INTRODUCTION

The term Dividend refers to that part of the profits of a company which is distributed

amongst its shareholders. It may therefore be defined as the return that a shareholder

gets from the company, out of its profits, on his share holdings. “According to the

Institute of Charted Accounts of India” dividend is a “Distribution to shareholder out

of profits or reserves available for this purpose”.

The Dividend policy has the effect of dividing its net earnings into two Parts:

Retained earnings and dividends. The retained earnings provide funds two finance the

long-term growth. It is the most significant source of financing a firm’s investment in

practice. A firm, which intends to pay dividends and also needs funds to finance its

investment opportunities, will have to use external sources of finance. Dividend

policy of the firm thus has its effect on both the long-term financing and the wealth of

shareholders. The moderate view, which asserts that because of the information value

of dividends, some dividends should be paid as it may have favorable affect on the

value of the share.

The theory of empirical evidence about the dividend policy does not matter if we

assume a real world with perfect capital markets and no taxes. The second theory of

dividend policy is that there will definitely be low and high payout clients because of

the differential personal taxes. The majority of the holders of this view also show that

balance, there will be preponderous low payout clients because of low capital gain

taxes. The third view argues that there does exist an optimum dividend policy. An

optimum dividend policy is justified in terms of the information in agency costs.

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Dividend Decisions- Theoretical Frame Work: Dividend Practices

and Models a Conceptual Framework

Dividend refers to that portion of a firm’s net earnings, which are paid out to the

shareholders. Our focus here is on dividends paid to the ordinary shareholders

because holders of preference shares are entitled to a stipulated rate of dividend.

Moreover, the discussion is relevant to widely held public limited companies, as the

dividend issue does not pose a major problem for closely held private limited

companies, since dividends are destroyed out of the profits, the alternative to the

payment of dividends is the retention of earning profits. The retained earning

constitutes an accessible important source and financing the investment requirements

of firms. There is, thus a type of inverse relationship between retained earnings and

cash dividends: larger retentions, lesser dividends smaller retentions, larger dividends.

Thus, the alternative uses of the not earnings-dividends and retained earnings are

competitive and conflicting.

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

plugging them back into the business. The choice would obviously hinge on the effect

of the decision on the maximizations of shareholders wealth. Given the objective of

financial management of maximizing present values, the firm should be guided by the

considerations as to which alternative use is consistent with the goal of wealth

maximization. That is, the firm would be well advised to use the net profits for paying

dividends to the shareholders if that payment will lead to the maximization of wealth

of the owners. If not, the firm should rather retain theme to finance investment

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programmers. The relationship between dividends and value of the firm should

therefore, be the decision criterion.

There are however, conflicting opinions regarding the impact of dividends on the

valuation of a firm. According to one school of thought, dividends are irrelevant so

that the amount of dividends paid has no effect on the, valuation of a firm.

On the other hand, certain theories consider the dividend decision as relevant to the

value of the firm measured in terms f the market price of the shares.

The purpose of thus report is, therefore, to present a critical analysis of some

important theories representing these two schools of thought with a view to

illustrating the relationship between dividend policy and the valuation of a firm. The

theories, which support the relevance hypothesis, are examined in the report.

OVERVIEW OF DIVIDEND DECISION

Dividend decision refers to the policy that the management formulates in regard to

earnings for distribution as dividends among shareholders.

Dividend decision determines the division of earnings between payments to

shareholders and retained earnings.

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

company about the amount and timing of any cash payments made to the company's

stockholders. The Dividend decision is an important part of the present day corporate

world. The Dividend decision is an important one for the firm as it may influence its

capital structure and stock price. In addition, the Dividend decision may determine

the amount of taxation that stockholders pay.

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FACTORS INFLUENCING DIVIDEND DECISIONS

There are certain issues that are taken into account by the directors while making the

dividend decisions:

 Free Cash Flow

 Signaling of Information

 Clients of Dividends

FREE CASH FLOW THEORY (sub headings should be 12, major

headings should be 14)

The free cash flow theory is one of the prime factors of consideration when a

dividend decision is taken. As per this theory the companies provide the shareholders

with the money that is left after investing in all the projects that have a positive net

present value.

SIGNALING OF INFORMATION

It has been observed that the increase of the worth of stocks in the share market is

directly proportional to the dividend information that is available in the market about

the company. Whenever a company announces that it would provide more dividends

to its shareholders, the price of the shares increases.

CLIENTS OF DIVIDENDS

While taking dividend decisions the directors have to be aware of the needs of the

various types of shareholders as a particular type of distribution of shares may not be

suitable for a certain group of shareholders.

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It has been seen that the companies have been making decent profits and also reduced

their expenditure by providing dividends to only a particular group of shareholders.

FORMS OF DIVIDEND

 Scrip Dividend- An unusual type of dividend involving the distribution of

promissory notes that calls for some type of payment at a future date.

 Bond Dividend- A type of liability dividend paid in the dividend payer's

bonds.

 Property Dividend- A stockholder dividend paid in a form other than cash,

scrip, or the firm's own stock.

 Cash Dividend- A dividend paid in cash to a company's shareholders ,

normally out of the its current earnings or accumulated profits

 Optional Dividend- Dividend which the shareholder can choose to take as

either cash or stock.

SIGNIFICANCE OF DIVIDEND DECISION

 The firm has to balance between the growth of the company and the

distribution to the shareholders

 It has a critical influence on the value of the firm

 It has to also to strike a balance between the long term financing

decision( company distributing dividend in the absence of any investment

opportunity) and the wealth maximization

 The market price gets affected if dividends paid are less.

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  Retained earnings helps the firm to concentrate on the growth, expansion and

modernization of the firm

 To sum up, it to a large extent affects the financial structure, flow of funds,

corporate liquidity, stock prices, and growth of the company and investor's

satisfaction.

FACTORS INFLUENCING THE DIVIDEND DECISION

 Liquidity of funds

 Stability of earnings

 Financing policy of the firm

 Dividend policy of competitive firms

 Past dividend rates

 Debt obligation

 Ability to borrow

 Growth needs of the company

 Profit rates

 Legal requirements

 Policy of control

 Corporate taxation policy

 Tax position of shareholders

 Effect of trade policy

 Attitude of the investor group

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RESIDUAL DIVIDEND POLICY

It is used by companies, which finance new projects through equity that is internally

generated. In this policy, the dividend payments are made from the equity that

remains after all the project capital needs are met. This equity is also known as

residual equity. It is advisable that those companies, which follow the policy of

residual dividend, should maintain a balanced debt/equity ratio. If a certain amount

of money is left after all forms of business expenses then the corporate houses

distribute that money among its shareholders as dividends.

The companies that follow a residual dividend policy pay dividends only if other

satisfactory opportunities and sources of investment of funds are not available. The

main advantage of a residual dividend policy is that it reduces to the issues of new

stocks and flotation costs. The drawback of this policy mainly lies in the facts that

such a policy does not have any specific target clients. Moreover, it involves the risk.

Before opting for the policy of residual dividend, the earnings that need to be

retained to back up the capital budget have to be calculated. Then, the earnings that

are left can be paid out in the form of dividends to the shareholders. Thus, the issue of

new equities gets considerably reduced and this in turn leads to reduction in signaling

and flotation costs. The amount payable as dividend fluctuates heavily if this policy is

practiced. When the total value of productive investments is in excess of the total

value of retained earnings and sustainable debt, the companies feel the urge to exploit

the opportunities thus created to postpone a few investment schemes.

CALCULATION OF RESIDUAL DIVIDEND POLICY

Let's suppose that a company named CBC has recently earned $1,000 and has a strict

policy to maintain a debt/equity ratio of 0.5 (one part debt to every two parts of

equity). Now, suppose this company has a project with a capital requirement of $900.

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In order to maintain the debt/equity ratio of 0.5, CBC would have to pay for one-third

of this project by using debt ($300) and two-thirds ($600) by using equity. In other

words, the company would have to borrow $300 and use $600 of its equity to

maintain the 0.5 ratio, leaving a residual amount of $400 ($1,000 - $600) for

dividends. On the other hand, if the project had a capital requirement of $1,500, the

debt requirement would be $500 and the equity requirement would be $1,000, leaving

zero ($1,000 - $1,000) for dividends. If any project required an equity portion that

was greater than the company's available levels, the company would issue new stock

ARGUMENTS AGAINST DIVIDENDS

First, some financial analysts feel that the consideration of a dividend policy is

irrelevant because investors have the ability to create "homemade" dividends. These

analysts claim that this income is achieved by individuals adjusting their personal

portfolios to reflect their own preferences. For example, investors looking for a steady

stream of income are more likely to invest in bonds (in which interest payments don't

change), rather than a dividend-paying stock (in which value can fluctuate). Because

their interest payments won't change, those who own bonds don't care about a policy.

The second argument claims that little to no dividend payout is more favorable for

investors. Supporters of this policy point out that taxation on a dividend are higher

than on a capital gain. The argument against dividends is based on the belief that a

firm that reinvests funds (rather than paying them out as dividends) will increase the

value of the firm as a whole and consequently increase the market value of the stock.

According to the proponents of the no dividend policy, a company's alternatives to

paying out excess cash as dividends are the following: undertaking more projects,

repurchasing the company's own shares, acquiring new companies and profitable

assets, and reinvesting in financial assets

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ARGUMENTS FOR DIVIDENDS

In opposition to these two arguments is the idea that a high dividend payout is

important for investors because dividends provide certainty about the company's

financial well-being; dividends are also attractive for investors looking to secure

current income. In addition, there are many examples of how the decrease and

increase of a dividend distribution can affect the price of a security. Companies that

have a long-standing history of stable dividend payouts would be negatively affected

by lowering or omitting dividend distributions; these companies would be positively

affected by increasing dividend payouts or making additional payouts of the same

dividends. Furthermore, companies without a dividend history are generally viewed

favorably when they declare new

dividend. .

The residual dividend policy is more suitable for the government concerns because

they mainly aim for creation of value and maximization of wealth and therefore they

have to make use of every value added investment opportunity that comes on their

way. A little change in the basic postulates of the policy usually occurs when it is

applied to the government sector because it takes into its purview the government's

liking for dividends rather than capital gains.

The dividend discount model is used for the purpose of equity valuation. There are

different types of dividend discount model and all these models are very useful. The

usefulness of the DDM (dividend discount model) depends on the application of the

same.

A sensitivity analysis of the dividend discount model is very necessary because the

model itself is highly sensitive towards the presumptions regarding the growth and

discount rates.

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 The dividend discount model is used by huge number of professionals because the

model is able to illustrate the difference between reality and theories through different

examples. But at the same time it should also be remembered that there are some

important factors like the realistic transition phases and some others.

