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DIVIDEND AND ITS IMPORTANCE

Subject: CORPORATE LAW-I

Submitted to: - Submitted by:-

Mrs. Nandita. s. jha ADHISH PRASAD

Faculty of Corporate Law -I Roll no: - 904

Semester: - 7th

Session: - 2013-18
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CERTIFICATE

This is to certify that the Project Work entitled Dividend and its importance Submitted by Mr.
ADHISH PRASAD is the record of original work carried out during semester-VII of Fourth Year
B.A. LL.B. Course for the academic year 2013-2018 under my supervision and guidance in
conformity with the syllabus prescribed by Chanakya National Law University. This project
work has not been submitted in any other college or university.

Place: PATNA. GUIDE

Date:12/11/2016
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ACKNOWLEDGEMENT

I am very thankful to everyone who all supported me for I have completed my project effectively
and moreover on time. I am equally grateful to my Corporate Law faculty: Mrs. Nandita. S. Jha
Mam. She gave me moral support and guided me in different matters regarding the topic. She
had been very kind and patient while suggesting me the outlines of this project and correcting my
doubts. I thank her for her overall supports. Last but not the least, I would like to thank my
friends who helped me a lot in gathering different information, collecting data and guiding me
from time to time in making this project despite of their busy schedules ,they gave me different
ideas in making this project unique.

Thanking you

ADHISH PRASAD
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TABLE OF CONTENTS

1. LIST OF ABBREVIATION................................................................................................5

2. AIMS & OBJECTIVE.....6

3. HYPOTHESIS.....6

4. RESEARCH METHODOLOGY....6

5. SOURCES OF DATA.6

CHAPTERISATION

i. INTRODUCTION ...........7-9

ii. CLASSIFICATION OF DIVIDEND.......................................10,11

iii. IMPACT OF DIVIDEND IN MARKET..........................................................12,13

iv. CONCLUSION......................................................................14

BIBLIOGRAPHY........15
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LIST OF ABBREVIATION

1. Sec.- Section
2. Ed.- Edition
3. Co.- Company
4. No.- Number
5. %- Percentage
6. Dr.- Doctor
7. I.T- Income Tax
8. BOD- Board of Directors
9. HCL- Helicopter Corporation of India
10. ONGC- Oil and Natural Gas Corporation Limited
11. PHL- Pawan Hans Limited
12. Ltd.- Limited
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AIMS AND OBJECTIVE-

1. To examine the dividend and find out its advantages and disadvantages
2. To find out the deceleration and payment of dividend.

HYPOTHESIS-

Dividend is a return on the share capital subscribed for and to its shareholders by a company.

RESEARCH METHODOLOGY-

Researcher shall emphasize and use the doctrinal method to prepare this project topic.

SOURCES OF DATA-

PRIMARY SOURCES:- SECONDARY SOURCES:-

1. The Companies Act, 2013 1. Books on Corporate Law

2. Websites

3. Journal

4. Magazines
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CHAPTER 1: INTRODUCTION

The word Dividend has origin from the Latin word Dividendum. It means a thing to be
divided. Dividend means the portion of the profit received by the shareholders from the
companys net profit, which is legally available for distribution among the members.1
Therefore, dividend is a return on the share capital subscribed for and paid to its shareholders by
a company. Dividend defined under Sec. 2(35) of the Companies Act, 2013, includes any interim
dividend.2

KINDS OF DIVIDENDS

Cash Dividend:
The cash dividend is by far the most common of the dividend types used. On the date of
declaration, the board of directors resolves to pay a certain dividend amount in cash to those
investors holding the company's stock on a specific date. The date of record is the date on which
dividends are assigned to the holders of the company's stock. On the date of payment, the co.
issues dividend payments.

