industries Ltd (RIL) has tied up with United Oil processing company of the

US, for production of paraxylene at Jamnagar.

In 1995-96, it entered the telecom industry through a joint venture with Nynex, US,

RIL is Indias largest private sector enterprise, is a major player in the Indian

petrochemicals sector1996.

During the same year company undertook to implement 3 independent power projects

in separate entities with a total power generating capacity of 1331 MW at

Patalganaga, Bawana and Jamnagar.

15% Pref. Shares redeemed. 1908 shares out of these meant for amalgamation issued.

1997

Reliance undertook to make significant investments in Reliance Petroleum Ltd., for

setting up of the grass root refinery at Jamnagar, Gujarat

46,60,90,452 bonus equity shares allotted 7289149 No. of equity shares allotted at

conversion of debentures and reissue of forfeited shares.

The National Securities depository Ltd (NSDL) and Reliance Industries Ltd are

embarking on a joint marketing effort to issue RIL bonus shares in the demat form.

RIL was one of the first companies to join the depository and by issuing bonus shares

through the demat forms; investors will be assured of clean securities.

Around 57 lakh euro-convertible bonds of Reliance Industries Ltd. Were converted

into equity shares ahead of the book-closure for the 1:1 bonus issue on November 29.

Reliance Industries Ltd (RIL) founder and chairmn Dhirubhai Ambani was awarded

the prestigious the deans medal by the Wharton School (University of Pennsylvania)

at a glittering ceremony in Mumbai on 15th June.


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Reliance Industries Ltd (RIL) has struck an understanding with the US based

engineering firm Carter burgess Ltd to undertake projects in the road sector through

the joint venture route. In the proposed joint venture, reliance will have the majority

stake. 65,00,000 redemption pref shares of rs. 100 each issued.

1999

The company undertook the commissioning of its Jamnagar Petrochemicals complex.

Reliance Industries Ltd is currently setting up a Rs 5,550 crores petrochemical

complex at Jamnagar.

Once again Reliance Industries Ltd (RIL)is in the international limelight. RIL been

named as one of the worlds 100 best-managed companies for the year 1999 by

industry week (IW), a leading US magazine.

During 1999-2000, the company competed its integrated Jamnagar complex, in a

record period of less then 3 years.

2000

Reliance has been ranked the second largest produced of POY and PSF in the world,

and the larges polyster manufacturer in India, with a market share of 51%.

Reliance is setting up a new venture for e-commerce related services and has roped in

National Stock Exchanges head of market operations, derivatives, IPO and

membership Ashishkumar Chauhan for piloting the new project.

Reliance Industries Ltd. Wanted to buy back shares up to Rs 1,100 cr at rs 303

The company has informed that, Reliance Power Ventures Ltd., a wholly owned

subsidiary of the company, propose to acquire an aggregate of 2,75,45,133 fully paid


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equity shares of BSEs of face value of Rs. 10 each at a price of Rs. 234/- per fully

paid up equity shares.

Issue of equity linked warrants under Employees Stock Option Plan.

The board has issued 5,26,87,851 equity-lined warrants under the ESOP in

accordance with the resolutions passed at the companys 26th AGM.

Credit rating agency Crisil has assigned the highest safety rating of AAA to the Rs

500 crore non-convertible debenture issue of the company.

Reliance holds a 30% interest in an unincorporated joint venture with Enron and

ONGC, to develop the proven Panna, Mukta and Tapti (PMT) oil and gas fields.

Enron has a 30% share and ONGC the balance 40% share.

2001

Fitch Ratings India Ltd. Has assigned Ind AAA rating to the Rs 5000- crore non-

convertible debentures of the company

Reliance industries has raised its stake in Larsen & Turbo from 0.38 percent to 2.87

percent.

Reliance is the worlds third largest producer of paraxylene (PX), and the worlds

fourth largest producer of PTA. Within the country, reliance is the larges

manufacturer of PX, PTA and MEG, with a market share of over 80%.

Reliance is the largest producer of polymers in the country with a market share of

52%. Reliance has a capacity of nearly a million tones per year of polypropylene (PP ).

400,000 tonnes per year of polythelene (PE) and 300,000 tonnes per year of

polyvinyle chloride (PVC).

In November 2001 Reliance Industries sold its just over10% equity stake in Larsen &

Toubro the second largest player in the cement industry, to Grasim Industries for Rs.