There are several types of dividend discount model. Following are the two most

preferred types of DDM:

 STABLE MODEL: According to this model, value of stock is equal to

DPS(1) / Ks - g. This model is appropriate for the firms with long term steady

growth. These types of firms pretend to grow simultaneously with the long

term nominal development rate of the economy.

 TWO-STAGE MODEL: This particular model tries to bring out the

difference between the theory and the reality. It simply pretends that the

company would go through several good and bad periods. According to this

model, the company that is going through a high-growth period is bound to

face a decline in the growth rate. After that downfall the company is expected

to experience a stable growth phase.

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1.1 NEED FOR THE STUDY

The principal objective of corporate financial management is to maximize the market

value of the equity shares. Hence the key question of interest to us in this study is,

“What is the relationship between dividend policy and market price of equity shares?”

Most of the discussion on dividend of dividend policy and firm value assumes that the

investment decision of a firm is independent of its dividend decision. The need for

this study arise from the above raised question and the most controversial and

unresolved doubts about the relevance of irrelevance of the dividend policy.

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1.2 OBJECTIVES OF THE STUDY

1. To understand the importance of the dividend decision and their impact on the

firm’s capital budgeting decision.

2. To know the various dividend policies followed by the firm.

3. To understand the theoretical backdrop of the various divided theories.

4. To compare the various theories of dividend with reference to their

assumptions and conclusions.

5. To know whether the dividend decisions have an impact on the market value

of the firm’s equity.

6. To see the various dividend policies of the INDUSTRIAL CREDIT AND

INVESTMENT CORPORATION OF INDIA (ICICI).

7. To derive the empirical evidence for the relevance theories of dividends

WALTER’S MODEL AND GORDON’S MODEL

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1.3 SCOPE OF THE STUDY

Investment Decision Investment decision relates to selections of asset in which funds

will be invested by a firm. The asset that can be acquired by a firm may be long term

asset and short term asset. Investment Decision with regard to long term assets is

called capital budgeting. Decision with regard to short term or current assets is called

working capital management.

Dividend Decision A firm distributes all profits or retain them or distribute a portion

and retain the balance with it. Which course should be allowed? The decision depends

upon the preference of the shareholders and investment opportunities available to the

firm.

Dividend Decision Dividend decision has a strong influence on the market prize of

the share. So the dividend policy is to be determined in terms of its impact on

shareholder’s value. The optimum dividend policy is one which maximizes the value

of shares and wealth of the shareholders.

Dividend Decision The financial manager should determine the optimum pay out ratio

I.e. the proportions of net profit to be paid out to the shareholders. The above three

decisions are inter related. To have an optimum financial decision the three should be

taken jointly.

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1.4 IMPORTANCE OF THE STUDY:

The dividend policy of a firm determines what proportion of earnings is paid to

shareholders by the way of dividends and what proportion is ploughed back in the

firm for reinvestment purposes. If a firm‘s capital budgeting decision is independent

of its dividend of its dividend policy, a higher dividend payment will entail a greater

dependence on external financing. On the other hand, if a firm’ s capital budgeting

decision is dependent on its dividend decision, a higher payment will cause shrinkage

of its capital budget and vice versa. In such a case the dividend policy has a bearing

on the capital budgeting decision.

Any firm, whether a profit making or non-profit organization has to take certain

capital budgeting decision. The importance and subsequent indispensability of the

capital budgeting decision has led to the importance of the dividend decisions for the

firms.

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1.5 RESEARCH METHDOLOGY

Methodology is a systematic procedure of collecting information in order to analyze

and verify a phenomenon. The collection of information is done through two principle

sources. They are as follows:

Primary Data

It is the information collected directly without any references. In this study it is

gathered through interviews with concerned officers and staff, either individually or

collectively, some of the information has been verified or supplemented with personal

observation conducting personal interviews with the concerned officers of finance

department of ICICI Bank.

Secondary data

The secondary data was collected from already published sources such as, pamphlets

of annual reports, returns and internal records, reference from text books and journals

relating to financial management.

The data collection includes

(a) Collection of required data from annual records of ICICI Bank.

(b) Reference from text books and journals relating to dividend decisions.

SAMPLE OF THE STUDY

 A sample is a part of the target population, carefully selected to represent that

population. When researchers undertake sampling studies, they are interested

in estimating one or more population values and/ or testing one or more

statistical hypothesis.

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 The sample of our study consists of the financial data of INDUSTRIAL

CREDIT AND INVESTMENT CORPORATION OF INDIA (ICICI) for the

past five financial years.

DATABASE FOR THE STUDY

 The sources of information are classified to two-primary data and secondary

data. The data collected by the researcher and agent known to the researcher,

especially to answer the research question, is known as the primary data.

Studies made by others for their own purposes represent secondary data to the

researcher.

 Secondary sources can usually be found more quickly and cheaply than

primary data especially when national and international statistics are needed.

Similarly, data about distant places often can be collected more cheaply

through secondary sources.

 The data used for this study is mostly secondary data. The information

regarding the financial data of the past five years has been collected from the

various website like the indiainfoline.com, the web portals of the respective

company and other related sites.

PERIOD OF THE STUDY

 The period of any research is the period which the data has been collected and

analyzed. The period of this study has been limited to five financial years

starting from 01-04-2007 to 31-03-2011.

SAMPLING DESIGN

 A variety of sampling techniques is available. The one selected depends on the

requirements of the project and its objectives. The various methods of

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 sampling have been classified basing on the representation – probability or

non probability and on element selection-restricted.

 The sampling technique selected for conducting this study is judgment

sampling. This is a restricted and non- probabilistic method of sampling ;

where the sample consisting of one company has been selected on basis of the

past dividend payment made by the company.

TOOLS OF COLLECTING DATA

 There are various ways of collecting the data. Some of the most commonly

used ones are telephone interview, personal interview and, questionnaire

administering. These are basically the methods for collecting the primary data

the data required for conducting this study it has been collected from the

various web portals as the data is basically secondary in nature.

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1.6 HYPOTHESIS FOR THE STUDY

A proposition is a statement about concepts that may be judged as true or false if it

refers to observable phenomena. When a proposition is formulated for empirical

testing, we call it a hypothesis. Hypotheses have also been described as statements in

which we assign variables to cases. A case id defined in this sense as the entity or the

thing the hypothesis. Talks about The variable are the characteristic, trait, or attribute

that, in the hypothesis, are imputed to the case. In research, a hypothesis serves

several important functions. The most important is that it guides the directions of the

study. It defines facts that are relevant and those that are not: in doing so, it suggests

which form of research design is likely to be most important. A final role of the

hypothesis is to provide a framework for organizing the conclusions of that result.

In classical tests of significance two kinds of hypotheses are used. The null

hypothesis, which is a statement that they’re no difference, exists between the

parameter and the statistic being compared to it. A second or alternative hypothesis is

the logical opposite of the null hypothesis.

The null hypothesis in this study is as following:

‘The dividend decisions are relevant to the capital budgeting decisions of the firm’s

belonging to the cement industry and the in turn effect the market value of the firms’

equity.

To prove this hypothesis we shall try to prove the two theories of relevance of

dividend-Walter’s model and Gordon’s model

The alternate hypothesis in this case shall be as follows:

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The dividend decisions are irrelevant to capital budgeting decisions of the firm

belonging to the INDUSTRIAL CREDIT AND INVESTMENT CORPORATION OF

INDIA (ICICI) and they in turn have no effect on the market value of the firm equity.

IRRELEVANCE OF DIVIDENDS

MODIGLIANI AND MILLER MODEL

The crux of the argument supporting the irrelevance of dividends to Valuation is that

the dividend policy of a firm is a part of its financing decision. As a part of the

financing decision, the dividend policy of the firm is a residual decision and dividends

are passive residuals.

CRUX OF THE ARGUMENT

The crux of the MM position on the irrelevance of dividend is the arbitrage argument.

The arbitrage process, involves a swathing and balancing operation. In other words,

arbitrage refers to entering simultaneously into two transactions here are the acts of

paying out dividends and raising external funds either through the sale of new shares

or raising additional loans-to finance investment programmes. Assume that a firm has

some investment opportunity.

Given its investment decision, the firm has two alternatives: (i) it can passiceretain is

earnings to finance the investment programmed; (ii) or distribute the earnings to he

shareholders as dividend and raise an equal amount externally through the sale of new

shares/bonds for the purpose. If the firm selects the second alternative, arbitrage

process is involved, in that payment of dividends is associated with raising funds

through other means of financing, the effect of dividend payment on Shareholders’

wealth will be exactly offset by the effect of raising additional share capital.

When dividends are paid to the shareholders, the market price of the shares will

decrease. What the investors as a result of increased dividends gain will be neutralized

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completely vie the reduction in the terminal value of the shares. The market price

before and after the payment of dividend would be identical. The investors according

to Modigliani and Miller, would, therefore, be indifferent between dividend and

retention of earnings. Since the shareholders are indifferent, the wealth would not be

affect by current and future dividend decisions of the firm. It would depend entirely

upon the expected future earnings of the firm.

There would be no difference to the validity of the mm premise, if external funds

were raised in the form of debt instead of equity capital. This is because of their

indifference between debt and equity witty retest to leverage. The cost of capital is

independent of leverage and the cost of debt is the same as the real cost of equity.

Those investors are indifferent between dividend and retained earnings imply that the

dividend decision is irrelevant. The arbitrage process also implies that the total market

value plus current dividends of two firms, which are alike in all respects except D/P

ratio, will be identical. The individual shareholder can retain and invest his own

earnings as we;; as the firm would. With dividends being irrelevant, a firm’s cost of

capital would be independent of its D/P ratio.

Finally, the arbitrage process will ensure that-under conditions of uncertainty also the

dividend policy would be irrelevant. When two firms are similar in respect of business

risk, prospective future earnings and investment policies, the market price of their

shares must be the same. This, mm argues, is wealth to less wealth. Differences in

current and future dividend policies cannot affect the market value of the two firms as

the present value of prospective dividends plus terminal value is the same.

A CRITIQUE

Modigliani and Miller argue that the dividend decision of the firm is irrelevant in the

sense that the vale the firm is independent of it. The crux of their argument is that the

investors are indifferent between dividend and retention of earnings. This is mainly

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because of the balancing natures internal financing (retained earnings) and external

financing (raising of funds externally) consequent upon distribution earnings to

finance investment program’s. Whether the mm hypotheses provides a satisfactory

framework for the theoretical relationship between dividend decision and valuation

will depend, in the ultimate analysis on whether external and internal financing really

balance each other. This in turn, depends upon the critical assumptions stipulated by

them. Their conclusions, it may be noted, under the restrictive assumptions, a

logically consistent and intuitively appealing. But these assumptions are unrealistic

and untenable in practice As a result, the conclusion that dividend payment and other

methods of financing exactly offset each other and, hence, the irrelevance of

dividends is not a practical proposition’ it is merely of theoretical relevance.