Bonus Share (Stock Dividend):

Bonus share is also called as the stock dividend. Bonus shares are issued by the Co. when they
have low operating cash, but still want to keep the investors happy. Each equity shareholder
receives a certain number of additional shares depending on the number of shares originally
owned by the shareholder.
For example, if a person possesses 10 shares of Company A, and the company declares bonus
share issue of 1 for every 2shares, the person will get 5 additional shares in his account. From
companys angle, the no. of shares and issued capital in the company will increase by 50% (1/2
shares).

1
Avtar Singh, Company Law, pp.318, (16th ed., 2013)
2
Section 2(35), Companies Act, 2013
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Scrip dividend:
A company may not have sufficient funds to issue dividends in the near future, so instead, it
issues a scrip dividend, which is essentially a promissory note to pay shareholders at a later
specific date.

Liquidating dividend:
This may be a precursor to shutting down the business and the board of directors may wish to
return the capital originally contributed by shareholders as a dividend. Liquidating dividends are
paid after satisfying all corporate debts.

Regular Dividend (Final Dividend).

By Regular dividend we mean regular dividend paid annually, proposed by the board of directors
and approved by the shareholders in general meeting. It is also known as final dividend because
it is usually paid after the finalization of accounts. It is generally paid in cash as a percentage of
paid up capital, say 10 % or 15 % of the capital. Sometimes, it is paid per share. No dividend is
paid on calls in advance or calls in arrears. The company is, however, authorised to make
provisions in the Articles prohibiting the payment of dividend on shares having calls in arrears.3

Interim Dividend.
If Articles so permit, the directors may decide to pay dividend at any time between the two
Annual General Meeting before finalizing the accounts. It is generally declared and paid when
company has earned heavy profits or abnormal profits during the year and directors which to pay
the profits to shareholders. Such payment of dividend in between the two Annual General
meetings before finalizing the accounts is called Interim Dividend. No Interim Dividend can be
declared or paid unless depreciation for the full year (not proportionately) has been provided for.
It is, thus, an extra dividend paid during the year requiring no need of approval of the Annual
General Meeting. It is paid in cash.

3
Types of dividend, http://businessjargons.com/types-of-dividend.html, Accessed on 21/10/2016 at 20:12.
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Bond Dividends.
In rare instances, dividends are paid in the form of debentures or bounds or notes for a long term
period. The effect of such dividend is the same as that of paying dividend in scrips. The
shareholders become the secured creditors is the bonds has a lien on assets.

Property Dividend.
Sometimes, dividend is paid in the form of asset instead of payment of dividend in cash. The
asset could be any of this equipment, inventory, vehicle or any other asset. The value of the asset
has to be restated at the fair value while issuing a property dividend. The distribution of
dividend is made whenever the asset is no longer required in the business such as investment or
stock of finished goods.
But, it is, however, important to note that in India, distribution of dividend is permissible in the
form of cash or bonus shares only. Distribution of dividend in any other form is not allowed.4

4
Four types of dividend policy, http://managementation.com/types-of-dividend-policy/, Accessed on 23/10/2016
at 22:22.
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CHAPTER 2: CLASSIFICATION OF DIVIDEND

Dividends can be classified into different categories:-

(a) Sources from which they are derived: e.g.:

(i) Retained Earnings; (Profits generated by a company that are not distributed to stockholders
(shareholders) as dividends but are either reinvested in the business or kept as a reserve for
specific objectives (such as to pay off a debt or purchase a capital asset)

(ii) Current Profit; (Current Profit means profit after tax. Current profits are included in
accumulated profits in section 2(22) (e) of I.T. Act 1961. The expression accumulated
profits was defined in the 1961 Act so as to include current profit upto date of distribution or
payment.)5

(b) Medium in which they are distributed; e.g:

(i) Cash Dividend; (This is a payment made by a company out of its earnings to investors in the
form of cash and results in outflow of funds from the firm. Cash dividends transfer the economic
value from the company to the shareholders instead of the company using the money for
operations. The firm should, therefore, have adequate cash resources at its disposal or provide for
such resources so that its liquidity position is not adversely affected on account of distribution of
dividends in cash. Cash dividends indeed provide shareholders with regular income on their
investment along with exposure to capital appreciation.)