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766.5 cr. The divestment of the L& T stake is in consonance with its declared

objectives of unlocking value from its investments, in the interests of maximizing

overall shareholder value.

In January 2002, Reliance Petro investments have become a subsidiary of the

company, while Reliance Life Insurance Company and Reliance General Insurance

Company have ceased to be subsidiaries of the company.

In March 2002, the Board approved the proposal for amalgamation of Reliance

Petroleum Limited (RPL) with the company. The proposed scheme of Amalgamation

provided that the amalgamation will take effect from the appointed date i.e. April 1,

2001. All assets, liabilities and obligations of RPL will vest in the company w.e.f.

from the said appointed date. One equity share of the company will be allotted for

every eleven equity shares of RPL held.

Shareholders of Reliance Petroleum Ltd on April 15 approved the merger of RPL

with Reliance Industries Ltd at a meeting held in Jamnagar and convened under the

orders of the Gujarat High Court.

Reliance Industries acquires 26% state & management control in Indian

Petrochemicals Corporation Ltd. (IPCL) by paying Rs 1490.84 cr to Government of

India.

2003

Shuts down the aromatics plant at Jamnagar, Gujarat companys Hazira

manufacturing unit gets IMC-Bajaj quality award 2002

Anil Ambani appointed as BSES MD

Reduces stake in BSES from 55% to 49.5% and BSES ceases to be subsidiary of the

company due to the disinvestment


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Foreign institutional investors (FIIs) convert 24 million shares of the company into

global Depository Receipts (GDRs)

Oil discovered in RLs exploration block9 in Yemen in which the company holds

20% shares

Anil Ambani, Vice Chairman & Managing Director, voted as MTV Youth Icon of the

year.

Mukesh Ambani chairman and managing director (CMD), donates

$2million to health programs of the international federation of Red Cross (IFRC ) and

Red Crescent Societies.

Reliance exhorts NTPC Kayamkulam plant transplantation to Kakinada

2004

Reliance Jamnagar refinery voted best among 50 refineries worldwide Gujarat gives

away Gujarat Garima Awards to Tata, Ambani

Reliance Industries Limited (RIL) has increased the capacity of its Jamnagar refinery

to 33 million tones from 30 million tones.

Mukesh Ambani ranks 40th in the world business leaders

Reliance joins hands with Gail for Indo-Iran natural gas pipeline project

Reliance Industries countrys largest private sector company, has surged ahead of

global players after it posted a net profit of more than $1 billion in 2003-04

RIL chairman wins Asia Society Leadership award


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2005

Reliance Industries Ltd was awarded the international Refiner of the year 2005 at

the World Refining and Fuels Conferences awards ceremony held in San Francisco

on March 10, 2005.

Reliance Industries wins annual 2005 ASTD Best Awards from American Society

for Training & development.

Reliance Industries wins two National Energy Conservation awards

Reliance industries bags National Awards for R & D Efforts in industry 2005

2006

RIL commences the setting up of a new export-oriented refinery through its

subsidiary, Reliance Petroleum Limited (RPL). The refinery will have a total

atmospheric distillation capacity of approximately 580,000 barrels per stream day

with a Nelson Complexity of 14.0 and an integrated polypropylene plant with a

capacity of 0.9 Million TPA. The capital cost of the RPL project is estimated at Rs

27,000 crore (approximately US$ 6 billion). RPL completes its US$ 1.2 billion Initial

Public Offering of equity shares which received an overwhelming response across

different classes of investors.

Reliance's debt ratings from S&P and Moody's pierce India's sovereign ratings.

Reliance becomes India's first private sector enterprise to cross US$2 billion profit

mark.


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2007

Value creation through integration - A landmark merger of Indian Petrochemicals

Corporation Limited (IPCL) with Reliance Industries Ltd. (RIL) has been completed.

Reliance Retail entered the organised retail market in India with the launch of its

convenience store format under the brand name of Reliance Fresh.

The worlds largest polyester expansion project commissioned during the year. We

brought a Polyester capacity of 550 KTA on stream at globally competitive costs in a

record time of eighteen months. With this expansion, our polyester capacity has been

augmented to 2 million tonnes per year. Subsequently, Reliance now have 4% of

global polyester capacity and 6% of global production.

During the year, we expanded our polypropylene (PP) capacity by 280 KTA at

Jamnagar that increased the combined capacity to 1,710 KTA. With this expansion,

we now have 3.5% of global PP capacity and 3.6% of global PP

Dividend Project - Type by Paresh

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