The validity of the MM Approach is open to question on two Coutts:

(i)Imperfection of capital market, and (ii) Resolution of uncertainty

Market Imperfection: Modigliani and Miller assume that capital markets are perfect.

This implies that there are no taxes; flotation costs do not exist and there is absence of

transaction costs. These assumptions ate untenable in actual situations.

A. TAX EFFECT

An assumption of the mm hypothesis is that there are no taxes. It implies that

retention of earnings (internal financing) and payment of dividends (external

financing) are, from the viewpoint of law treatment, on an equal footing the investors

would find both forms of financing equally desirable. The tax liability of the

investors, broadly speaking, is of two types: (i) tax on dividend income, and (ii0

capital gains. While the first type of tax is payable by the investors when the firm

pays dividends, the capital gains tax is related to retention of earnings. From an

operational viewpoint, capital gains tax is (i) lower thebe the tax or dividend income

and (ii) it becomes payable only sheen shares are actually sold, than is, it is a differed

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till the actual sale of the shares. The types of taxes, MM position would imply

otherwise. The different tax treatment of div dined and capital gains means that with

the retention of earnings the shareholders. For example, a firm pays dividends to the

shareholders out of the retained earnings; to finance its investment program’s it issues

rights shares. The shareholders would have to pay tax on the dividend income at rates

appropriate to their income bracket. Subsequently, they would purchase the shares of

the firm. Clearly, than tax could have been avoided if, instead of paying dividend, the

earnings were retained if, however the investors required funds, they could sell a part

of their investments, in which case they will pay tax (capital gains) at a lower rate.

There is a definite advantage to the investors Owing to the tax differential in dividend

and capital gains tax and , therefore, they can be expected to prefer retention of

earnings.

B.FLOTATION COSTS

Another assumption of a perfect capital market underlying the MM Hypothesis is

dividend irrelevance is the absence of flotation costs. The term ‘flotation cost’ refers

to the cost involved in raising capital from the market for instance, underwriting

commission, brokerage and other expenses. The presence of flotation costs affects the

balancing nature of internal (retained earnings) and external (dividend payments)

financing. The MM position, it may be recalled, agues that given the investment

decision of the firm, external funds would have to be raised, equal to the amount of

dividend, through the sale of new share to finance the investment programmed. The

two methods of financing are not perfect substitutes because of flotation costs. The

introduction of such costs implies that the net proceed from the sale of new shares

would be less than the face valid of the shares, depending upon their size.8 it means

tat to be able to make use of external funds, equivalent to the dividend payments, the

firms would have to sell shares for an amount in excess of retained earnings. In other

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words, external financing through sale of shares would be costlier than internal

financing via retained earnings. The smaller the size of the issue, the greater is the

percentage flotation cost. 9 To illustrate suppose the cost of flotation is 10per cent and

the retained earnings are Rs.900, In case dividends are paid, the firm will have to sell

shares worth Rs.100/- to raise funds are paid, the firm will have to sell shares worth

Rs.1000/- to raise funds equivalent or the retained earnings. That external financing is

costlier is another way of saying that firms would prefer to retain earnings rather tab

pay dividends and then raise funds externally.

C.TRANSACTION AND INCONVENIENCE COSTS

Yet another assumption, which is open to question, is that there are no transaction

costs in the capital market. Transaction costs refer to costs associated with the sale of

securities by the shareholder-investors. The no-transaction costs postulate implies that

if dividends are not paid (or earnings are retained), the investors desirous of current

income to meet consumption needs can sell a part of their holdings without incurring

any cost, like brokerage and so on. This is obviously an unrealistic assumption. Since

the sale of securities involves cost, to get current income equivalent to the dividend, if

paid, the investors would have to sell securities in excess of the income that they will

receive. Apart from the transaction cost, the sale of securities, as an alternative to

current income, is inconvenient to the investors. Moreover, uncertainty is associate

with the sale of securities. For all these reasons an investor cannot be expected, as

MM assume, to be indifferent between dividend and retained earnings. The investors

interested in current income would certainly prefer dividend payment to plugging

back of profits by the firm.

D.INSTITUTIONAL RESTRICTIONS

The dividend alternative is also supported by legal restrictions as to the type of

ordinary shares in which certain investors can invest for instance, the Life Insurance

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Corporation of India is permitted in terms of clauses I(a) to I(g) of section 27-A of the

Insurance Act, 1938, to invest in only such equity shares on which a dividend of not

less than 4 per cent including bonus has been paid for 5 years out of 7 years

immediately preceding. To be eligible for institutional investment, the companies

should pay dividends. These legal impediments therefore, favor dividends to retention

of earning. A variation of the legal requirement to pay dividends is to be found in the

case of the Unit Trust of India (UTI). The UTI is required in terms of the stipulations

governing its operation, to distribute at least 90 percent of its net income to unit

holder. It cannot invest more than 5 per cent of its inventible fund under the unit

schemes 1964 and 1971, in the shares of new industrial undertakings. The point is that

the eligible securities for investment by the UTI are assumed to be those that are on

the dividend payment list.

To conclude the discussion of market imperfections there are four factors, which

dilute the difference of investors between dividends and retained earnings. Of these,

flotation costs seem to favor retention of earnings on the other hand, the desire for

current income and, the related transaction and inconvenience costs, legal restrictions

as applicable to the eligible securities for institutional investment and tax example of

dividend income imply a preference of payment of dividends. In sum, therefore,

market importer implies that investors would like the company to retain earnings to

finance investment programs. The dividend policy is not irrelevant.

RESOLUTION OF UNCERTAINTY

A part from the market imperfection, the validity of the mm hypothesis, insofar as it

argues that dividends are irrelevant, is questionable under conditions of uncertainty.

MM hold, it would be recalled, the at dividend policy is as irrelevant under conditions

of uncertainty as, it is when prefect certainty is assumed. The MM hypothesis,

- 24 -
however, not tenable as investors cannot between dividend and retained earnings

under conditions of uncertainty. This can be illustrated with reference to four aspects:

(i) near vs. distant dividend; (ii) informational content of dividends; (in) preference

for current income; and (iv) sale of stock at uncertain price/under pricing.

i. NEAR VS DISTANT DIVIDEND

One aspect of the uncertainty situation is the payment of dividend now or at a later

data. If the earnings are used to pay dividends to the investors, they get immediate or

neat dividend if however, the net earnings are retained, and the shareholders would be

entitled to receive a return after some time in the form of an increase in the price of

shares (Capital gains) or bonus shares and so on. The dividends may, then, be referred

to as ‘distant-or-future’ dividends. The crux of the problem is: are investors indifferent

between immediate and future dividends. According to Gordon” investors are not

indifferent; rather, they would prefer near dividend to distant dividend the when it

would be payment of the investors cannot be precisely forecast. The longer the

distance in future dividend payment, the higher is the uncertainty to the shareholders.

The uncertainty increases the risk of the investors. The payment of immediate

dividend resolves uncertainty. The argument that near dividend is preferred over the

distant dividends involves the “bird-in-hand’ argument. This argument is developed in

some detail in the later part of this report, since current dividends are less risky than

future/distant dividends; shareholders would favors dividends to retained earnings.

ii. INFORMATIONAL CONTENT OF DIVIDENDS

Another aspect of uncertainty, very closely related to the first (i.e., Resolution of

uncertainty or the –bird-in-hand’ argument) is the informational content of dividend

argument. According to the latter argument, as the name suggests, the dividend

contains some information vital to the investors. The payment of dividend conveys to

the shareholders information relating to profitability of the firm.

- 25 -
The international content argument finds support in some empirical evidence. IT id

contended that changes in dividends convey more significant information than what

earnings announcements do. Further, the market reacts to dividend changes-prices rise

in response to a significant increase in dividends and fall when there is a significant

decrease or omission.

iii. PREFERENCE FOR CURRENT INCOME

The Third aspect of the uncertainty question to dividends is based on the desire of

investors for current income to meet c consumption requirements. The MM

hypothesis of irrelevance of dividends implies that in case dividends are not paid,

investors who prefer current income can sell a part of their holdings in the firm for the

purpose. But, under uncertainty conditions, the two alternatives are not on the same

footing because (i) selling a small fraction of holdings periodically is inconvenient.

that selling shares to obtain income, as an alterative to dividend, involves uncertain

price and inconvenience, implies that investors are likely to prefer current dividend.

The MM proposition would, therefore, not be valid because investors are not

indifferent.

iv. UNDER PRICING

Finally the MM hypothesis would also not be valid when conditions are assumed to

be uncertain because of the prices at which the firms can sell shares to raise funds to

finance investment program’s consequent upon the distribution of earnings to the

shareholders The irrelevance argument would valid provided the firm is able to sell

shares to replace dividends at the current price. Since the shares would have to be

offered to bedew investors, the firm can sell the shares only at a price below the

prevailing price.

RELEVANT THEORIES OF DIVIDENDS

- 26 -
In sharp contrast to the MM position, there are some theories that consider dividend

decisions to be an active variable in determining the value of a firm. The dividend

decision is, therefore, relevant. We critically examine below two theories representing

this notion:

i) WALTER’S MODEL

ii) GORDON’S MODEL

WALTER’S MODEL

Proposition Walter’s models support the doctrine that dividends are relevant. The

investment policy of a firm cannot be separated from its dividends policy and both

are, according to Walter, interlinked. The choice of an appropriate dividend policy

affects the value of an enterprise.

The key argument in support of the relevance proposition of Walter’s model is the

relationship between the return on a firm’s investment or its internal rate of return (r)

and its cost of capital or the required rate of return (Ke) The firm would have an

optimum dividend policy, which will be determined y the relationship of r and k. In

other words, if the return on investments exceeds the cost of capital, the firm should

refrain the earnings, whereas it should distribute the earnings to the shareholders in

case the required rate of return exceeds the expected retune on the firm’s investments.

The rationale is that if r > ke, the firm is able to earn more than what the shareholders

could by reinvesting, if the earnings are paid to them. The implication of r < ke is that

shareholders can earn a higher return by investing elsewhere.

Walter’s model, thus, relates the distribution of dividends (retention of earning) to

available investment opportunities. If a firm has adequate and profitable investment

opportunities, it will be able to earn more than what the investors expect so that r>ke.

Such firms may be called growth firms. For growth firms, the optimum dividend

policy would be given by a D/P ratio of zero.