(ii) Share Dividend ,i.e Bonus Shares; (Bonus shares are additional shares given to the current
shareholders without any additional cost, based upon the number of shares that a shareholder
owns. These are companys accumulated earnings which are not given out in the form of
dividends, but are converted into free shares.)6

5
Understanding deemed dividend, http://taxguru.in/income-tax/understanding-deemed-dividend-latest-case-
laws.html, Accessed on 28/10/2016 at 18:30.
6
Procedure of issue of shares, http://taxguru.in/company-law/impact-companies-act-2013-rules-bonus-issue-
shares.html, Accessed on 23/10/2016 at 19:22.
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(c) The regularity with which they are paid; e.g.:

(i)Interim Dividend; (The Board of Directors of a company may declare interim dividend during
any financial year of the surplus in the profit and loss account and out of profits of the financial
year in which such interim dividend is sought to be declared. In case the company has incurred
loss during the current financial year up to the end of the quarter immediately preceding the date
of declaration of interim dividend, such interim dividend shall not be declared at a rate higher
than the average dividends declared by the company during the immediately preceding three
financial years. {Section 123(3)}.This restriction ensures financial prudence).7

(ii)Annual Dividend, i.e Regular Dividend; (By annual dividend we mean regular dividend
paid annually, proposed by the BOD and approved by the shareholders in general meeting. It is
also known as final dividend because it is usually paid after the finalization of accounts.)

According to Sect. 205 (3) of the Companies Act, dividend must be paid in cash except when the
company decides to capitalize profits/reserves by issuing fully paid up bonus shares or making
partly paid up shares into fully paid up. That is Scrip Dividends cannot be paid and it is 110
longer legal in India.

7
The Companies Act 2013- Provision relating to dividend payment, http://www.caclubindia.com/articles/the-
companies-act-2013-provisions-relating-to-dividend-payment-19241.asp, Accessed on 22/10/2016 at 17:23.
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CHAPTER 3: IMPACT OF DIVIDEND IN MARKET

For investors, dividends serve as a popular source of investment income. For the issuing
company, they are a way to redistribute profits to shareholders as a way to thank them for their
support and to encourage additional investment. Dividends also serve as an announcement of the
company's success. Because dividends are issued from a company's retained earnings, only
companies that are substantially profitable issue dividends with any consistency. Though some
companies may issue dividends to create the illusion of profitability, this is the exception rather
than the rule.

If a company has 1 million shares outstanding and declares a 50-cent dividend, then an investor
with 100 shares receives $50 and the company pays out a total of $500,000. If it instead issues a
10% stock dividend, the same investor receives 10 additional shares, and the company doles out
100,000 new shares in total.8

When a dividend is paid, the total value is deducted from a company's retained earnings.
"Retained earnings" refers to the total amount of profit a company has accumulated over time
that has not been put to other uses. Essentially, it is the amount of money a business has on
account that it can use to pay dividends or fund growth projects.9

Example:- Pawan Hans Ltd.

It was incorporated on 15 October 1985 as the Helicopter Corporation of India (HCI), the
country's national helicopter company with the objective of providing helicopter support services
to the oil sector for its off-shore exploration operations, services in remote areas and charter
services for promotion of tourism. It is a government owned enterprise with 78.5% in

8
G.K. Kapoor & Sanjay Dhamija, Company Law, pp.214 (19th ed., 2015)
9
How dividend work, http://www.investopedia.com/articles//091015/how-dividends-affect-stock-prices.asp,
Accessed on 24/10/2016 at 21:34
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government hands & 21.5% with ONGC. ONGC has upped its stake to 49% recently, a move
that will see the equity base of PHL being enhanced to 245 crore from the existing 113 crore.10

The Minister for Civil Aviation P. Ashok Gajapathi Raju received a cheque of Rs.3,95,84,735/-
from Dr. B.P. Sharma, Chief Managing Director, Pawan Hans Ltd, as dividend for the year
2014-15. R.N. Choubey, Secretary, Civil Aviation and other senior officials of the Ministry of
Civil Aviation and Pawan Hans were also present on the occasion. Pawan Hans has declared a
dividend of Rs. 7.76 crores for the financial year 2014-15. A cheque of Rs. 3, 80, 15,265 has also
been paid to ONGC as being 49% shareholder of PHL.11

Hero Motocorp Ltd., formerly Hero Honda.