- 27 -
That is to say the firm should plough back the entire earnings within the firm. The

market value of the shares will be maximized as a result. In contrast, if a firm does not

have profitable investment opportunities (when r < ke,) the shareholders will be better

off if earnings are paid out to them so as to enable them to earn a higher return by

using the funds elsewhere. In such a case, the market price of shares will be

maximized by the distribution of the entire earnings as dividends. A D\P ratio of 100

would give an optimum dividends policy.

Finally, when r= k (normal firms), it is a matter of indifference whether earnings are

retained or distributed. This is so because for all D/P ratios (ranging between zero and

100) the market price of shares will remain constant. For such firms, there is no

optimum dividend policy (D/P rario.)

ASSUMPTIONS

The critical assumptions of Walter’s Model are as follow:

1.All financing is done through retained earnings: external sources of funds like debt

or new equity capital are not used.

2. With additional investments undertaken, the firm’s business risk does not change. It

implies that r and k are constant.

3. There is no change in the key variable, namely, beginning earnings per

share, E. And dividends per share, D. The values of D and E may be changed in the

model to determine results, but any given value of E and D are assumed to remain

constant in determining results, but any given value of E and D are assumed to remain

constant in determining a given value.

4. The firm has perpetual (or very long) life.

LIMITATIONS

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The Walter’s model, one of the earliest theoretical models, explains the relationship

between dividend policy and value of the firm under certain simplified assumptions.

Some of the assumptions do not stand critical evaluation. IN the first place, the

Walter’s model assumes that exclusively retained earnings finance the firm’s

investment; no external financing is used. The model would be only applicable to all-

equity firms. Secondly, the model assumes that r is constant. This is not a realistic

assumption because when the firm makes increased investments, r also changes.

Finally as regards the assumption of constant risk complexion of firm has a direct

bearing on it. By assuming a constant Ke. Walter’s model ignores the effect of risk on

the value of the firm.

GORDON’S MODEL

Another theory, which contends that dividends are relevant, is Gordon’s model. This

model, which opines that dividend policy of a firm affects its value, is based on the

following assumptions:

ASSUMPTIONS

1. The firm is an all-equity firm. No external financing is used and exclusively

retained earnings finance investment program’s.

2. r and ke are constant.

3. The firm has perpetual life.

4. The retention ratio, once decided upon, is constant. Thus, the growth rate,

(g=br) is also constant.

5. Kc>br.

ARGUMENTS

It can be seed from the assumption of Gordon’s model that they are similar to those

of Walter’s model. As a result, Gordon’s model, like Walter’s contends that dividend

policy of the firm is relevant and that investors put a positive premium on current

- 29 -
incomes/dividends. The crux of Gordon’s arguments is a two-fold assumption: (i)

investors are risk averse, and (ii) they put a premium on a certain return and discount/

penalize uncertain returns.

As investors are rational, they want to avoid risk. The term risk refers to the

possibility of not getting a return on investment. The payment of current dividends

ipso facto completely removes any chance of risk. If, however, the firm retains the

earnings (i.e. current dividends is uncertain, both with respect to the amount as well as

the timing. The rational investors can reasonably be expected to prefer current

dividend. In other words, they would discount future dividends that are they would

placeless importance on it as compared to current dividend. The investors evaluate the

retained earnings as a risky promise. In case the earnings are retained, therefore the

market price of the shares would be adversely affected.

The above argument underlying Gordon’s model of dividend relevance is also

described as a bird-in-the-hand argument. “That a bird in hand is better than two in

the bush is based to the logic that what is available at present is preferable to what

may be available in the future. Basing his model on this argument, Gordon argues that

the futures are uncertain and the more distant the future is, the more uncertain in it is

likely to be. If, therefore, current dividends are withheld to retain profits, whether the

investors would at all receive them later is uncertain. Investors would naturally like to

avoid uncertainty. In fact, they would be inclined to pay a higher price for shares on

which current dividends are paid. Conversely, they would discount the value of shares

of a firm, which Postpones dividends. The discount rate would vary, as shown if

figure with the retention rate or level of retained earnings. The term retention ratio

means the percentage of earnings retained. It is the invers of D/P ratio. The omission

of dividends, or payment of low dividends, would lower the value of the shares.

- 30 -
Dividend Capitalization Model: According to Gordon, the market valued of a

share is equal to the present value of future streams of dividends. A simplified version

of Gordon’s model can be symbolically 18 expressed as

E ( 1-b )

-----------

Kc-br

Where p = price of a share

E= Earnings per share

b= Retention ratio or percentage of earnings retained.

1-b=D/P ratio, i.e. percentage of earnings distributes as dividends

Kc= Capitalization rate/cost of capital

Br=g=Growth rate= rate of return on investment of an all-equity firm

- 31 -
DIVIDEND POLICIES

In the light of the conflicting and contradictory viewpoints as also the available

empirical evidence, there appears to be a case for the proposition that dividend

decisions are relevant in the sense that investors prefer them over retained earnings

and they have a bearing on the firm’s objective of maximizing the shareholder’s

wealth.

FACTORS DETERMINIG THE DIVIDEND POLICIES

The factors determining the dividend policy of a firm may, for purpose of exposition,

be classified into: (a) Dividend payout (D/P) ratio, (b) Stability of dividends, (c)

Legal, contractual and internal constraints and restrictions, (d) Owner’s

considerations, (e) Capital market considerations, and (f) Inflation.

A. DIVIDEND PAYOUT (D/P) RATIO

A major aspect of the dividend policy of a firm is its dividend payout (D/P) ratio, that

is, the percentage share of the net earnings distributed to the shareholders as

dividends. The relevance of the D/P ratio, as a determinant of the dividend policy of a

firm, has been examined at some length in the preceding chapter. It is briefly

recapitulated here.

Dividend policy involves the decision to pay out earnings or to retain them for

reinvestment in the firm. The retained earnings constitute a source of financing. The

payment of dividends result in the reduction of cash adds, therefore, in a depletion of

total assets. In order to maintain the asset level, as well as finance investment

opportunities, the firm must obtain funds from the issue of additional equity or debt.

If the firm is unable to raise external funds, its growth would be affected. Thus,

dividend imply outflow of cash and lower future growth. In other words, the dividend

policy of the firm affects both the shareholders’ wealth and the long-term growth of

the firm. The optimum dividend policy should strike the balance between current

- 32 -
dividends and future growth which maximizes the price of the firm’s shares. The D/P

ratio of a firm should be determined with reference to two basic objectives-

maximizing the wealth of the firm’s owners and providing sufficient funds to finance

growth. These objectives are not mutually exclusive, but interrelate.

Given the objective of wealth maximization, the firm’s dividend policy (D/P ratio )

should be one, which can maximize the wealth of its owners in the ‘long run’. In

theory, it can be expected that the shareholders take into account the long-run effects

of D/P ratio that is, if the firm is paying low dividends and having high retentions,

they recognize the element of growth in the level of future earnings of the firm.

However, in practice, they have a clear-cut preference for dividends because of

uncertainty and imperfect capital markets. The payment of dividends can therefore, be

expected to affect the price of shares: a low D/P ratio may cause a decline in share

prices, while a high ratio may lead to rise in the market price of the shares.

Making a sufficient provision for financing growth can be considered a secondary

objective of dividend policy. Without adequate funds to implement acceptable

projects, the objective of wealth maximization cannot be achieved. The firm must

forecast its future needs for funds, and taking into account the external availability of

funds and certain market considerations, determine both

The amount of retained earnings needed and the amount of retained earnings available

after the minimum dividends have been paid. Thus, dividend payments should not be

viewed as a residual, but rather a required outlay after which any remaining funds can

be reinvested in the firm.

- 33 -
B. Stability of Dividends

The second major aspect of the dividend policy of a firm is the stability of dividends.

The investors favors stable dividend as much as they favors the payment of dividends

(D/P ratio).

The term dividend stability refers to the consistency or lack of variability in the

stream of dividends. In more precise terms, it means that a certain minimum amount

of dividend is paid out regularly. The stability of dividends can take any of the

following three forms: (i) constant dividend per share, (ii) constant/stable /P ratio, and

(iii) constant dividend per share plus extra dividend.

i. Constant dividend per share

According to this form of stable dividend policy, a company follows a policy of

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

Rs 10, firm may pay a fixed amount of, say Rs 2-50 as dividend. This amount would

be paid year after year, irrespective of ht level of earnings. oIn other words,

fluctuations in earnings would not affect the dividend payments. In fact, when a

company follows such a dividend policy, it will pay dividends to the shareholder even

when it suffers losses. A stable dividend policy in terms of fixed amount of dividend

per share does not, however, mean that the amount of dividend is fixed for all times to

come. The dividends per share are increased over the years when the earnings of the

firm increase and it is

Expected that the new level of earnings can be maintained. Of course, if the increase

to be temporary, the annual dividend remains at the existing level.

It can, thus, be seen that while the earnings may fluctuate from year to year, the

dividend per share is constant – To be able to pursue such a policy, a firm whose

- 34 -
earnings are not stable would have to make provisions in years when earnings are

higher for payment of dividends 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.

ii. CONSTANT PAYOUT RATIO

With constant/target payout ratio, a firm pays a constant percentage of net earnings as

dividend to the shareholders. In other words, a stable dividend payout ratio implies

that the percentage of earnings paid out each year is fixed. Accordingly, dividends

would fluctuate proportionately with earnings and are likely to be highly volatile in

the wake of wide fluctuations in the earnings of the company. As a result, when the

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

dividends, according to the target payout ratio, would be low or nil. To illustrate, if

affirm has a policy of 50 percent target payout ratios, its dividends will range between

Rs 5and zero per share on the assumption that the earnings per share are Rs 10 and

zero respectively. The relationship between the earnings per share (EPS) and dividend

per share (DPS) under the policy of constant payout ratio.

iii. STABLE RUPEE DIVIDEND PLUS EXTRA DIVIDEND

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

years of marked prosperity; additional or extra dividend is paid over and above the

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

pays the normal dividend per share. The policy of paying sporadic dividends may not

find favor with them. The alternative to the combination of a small regular dividend

and an extra dividend is suitable for companies whose earnings fluctuate widely. With

this method, a firm can regularly pay a fixed, though small, amount of dividend so

that there is no risk of being able to pay dividend to the shareholders. At the same
- 35 -
time, the investors can participate in the prosperity of the firm. By calling the amount

by which the dividends exceed the normal payments as extra. The firm, in effect,

cautions the investors-both existent as well as prospective- they should not consider it

as a permanent increase in dividends. It may, therefore, be noted that from the

investor’s viewpoint, the extra dividend is of a sporadic nature. What the investors

expect is that they should get an assured fixed amount as dividends, which should

gradually and consistently increase over the years. The most commendable from of

stable dividend policy is the constant dividend per share policy. There are several

reasons why investors why investors would prefer a stable dividend policy. There ate

several reasons why investors would prefer a stable dividend policy and pay a higher

price for a firm’s shares which observe stability in dividend payments.

DESIRE FOR CURRENT INCOME

A factor favoring a stable policy is the desire for current income by some investors.

Investors such as retired persons and windows, for example, view dividends as a

source of funds to meet their current living expenses. Such expenses are fairly

constant from period to period. Therefore, a fall in dividend will necessitate selling

shares to obtain funds to meet current expenses and, conversed, reinvestment of some

of the dividend income if dividends rise significantly. For one thing, many of the

income-conscious investors may not like to ‘dip into their principal’ for current

consumption. Moreover, either of the alternatives involves, inconvenience apart,

transaction costs in terms of brokerage, and other expenses. These costs are avoided if

the dividend stream is stable and predictable. Obviously, such a group of investors

may ve willing to pay a higher share price to avoid the inconvenience of erratic

dividend. Payments, which disrupt their budgeting. They would place positive utility

on stable dividends.

- 36 -
INFORMATION CONTENT

Another reason for pursing a stable dividend policy is that investor’s are thought to

use dividends and changes in dividends as a source of information about the firm’s

profitability. If investors know that the firm will change dividends only if the

management foresees a permanent earnings change, then the level of dividends

informs investors about the compacts expected earnings. Accordingly, the market

views the changes in the dividends of such a company as of a semi-permanent nature.

A cut in dividend implies poor earnings expectation; no change, implies earnings

stability; and a dividend increase, signifies the managements optimism about

earnings. On the other hand, a company that pursues an erratic dividend payout policy

does not provide any such information, thereby increasing the risk associated with the

shares. Stability of dividends, where such dividends are based upon long-run earning

power of the company, is, therefore, a means of reducing share-riskiness and

consequently increasing share value to investors.

REQUIREMENTS OF INSTITUTIONAL INVESTORS:

A third factor encouraging stable dividend policy is the Requirement of institutional

investors like Life Insurance Corporation of India and General Insurance Corporation

of India (insurance companies) and Unit Trust of India (mutual funds) and so on, to

invest in companies which have a record of continuous and stable dividend. These

financial institutions owing to the large size of their inventible funds, re[resent a

significant force in the financial markets and their demand for the company’s

securities can have an financial markets and their demand for the company’s securities

cha have an enhancing

Effect on its price and, there by on the shareholder’s wealth. A stale dividend policy is

a prerequisite to attract the inventive funds of these institutions. One consequential

- 37 -
impact of the purchase of shares nay them is that there may be an increases in the

general demand for the company’s shares. Decreased marketability risk, coupled with

decreased financial risk, will have a positive effect on the value of the firm’s shares.

A part from theoretical postulates for the desirability of stable dividends, there are

also Manu empirical studies classic among them being that of limner5. To support the

viewpoint that companies purser a stable dividend policy. In other words, companies,

while taking decisions on the payment of dividend, bear mind the dividend below the

amount paid in previous years. Actually, most firms seem to favor a policy of

establishing a non-decreasing dividend per share above a level than can safely be

sustained in the future. These cautious creep up of dividends per share results in stable

dividend per share pattern during fluctuant earnings per share periods, and a rising

ste[ function pattern of dividends per share during increasing earning per share

periods.

PHILIP A.HAMILL AND WASIM AL-SHATTARAT in their article titled

DETERMINANTS OF DIVIDEND PAYOUT RATIO stated that there is a plethora of

empirical evidence testing theories which have been proposed to explain dividend

policies and assessments of managerial opinions for firms listed on developed

markets’ stock exchanges. The following are the determinants:

1.Agency cost

2.The level of inside ownership

3. No. of shareholders

4. The level of institutional ownership

- 38 -
PRAMATH NATH ACHARYA AND PRASANA KUMAR in their article titled

DETERMINANTS OF CORPORATE DIVIDEND POLICY stated that the dividend

policy decision is crucial for any corporate entity whose shares are listed in the stock

exchange. There are some theoretical views that dividends increase the value of

shares, but on the contrary, some theorists are of the opinion that dividends do not

increase the share value. Never the less, most analysts are unwilling to assert that

dividends are totally irrelevant.

- 39 -
A bank is a financial institution that accepts deposits and channels those deposits into

lending activities. Banks primarily provide financial services to customers while

enriching investors. Government restrictions on financial activities by banks vary over

time and location. Banks are important players in financial markets and offer services

such as investment funds and loans. In some countries such as Germany, banks have

historically owned major stakes in industrial corporations while in other countries

such as the United States banks are prohibited from owning non-financial companies.

In Japan, banks are usually the nexus of a cross-share holding entity known as the

keiretsu. In France, bancassurance is prevalent, as most banks offer insurance services

(and now real estate services) to their clients.

The level of government regulation of the banking industry varies widely, with

countries such as Iceland, having relatively light regulation of the banking sector, and

countries such as China having a wide variety of regulations but no systematic

process that can be followed typical of a communist system.

The oldest bank still in existence is Monte dei Paschi di Siena, headquartered in

Siena, Italy, which has been operating continuously since 1472.

- 40 -
HISTORY

ORIGIN OF THE WORD

The name bank derives from the Italian word banco "desk/bench", used during the

Renaissance by Jewish Florentine bankers, who used to make their transactions above

a desk covered by a green tablecloth. However, there are traces of banking activity

even in ancient times, which indicates that the word 'bank' might not necessarily come

from the word 'banco'.

In fact, the word traces its origins back to the Ancient Roman Empire, where

moneylenders would set up their stalls in the middle of enclosed courtyards called

macella on a long bench called a bancu, from which the words banco and bank are

derived. As a moneychanger, the merchant at the bancu did not so much invest money

as merely convert the foreign currency into the only legal tender in Rome—that of the

Imperial Mint.

The earliest evidence of money-changing activity is depicted on a silver drachm coin

from ancient Hellenic colony Trapezus on the Black Sea, modern Trabzon, c. 350–325

BC, presented in the British Museum in London. The coin shows a banker's table

(trapeza) laden with coins, a pun on the name of the city.

In fact, even today in Modern Greek the word Trapeza means both a table and a bank.

TRADITIONAL BANKING ACTIVITIES

Banks act as payment agents by conducting checking or current accounts for

customers, paying cheques drawn by customers on the bank, and collecting cheques

- 41 -
deposited to customers' current accounts. Banks also enable customer payments via

other payment methods such as telegraphic transfer, EFTPOS, and ATM.

Banks borrow money by accepting funds deposited on current accounts, by accepting

term deposits, and by issuing debt securities such as banknotes and bonds. Banks lend

money by making advances to customers on current accounts, by making installment

loans, and by investing in marketable debt securities and other forms of money

lending.

Banks provide almost all payment services, and a bank account is considered

indispensable by most businesses, individuals and governments. Non-banks that

provide payment services such as remittance companies are not normally considered

an adequate substitute for having a bank account.

Banks borrow most funds from households and non-financial businesses, and lend

most funds to households and non-financial businesses, but non-bank lenders provide

a significant and in many cases adequate substitute for bank loans, and money market

funds, cash management trusts and other non-bank financial institutions in many cases

provide an adequate substitute to banks for lending savings to.

ENTRY REGULATION

Currently in most jurisdictions commercial banks are regulated by government

entities and require a special bank licence to operate.

Usually the definition of the business of banking for the purposes of regulation is

extended to include acceptance of deposits, even if they are not repayable to the

customer's order—although money lending, by itself, is generally not included in the

definition.

- 42 -
Unlike most other regulated industries, the regulator is typically also a participant in

the market, i.e. a government-owned (central) bank. Central banks also typically have

a monopoly on the business of issuing banknotes. However, in some countries this is

not the case. In the UK, for example, the Financial Services Authority licences banks,

and some commercial banks (such as the Bank of Scotland) issue their own banknotes

in addition to those issued by the Bank of England, the UK government's central

bank.

DEFINITION

The definition of a bank varies from country to country.

Under English common law, a banker is defined as a person who carries on the

business of banking, which is specified as:

 Conducting current accounts for his customers

 Paying cheques drawn on him, and

 Collecting cheques for his customers.

In most English common law jurisdictions there is a Bills of Exchange Act that

codifies the law in relation to negotiable instruments, including cheques, and this Act

contains a statutory definition of the term banker: banker includes a body of persons,

whether incorporated or not, who carry on the business of banking' (Section 2,

Interpretation). Although this definition seems circular, it is actually functional,

because it ensures that the legal basis for bank transactions such as cheques do not

depend on how the bank is organized or regulated.

The business of banking is in many English common law countries not defined by

statute but by common law, the definition above. In other English common law

jurisdictions there are statutory definitions of the business of banking or banking

- 43 -
business. When looking at these definitions it is important to keep in mind that they

are defining the business of banking for the purposes of the legislation, and not

necessarily in general. In particular, most of the definitions are from legislation that

has the purposes of entry regulating and supervising banks rather than regulating the

actual business of banking. However, in many cases the statutory definition closely

mirrors the common law one. Examples of statutory definitions:

 "banking business" means the business of receiving money on current or

deposit account, paying and collecting cheques drawn by or paid in by

customers, the making of advances to customers, and includes such other

business as the Authority may prescribe for the purposes of this Act; (Banking

Act (Singapore), Section 2, Interpretation).

 "banking business" means the business of either or both of the following:

1. receiving from the general public money on current, deposit, savings or other

similar account repayable on demand or within less than [3 months] ... or with

a period of call or notice of less than that period;

2. paying or collecting cheques drawn by or paid in by customers[6]

Since the advent of EFTPOS (Electronic Funds Transfer at Point Of Sale), direct

credit, direct debit and internet banking, the cheque has lost its primacy in most

banking systems as a payment instrument. This has led legal theorists to suggest that

the cheque based definition should be broadened to include financial institutions that

conduct current accounts for customers and enable customers to pay and be paid by

third parties, even if they do not pay and collect cheques.

ACCOUNTING FOR BANK ACCOUNTS

- 44 -
Bank statements are accounting records produced by banks under the various

accounting standards of the world. Under GAAP and IFRS there are two kinds of

accounts: debit and credit. Credit accounts are Revenue, Equity and Liabilities. Debit

Accounts are Assets and Expenses. This means you credit a credit account to increase

its balance, and you debit a debit account to decrease its balance.

This also means you debit your savings account every time you deposit money into it

(and the account is normally in deficit), while you credit your credit card account

every time you spend money from it (and the account is normally in credit).

However, if you read your bank statement, it will say the opposite—that you credit

your account when you deposit money, and you debit it when you withdraw funds. If

you have cash in your account, you have a positive (or credit) balance; if you are

overdrawn, you have a negative (or deficit) balance.

The reason for this is that the bank, and not you, has produced the bank statement.