It is an Indian motorcycle and scooter manufacturer based in New Delhi, India. The company is
the largest two wheeler manufacturer in India. In 2010, when Honda decided to move out of the
joint venture, Hero Group bought the shares held by Honda.12

For the year ending March 2016, Hero Motocorp has declared an equity dividend of 3600.00%
amounting to Rs 72 per share. At the current share price of Rs 3145.40 this results in a dividend
yield of 2.29%.

The company has a good dividend track report and has consistently declared dividends for the
last 5 years.13

10
Pawan Hans declares 7.76 Crores as Dividend, http://pib.nic.in/newsite/PrintRelease.aspx?relid=134671
Accessed on 22/10/2016 at 17:34
11
Pawan Hans pays dividend to GOI, http://www.thenewsmanofindia.com/?m=201601&paged=2, Accessed on
21/10/2016 at 23:22.
12
Hero Motocorp declares interim dividend of Rs. 40 per share, http://www.business-standard.com/article/pti-
stories/hero-motocorp-declares-interim-dividend-of-rs-40-per-share-116031000446_1.html accessed last on
23/10/2016 at 5:55, Accessed on 21/10/2016 at 23:12.
13
Hero Motocorp, http://www.moneycontrol.com/company-facts/heromotocorp/dividends/HHM, Accessed on
22/10/2016 at 22:42.
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CHAPTER 4: CONCLUSION
After going through various books, online materials and other data sources, the researcher have
concluded that his hypothesis is true i.e. Dividend is a return on the share capital subscribed for
and to its shareholders by a company. It is one of the important ways in which the companies
communicate the financial health and the shareholder value. In other words, Dividends are
distributions of company earnings to the shareholders. They can be in the form of cash, stock, or
property. Most unrelated investors (not directly involved with the day-to-day operations of the
business) probably prefer to receive cash dividends. After all, who doesnt like cash? However,
stock dividends can be quite profitable in the long run when investors finally get around to
selling the shares they receive as stock dividends. Through a distribution from their earnings,
companies indicate a positive future and a strong performance. The ability and the willingness of
a company to pay stable dividends over a good period of time and even increase them steadily
gives a good picture about the fundamentals of the company.

So, we can say that a dividend is a distribution of part of the earnings of the company to its
equity shareholders. The board of directors of the company decides the dividend amount to be
paid out to the shareholders. Mostly, a dividend is stated as an amount each equity share gets. It
can also be stated as a percentage of the current market price.
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BIBLIOGRAPHY

PRIMARY SOURCE

STATUTE: -

Companies Act, 2013

SECONDARY SOURCE: -

BOOKS: -

Avtar Singh, Company Law, pp.318, (16th ed., 2013)

Dr. Rega Surya Rao, Lectures On Company Law, pp.121, (2nd ed., 2015)

WEBSITES:-

1. http://businessjargons.com/types-of-dividend.html
2. http://managementation.com/types-of-dividend-policy/
3. http://taxguru.in/income-tax/understanding-deemed-dividend-latest-case-laws.html,
4. http://taxguru.in/company-law/impact-companies-act-2013-rules-bonus-issue-
shares.html,
5. http://www.caclubindia.com/articles/the-companies-act-2013-provisions-relating-to-
dividend-payment-19241.asp
6. http://www.investopedia.com/articles/investing/091015/how-dividends-affect-stock-
prices.asp,
7. http://www.moneycontrol.com/company-facts/heromotocorp/dividends/HHM