Your savings might be your assets, but the bank's liability, so they are credit accounts

(which should have a positive balance). Conversely, your loans are your liabilities but

the bank's assets, so they are debit accounts (which should also have a positive

balance).

Where bank transactions, balances, credits and debits are discussed below, they are

done so from the viewpoint of the account holder—which is traditionally what most

people are used to seeing.

ECONOMIC FUNCTIONS

1. Issue of money, in the form of banknotes and current accounts subject to

cheque or payment at the customer's order. These claims on banks can act as

money because they are negotiable and/or repayable on demand, and hence

- 45 -
 valued at par. They are effectively transferable by mere delivery, in the case of

banknotes, or by drawing a cheque that the payee may bank or cash.

2. Netting and settlement of payments – banks act as both collection and paying

agents for customers, participating in interbank clearing and settlement

systems to collect, present, be presented with, and pay payment instruments.

This enables banks to economise on reserves held for settlement of payments,

since inward and outward payments offset each other. It also enables the

offsetting of payment flows between geographical areas, reducing the cost of

settlement between them.

3. Credit intermediation – banks borrow and lend back-to-back on their own

account as middle men.

4. Credit quality improvement – banks lend money to ordinary commercial and

personal borrowers (ordinary credit quality), but are high quality borrowers.

The improvement comes from diversification of the bank's assets and capital

which provides a buffer to absorb losses without defaulting on its obligations.

However, banknotes and deposits are generally unsecured; if the bank gets

into difficulty and pledges assets as security, to raise the funding it needs to

continue to operate, this puts the note holders and depositors in an

economically subordinated position.

5. Maturity transformation – banks borrow more on demand debt and short term

debt, but provide more long term loans. In other words, they borrow short and

lend long. With a stronger credit quality than most other borrowers, banks can

do this by aggregating issues (e.g. accepting deposits and issuing banknotes)

and redemptions (e.g. withdrawals and redemptions of banknotes),

maintaining reserves of cash, investing in marketable securities that can be

- 46 -
 readily converted to cash if needed, and raising replacement funding as needed

from various sources (e.g. wholesale cash markets and securities markets).

LAW OF BANKING

Banking law is based on a contractual analysis of the relationship between the bank

(defined above) and the customer—defined as any entity for which the bank agrees to

conduct an account.

The law implies rights and obligations into this relationship as follows:

1. The bank account balance is the financial position between the bank and the

customer: when the account is in credit, the bank owes the balance to the

customer; when the account is overdrawn, the customer owes the balance to

the bank.

2. The bank agrees to pay the customer's cheques up to the amount standing to

the credit of the customer's account, plus any agreed overdraft limit.

3. The bank may not pay from the customer's account without a mandate from

the customer, e.g. a cheque drawn by the customer.

4. The bank agrees to promptly collect the cheques deposited to the customer's

account as the customer's agent, and to credit the proceeds to the customer's

account.

5. The bank has a right to combine the customer's accounts, since each account is

just an aspect of the same credit relationship.

6. The bank has a lien on cheques deposited to the customer's account, to the

extent that the customer is indebted to the bank.

- 47 -
 7. The bank must not disclose details of transactions through the customer's

account—unless the customer consents, there is a public duty to disclose, the

bank's interests require it, or the law demands it.

8. The bank must not close a customer's account without reasonable notice, since

cheques are outstanding in the ordinary course of business for several days.

These implied contractual terms may be modified by express agreement between the

customer and the bank. The statutes and regulations in force within a particular

jurisdiction may also modify the above terms and/or create new rights, obligations or

limitations relevant to the bank-customer relationship.

Some types of financial institution, such as building societies and credit unions, may

be partly or wholly exempt from bank license requirements, and therefore regulated

under separate rules.

The requirements for the issue of a bank license vary between jurisdictions but

typically include:

1. Minimum capital

2. Minimum capital ratio

3. 'Fit and Proper' requirements for the bank's controllers, owners, directors,

and/or senior officers

4. Approval of the bank's business plan as being sufficiently prudent and

plausible.

TYPES OF BANKS

Banks' activities can be divided into retail banking, dealing directly with individuals

and small businesses; business banking, providing services to mid-market business;

- 48 -
corporate banking, directed at large business entities; private banking, providing

wealth management services to high net worth individuals and families; and

investment banking, relating to activities on the financial markets. Most banks are

profit-making, private enterprises. However, some are owned by government, or are

non-profit organizations.

Central banks are normally government-owned and charged with quasi-regulatory

responsibilities, such as supervising commercial banks, or controlling the cash interest

rate. They generally provide liquidity to the banking system and act as the lender of

last resort in event of a crisis.

TYPES OF RETAIL BANKS

 Commercial bank: the term used for a normal bank to distinguish it from an

investment bank. After the Great Depression, the U.S. Congress required that

banks only engage in banking activities, whereas investment banks were

limited to capital market activities. Since the two no longer have to be under

separate ownership, some use the term "commercial bank" to refer to a bank or

a division of a bank that mostly deals with deposits and loans from

corporations or large businesses.

 Community Banks: locally operated financial institutions that empower

employees to make local decisions to serve their customers and the partners.

 Community development banks: regulated banks that provide financial

services and credit to under-served markets or populations.

 Postal savings banks: savings banks associated with national postal systems.

- 49 -
  Private banks: banks that manage the assets of high net worth individuals.

 Offshore banks: banks located in jurisdictions with low taxation and

regulation. Many offshore banks are essentially private banks.

 Savings bank: in Europe, savings banks take their roots in the 19th or

sometimes even 18th century. Their original objective was to provide easily

accessible savings products to all strata of the population. In some countries,

savings banks were created on public initiative; in others, socially committed

individuals created foundations to put in place the necessary infrastructure.

Nowadays, European savings banks have kept their focus on retail banking:

payments, savings products, credits and insurances for individuals or small

and medium-sized enterprises. Apart from this retail focus, they also differ

from commercial banks by their broadly decentralised distribution network,

providing local and regional outreach—and by their socially responsible

approach to business and society.

 Building societies and Landesbanks: institutions that conduct retail banking.

 Ethical banks: banks that prioritize the transparency of all operations and

make only what they consider to be socially-responsible investments.

 Islamic banks: Banks that transact according to Islamic principles.

TYPES OF INVESTMENT BANKS

 Investment banks "underwrite" (guarantee the sale of) stock and bond issues,

trade for their own accounts, make markets, and advise corporations on capital

market activities such as mergers and acquisitions.

 Merchant banks were traditionally banks which engaged in trade finance. The

modern definition, however, refers to banks which provide capital to firms in

- 50 -
 the form of shares rather than loans. Unlike venture capital firms, they tend

not to invest in new companies.

BOTH COMBINED

 Universal banks, more commonly known as financial services companies,

engage in several of these activities. These big banks are very diversified

groups that, among other services, also distribute insurance— hence the term

bancassurance, a portmanteau word combining "banque or bank" and

"assurance", signifying that both banking and insurance are provided by the

same corporate entity.

OTHER TYPES OF BANKS

 Islamic banks adhere to the concepts of Islamic law. This form of banking

revolves around several well-established principles based on Islamic canons.

All banking activities must avoid interest, a concept that is forbidden in Islam.

Instead, the bank earns profit (markup) and fees on the financing facilities that

it extends to customers.

- 51 -
COMPANY PROFILE

ICICI Bank is India's second-largest bank with total assets of Rs. 4,062.34 billion

(US$ 91 billion) at March 31, 2011 and profit after tax Rs. 51.51 billion (US$ 1,155

million) for the year ended March 31, 2011. The Bank has a network of 2,556

branches and 7,440 ATMs in India, and has a presence in 19 countries, including

India.

ICICI Bank's equity shares are listed in India on Bombay Stock Exchange and the

National Stock Exchange of India Limited and its American Depositary Receipts

(ADRs) are listed on the New York Stock Exchange (NYSE).

Corporate Profile

ICICI Bank is India's second-largest bank with total assets of Rs. 3,562.28 billion

(US$ 77 billion) as on December 31, 2009.

Board Members

Mr. K. V. Kamath, Chairman

Mr. Sridar Iyengar

Mr. Homi R. Khusrokhan

Mr. Lakshmi N. Mittal

- 52 -
Mr. Narendra Murkumbi

Dr. Anup K. Pujari

Mr. Anupam Puri

Mr. M.S. Ramachandran

Mr. M.K. Sharma

Mr. V. Sridar

Prof. Marti G. Subrahmanyam

Mr. V. Prem Watsa

Ms. Chanda D. Kochhar,

Managing Director & CEO

Mr. Sandeep Bakhshi,

Deputy Managing Director

Mr. N. S. Kannan,

Executive Director & CFO

Mr. K. Ramkumar,

Executive Director

Mr. Sonjoy Chatterjee,

Executive Director

Mr. K. V. Kamath is a mechanical engineer and did his management studies from the

Indian Institute of Management, Ahmedabad. He joined ICICI in 1971 and worked in

the areas of project finance, leasing, resources and corporate planning. In 1988, he

joined the Asian Development Bank and spent several years in south-east Asia before

returning to ICICI as its Managing Director & CEO in 1996. He became Managing

Director & CEO of ICICI Bank in 2002 following the merger of ICICI with ICICI

Bank. Under his leadership, the ICICI Group transformed itself into a diversified,

technology-driven financial services group, that has leadership positions across

banking, insurance and asset management in India, and an international presence. He

- 53 -
retired as Managing Director & CEO in April 2009, and took up the position of non-

executive Chairman of ICICI Bank effective May 1, 2009. He was the President of the

Confederation of Indian Industry (CII) for 2008-09. He was awarded the Padma

Bhushan by the President of India in May 2008. He was conferred the Lifetime

Achievement Awards at the Financial Express Best Bank Awards 2008 and the NDTV

Profit Business Leadership Awards 2008; was named 'Businessman of the Year' by

Forbes Asia and The Economic Times' 'Business Leader of the Year' in 2007; Business

Standard's "Banker of the Year" and CNBC-TV18's "Outstanding Business Leader of

the Year" in 2006; Business India's "Businessman of the Year" in 2005; and CNBC's

"Asian Business Leader of the Year" in 2001. He has been conferred with an honorary

PhD by the Banaras Hindu University. He is a member of the Board of the Institute of

International Finance, a Director on the Board of Infosys Technologies and a member

of the Board of Governors of the Indian Institute of Management, Ahmedabad.

AWARDS

 Ms. Chanda Kochhar, Managing Director & CEO was awarded the "CNBC

Asia India Business Leader Of The Year Award". She also received the

"CNBC Asia's CSR Award 2011"

 For the third year in a row ICICI Bank has won The Asset Triple A Country

Awards for Best Domestic Bank in India

 ICICI Bank won the Most Admired Knowledge Enterprises (MAKE) India

2009 Award. ICICI Bank won the first place in "Maximizing Enterprise

Intellectual Capital" category, October 28, 2009

 Ms Chanda Kochhar, MD and CEO was awarded with the Indian Business

Women Leadership Award at NDTV Profit Business Leadership Awards ,

October 26, 2009.

- 54 -
 ICICI Bank received two awards in CNBC Awaaz Consumer Awards; one for

the most preferred auto loan and the other for most preferred credit Card, on

September 30, 2009

 Ms. Chanda Kochhar, Managing Director & CEO ranked in the top 20 of the

World's 100 Most Powerful Women list compiled by Forbes, August 2009

 Financial Express at its FE India's Best Banks Awards, honoured Mr. K.V.

Kamath, Chairman with the Lifetime Achievement Award , July 25, 2009

 ICICI Bank won Asset Triple A Investment Awards for the Best Derivative

House, India. In addition ICICI Bank were Highly commended , Local

Currency Structured product, India for 1.5 year ADR GDR linked Range

Accrual Note., July 2009

 ICICI bank won in three categories at World finance Banking awards on June

16, 2009

o Best NRI Services bank

o Excellence in Private Banking, APAC Region

o Excellence in Remittance Business, APAC Region

 ICICI Bank Mobile Banking was adjudged "Best Bank Award for Initiatives in

Mobile Payments and Banking" by IDRBT, on May 18, 2009 in Hyderabad.

 ICICI Bank's b2 branchfree banking was adjudged "Best E-Banking Project

Implementation Award 2008" by The Asian Banker, on May 11, 2009 at the

China World Hotel in Beijing.

 ICICI Bank bags the "Best bank in SME financing (Private Sector)" at the

Dun & Bradstreet Banking awards 2009.

- 55 -
 ICICI Bank NRI services wins the "Excellence in Business Model Innovation

Award" in the eighth Asian Banker Excellence in Retail Financial Services

Awards Programme.

 ICICI Bank's Rural Micro Banking and Agri-Business Group wins WOW

Event & Experiential Marketing Award in two categories - "Rural Marketing

programme of the year" and "Small Budget On Ground Promotion of the

Year". These awards were given for Cattle Loan 'Kamdhenu Campaign' and

"Talkies on the move campaign' respectively.

 ICICI Bank's Germany Branch has been certified by "Stiftung Warrentest".

ICICI Bank is ranked 2nd amongst 57 savings products across 19 banks

 ICICI Bank Germany won the yearly banking test of the investor magazine

€uro in the "call money"category.

 The ICICI Bank was awarded the runner's up position in Gartner Business

Intelligence and Excellence Award for Asia Pacific for its Business

Intelligence functions.

 ICICI Bank's Organisational Excellence Group was recently awarded ISO

9001:2008 certification by TUV Nord. The scope of certification comprised

processes around consulting and capability building on methods of quality &

improvements.

 ICICI Bank has been awarded the following titles under The Asset Triple A

Country Awards for 2009:

o Best Transaction Bank in India

o Best Trade Finance Bank in India

- 56 -
 o Best Cash Management Bank in India

o Best Domestic Custodian in India

ICICI Bank has bagged the Best Cash Management Bank in India award for

the second year in a row. The other awards have been bagged for the third year

in a row.

 ICICI Bank Canada received the prestigious Canadian Helen Keller Award at

the Canadian Helen Keller Centre's Fifth Annual Luncheon in Toronto. The

award was given to ICICI Bank its long-standing support to this unique

training centre for people who are deaf-blind.

We believe our fundamental challenge is to create a “just” society – one where

everyone has equal opportunity to develop and grow. Towards this end, ICICI

Foundation is committed to making India’s economic growth more inclusive,

allowing every individual to participate in and benefit from the growth process.

VISION

Our vision is a world free of poverty in which every individual has the freedom and

power to create and sustain a just society in which to live.

MISSION

Our mission is to create and support strong independent organisations which work

towards empowering the poor to participate in and benefit from the Indian growth

process.

As a key partner in India's economic growth for more than five decades, the ICICI

Group endeavours to promote growth in all sectors of the nation ’s economy. To give

focus to its efforts to promote inclusive growth amongst low-income Indian

households, the ICICI Group founded ICICI Foundation for Inclusive Growth in
- 57 -
January 2010.

The foundations of ICICI Group’s approach towards human and social development

were established with the Social Initiatives Group (SIG), a non-profit resource group

within ICICI Bank, in 2000.

The application for registration of the Foundation under section 12AA of the Income

tax Act, 1961 (“the Act”) was filed on February 7, 2008 and the application under

section 80G of the Act was filed on February 14, 2008. Subsequently, ICICI

Foundation was registered as a “PUBLIC CHARITABLE TRUST” under Section

12AA of the Act with effect from February 7, 2008. Further, ICICI Foundation

received approval under Section 80G(5)(vi) of the Act on March 19, 2008. This

approval is valid in respect of donation received by ICICI Foundation from February

14, 2008 to March 31, 2009.

Funds Flow 2010-2011

ICICI Foundation received Rs.617.80 million from the following sources as grants:

(January 4, 2008 to March 31, 2011) (spanning two financial years)

Source (January 4, 2008 – March 31, 2011) Amount (Rs. million)

ICICI Bank 500.00
ICICI Prudential Life Insurance 67.72
ICICI Lombard General Insurance 17.12
ICICI Securities 14.98
ICICI Securities PD 6.99
ICICI Home Finance 1.99
ICICI Venture 9.00
Total 617.80
ICICI Foundation also incurred total expenses of Rs.1.25 million during this period

and had a fund balance of Rs.61.55 million as on March 31, 2011.

Disbursements (January 4, 2008 to March 31, 2011)

Grant Beneficiaries (January 4, 2010 – March 31, 2011) Amount (Rs. million)
- 58 -
ICICI Foundation Programmes
ICICI Centre for Child Health and Nutrition 150.00
IFMR Finance Foundation 200.00
Environmentally Sustainable Finance 20.00
CSO Partners 50.00
CARE (Policy Unit) 5.00
Strategy and Advisory Group 20.00
ICICI Group Corporate Social Responsibility Programmes
Read to Lead 25.00
MITRA (ICICI Fellows Programme) 55.00
CARE (Disaster Management Unit) 5.00
Rang De 25.00
Total 555.00

The various modes of dividend theories, which have been discussed earlier, the

sample of the INDUSTRIAL CREDIT AND INVESTMENT CORPORATION OF

INDIA (ICICI).selected. And analyzed to empirical evidence for the two theories

supporting the relevance of dividend policies Walter’s model and Gordon’s model.

- 59 -
We shall classify the industrial credit and investment corporation of India (icici).into

these six categories basing on the explain the Dividend per share, Earning per share,

Return per share, Price Earning, Profit after Tax, Net worth. These are explaining

based on last five financial years’ data.

Since 2006-07 to 2010-11 collected the data in INDUSTRIAL CREDIT AND

INVESTMENT CORPORATION OF INDIA (ICICI).

How dividend per share is calculated? Where is the formula and

calculations?

4.1. COMPARISION OF DIVIDEND PER SHARE OF ICICI

Table No. 4.1

- 60 -
 YEAR DIVIDEND PERSHARE
2006-2007 2.00
2007-2008 2.50
2008-2009 2.50
2009-2010 3.00
2010-2011 4.00

Graph No. 4.1

INTERPRETATION:
The dividend Per Share of ICICI ltd., is Rs 2.00 in the year of 2006-07. The
dividend per share for the next two financial year is constant (i.e. Rs 2.50)

When it is compared with the year 2006-07 the dividend per share in the year
2007-08 it is increased at the rate of 50% and100% in the year of 2010-11.

4.2COMPARISION OF EARNING PER SHARE OF THE FIRM

FOR THE LAST FIVE YEARS

Table No. 4.2

YEAR EARNING PER SHARE

- 61 -
 2006-2007 6.04
2007-2008 13.77
2008-2009 7.33
2009-2010 9.99
2010-2011 58.08

Graph No. 4.2

INTERPRETATION:
The Earning per share of the firm is very low in the year 2006-07, but it is
doubled in the next year. The Earning per share fluctuated slightly during the
financial years 2008-09 and 2009-10. However, there is massive increase
reported (about 9 times to the starting year of 2006-07) in the year 2010-11. It
indicates the increase in the revenue of the profit.

4.3 PROFILE OF RETURN PER SHARE OF THE FIRM

Table No. 4.3

YEAR RETURN PER SHARE

2006-2007 4.04
2007-2008 11.20
2008-2009 5.17
2009-2010 6.99
2010-2011 54.08
- 62 -
Graph No. 4.3

INTERPRETATION:
Return per share of ICICI Ltd is low of in the year 2006-07 and in the next year it has
increased normally and after next year it is highly decreased. The year of 2010-11 the
return per share highly increased that is 54.08

4.4. COMPARISION OF PRICE EARNING OF THE ICICI

Table No. 4.4

YEAR PRICE EARNING

2006-2007 4.28
2007-2008 4.26
2008-2009 16.43
2009-2010 21.21
2010-2011 5.90

Graph No. 4.4

- 63 -
INTERPRETATION:
The Price earning value of the firm’s share is Rs 4.28 in the year 2006-07, it is same
in the next year also. It is reported high during the financial years 2008-09, and 2009-
10. However the price earning rate is very low in the year of 2010-11.

4.5.COMPARISION OF PROFIT AFTER TAX OF THE ICICI

Table No. 4.5

YEAR PROFIT AFTER TAX (in Rs)

2006-2007 28.15

2007-2008 63.00

2008-2009 33.51

2009-2010 45.71

2010-2011 265.68

Graph No. 4.5

- 64 -
INTERPRETATION:

The profit after tax of ICICI Ltd had low at 2006-07and next year was increased.

After decreased at the year of 2010-11 increased highly. That is 265.68. It indicates

the probability strength of the firm.

4.6.COMPARISION OF NET WORTH OF THE ICICI

Table No. 4.6

YEAR Net worth

2006-2007 338.78

2007-2008 348.48

2008-2009 377.15

2009-2010 416.05

2010-2011 654.46

Graph No. 4.6

- 65 -
INTERPRETATION:

There is a gradual increased in the net worth of the firm subject to very high in the

financial year 2010-11.

- 66 -
5.1 FINDINGS (more points to be included)

Following are the findings from the dividend decision analysis of the ICICI:

1) Profit After Tax has increased from Rs 45.75 Cores to Rs. 265.68 Cores.

2) Earning per share has improved from Rs 9.99 to Rs. 58.08

3) Dividend has been benched from Rs. 3.00 to 4.00

4) Increased net worth from Rs. 416.05 Cores to Rs. 654.43

5) The dividend carries some informational content.

6) The dividend pay out ratio has an impact on the firm.

7) The dividend per share increased normally.

8) There is a fluctuation in earning per share

9) The Return per share has been increased gradually.

- 67 -
5.2 SUGGESTIONS

The following Suggestions are being provide to the ICICI industry.

1) Investors always prefer the dividend payment for Capital appreciation.

Hence some amount of Dividend must be paid regularly.

2) The industry should improve the dividend per share.

3) The industry should follow stable dividend policy.

4) The industry should maintain high per share.

5) The industry must improve and maintain high ratio.

6) When the industry gets the price earning highly, that industry will grow

7) In The industry Net worth is very good. The industry has to maintain this

type of Net worth.

- 68 -
5.3 LIMITATIONS should come after objectives of the study

Every research conducted has certain limitations. These arise due to the method of

sampling used, the method of data collation used and the source of the data apart from

many other things. The limitations of this study are as follows:

The data collected is of secondary nature and hence it is difficult to ascertain the

reliability of the data.

a)The scope of the study has been limited to the impact of the dividend on

the market value of the firm’s equity. Others factors affecting the firm’s

market value have been assumed to have remained unchanged.

b)The period of the study has been limited to only five years.

c)The method of sampling used is ‘judgment sampling’ hence the choice

of the sample has been left entirely to the choice of the researcher. This has

led to some amount bias being introduced into the research process.

- 69 -
5.4 CONCLUSION

According to relevance theories of dividends, the dividend policy of the firm affects

the value of the firm and the price of the share. In order to increase the price of the

share in the market the firm needs to increase the rate of dividend. The firm should

follow the stable policy, but it needs to change the policies depending upon the

present market conditions. There is fluctuation in earning per share (EPS) consistently

during the last four years. The net worth of the company is very high and the firm

should implement those policies which helps in maintaining the same level and

improve it.

- 70 -
BIBLOGRAPHY:

INVESTMENT MANAGEMENT

INTERNATIOAL AUTHORS

1. Chandra, Prasanna: ‘Financial Management-Theory and Practice’, 5th

Edition, 2001, Tata Mc Graw Hill Publisbing House.

2. Cooper Donald E, Pamela S Schindler, 8th Edition, 2003, Mc Graw Hill

Publishing House.

3. Khan M Y, P jain: ‘Financial Management-Text and problems; 3rd Edition,

1999, Tata Mc Graw Hill Publishing

House.

4. Pandy I M: ‘Financial Management; 8th Edition, 2003, Vikas Publishing

House Private Limited.

5. Lawrence J. Gilma: Principle of managerial Finance, Addisa werly.

JOURNALS:

1 PHILIP A.HAMILL AND WASIM AL-SHATTARAT, DETERMINANTS OF

DIVIDEND PAYOUT RATIO, JOURNAL OF EMERGING MARKET FINANCE

11(2)

- 71 -
2.. PRAMATH NATH ACHARYA AND PRASANA KUMAR, DETERMINANTS

OF CORPORATE DIVIDEND POLICY, INDIAN JOURNAL OF FINANCE

WEBSITES:

www.finance.com

www.icici.com

www.finaancialreformsindia.com

- 72 -
Balance Sheet of ICICI Bank ------------------- in Rs. Cr. -------------------
Mar '12 Mar '11 Mar '10 Mar '09 Mar '

12 mths 12 mths 12 mths 12 mths 12 mt

Capital and Liabilities:

Total Share Capital 1,152.77 1,151.82 1,114.89 1,463.29 1,462.
Equity Share Capital 1,152.77 1,151.82 1,114.89 1,113.29 1,112.
Share Application Money 2.39 0.29 0.00 0.00 0.
Preference Share Capital 0.00 0.00 0.00 350.00 350.
Reserves 59,250.09 53,938.82 50,503.48 48,419.73 45,357.
Revaluation Reserves 0.00 0.00 0.00 0.00 0.
Net Worth 60,405.25 55,090.93 51,618.37 49,883.02 46,820.
Deposits 255,499.96 225,602.11 202,016.60 218,347.82 244,431.
Borrowings 140,164.91 109,554.28 94,263.57 67,323.69 65,648.
Total Debt 395,664.87 335,156.39 296,280.17 285,671.51 310,079.
Other Liabilities & Provisions 17,576.98 15,986.35 15,501.18 43,746.43 42,895.
Total Liabilities 473,647.10 406,233.67 363,399.72 379,300.96 399,795.
Mar '12 Mar '11 Mar '10 Mar '09 Mar '

12 mths 12 mths 12 mths 12 mths 12 mt

Assets
Cash & Balances with RBI 20,461.29 20,906.97 27,514.29 17,536.33 29,377.
Balance with Banks, Money at Call 15,768.02 13,183.11 11,359.40 12,430.23 8,663.
Advances 253,727.66 216,365.90 181,205.60 218,310.85 225,616.
Investments 159,560.04 134,685.96 120,892.80 103,058.31 111,454.
Gross Block 9,424.39 9,107.47 7,114.12 7,443.71 7,036.
Accumulated Depreciation 4,809.70 4,363.21 3,901.43 3,642.09 2,927.
Net Block 4,614.69 4,744.26 3,212.69 3,801.62 4,108.
Capital Work In Progress 0.00 0.00 0.00 0.00 0.
Other Assets 19,515.39 16,347.47 19,214.93 24,163.62 20,574.
Total Assets 473,647.09 406,233.67 363,399.71 379,300.96 399,795.

Contingent Liabilities 858,566.64 883,774.77 694,948.84 803,991.92 371,737.

Bills for collection 64,457.72 47,864.06 38,597.36 36,678.71 29,377.
Book Value (Rs) 524.01 478.31 463.01 444.94 417.

Source : Dion Global Solutions Limited

- 73 -
Profit & Loss account of ICICI Bank ------------------- in Rs. Cr. -------------------
Mar '12 Mar '11 Mar '10 Mar '09 Mar '08

12 mths 12 mths 12 mths 12 mths 12 mths

Income
Interest Earned 33,542.65 25,974.05 25,706.93 31,092.55 30,788.34
Other Income 7,908.10 7,108.91 7,292.43 8,117.76 8,878.85
Total Income 41,450.75 33,082.96 32,999.36 39,210.31 39,667.19
Expenditure
Interest expended 22,808.50 16,957.15 17,592.57 22,725.93 23,484.24
Employee Cost 3,515.28 2,816.93 1,925.79 1,971.70 2,078.90
Selling and Admin Expenses 2,888.22 3,785.13 6,056.48 5,977.72 5,834.95
Depreciation 524.53 562.44 619.50 678.60 578.35
Miscellaneous Expenses 5,248.97 3,809.93 2,780.03 4,098.22 3,533.03
Preoperative Exp Capitalised 0.00 0.00 0.00 0.00 0.00
Operating Expenses 8,843.63 8,594.16 10,221.99 10,795.14 10,855.18
Provisions & Contingencies 3,333.37 2,380.27 1,159.81 1,931.10 1,170.05
Total Expenses 34,985.50 27,931.58 28,974.37 35,452.17 35,509.47
Mar '12 Mar '11 Mar '10 Mar '09 Mar '08

12 mths 12 mths 12 mths 12 mths 12 mths

Net Profit for the Year 6,465.26 5,151.38 4,024.98 3,758.13 4,157.73
Extraordionary Items -0.43 -2.17 -0.09 -0.58 0.00
Profit brought forward 5,018.18 3,464.38 2,809.65 2,436.32 998.27
Total 11,483.01 8,613.59 6,834.54 6,193.87 5,156.00
Preference Dividend 0.00 0.00 0.00 0.00 0.00
Equity Dividend 1,902.04 1,612.58 1,337.86 1,224.58 1,227.70
Corporate Dividend Tax 220.35 202.28 164.04 151.21 149.67
Per share data (annualised)
Earning Per Share (Rs) 56.09 44.73 36.10 33.76 37.37
Equity Dividend (%) 165.00 140.00 120.00 110.00 110.00
Book Value (Rs) 524.01 478.31 463.01 444.94 417.64
Appropriations
Transfer to Statutory Reserves 2,306.07 1,780.29 1,867.22 2,008.42 1,342.31
Transfer to Other Reserves 0.32 0.26 1.04 0.01 0.01
Proposed Dividend/Transfer to
2,122.39 1,814.86 1,501.90 1,375.79 1,377.37
Govt
Balance c/f to Balance Sheet 7,054.23 5,018.18 3,464.38 2,809.65 2,436.32
Total 11,483.01 8,613.59 6,834.54 6,193.87 5,156.01

Source : Dion Global Solutions Limited

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Particular Mar '12 Mar '11 Mar '10 Mar '09 Mar '08

Capital and Liabilities:

Total Share Capital 1,152.77 1,151.82 1,114.89 1,463.29 1,462.68
Equity Share Capital 1,152.77 1,151.82 1,114.89 1,113.29 1,112.68
Share Application Money 2.39 0.29 0.00 0.00 0.00
Preference Share Capital 0.00 0.00 0.00 350.00 350.00
Reserves 59,250.09 53,938.82 50,503.48 48,419.73 45,357.53
Revaluation Reserves 0.00 0.00 0.00 0.00 0.00
Net Worth 60,405.25 55,090.93 51,618.37 49,883.02 46,820.21
Deposits 255,499.96 225,602.11 202,016.60 218,347.82 244,431.05
Borrowings 140,164.91 109,554.28 94,263.57 67,323.69 65,648.43
Total Debt 395,664.87 335,156.39 296,280.17 285,671.51 310,079.48
Other Liabilities & Provisions 17,576.98 15,986.35 15,501.18 43,746.43 42,895.39
Total Liabilities 473,647.10 406,233.67 363,399.72 379,300.96 399,795.08

Assets
Cash & Balances with RBI 20,461.29 20,906.97 27,514.29 17,536.33 29,377.53
Balance with Banks, Money at Call 15,768.02 13,183.11 11,359.40 12,430.23 8,663.60
Advances 253,727.66 216,365.90 181,205.60 218,310.85 225,616.08
Investments 159,560.04 134,685.96 120,892.80 103,058.31 111,454.34
Gross Block 9,424.39 9,107.47 7,114.12 7,443.71 7,036.00
Accumulated Depreciation 4,809.70 4,363.21 3,901.43 3,642.09 2,927.11
Net Block 4,614.69 4,744.26 3,212.69 3,801.62 4,108.89
Capital Work In Progress 0.00 0.00 0.00 0.00 0.00
Other Assets 19,515.39 16,347.47 19,214.93 24,163.62 20,574.63
Total Assets 473,647.09 406,233.67 363,399.71 379,300.96 399,795.07

Contingent Liabilities 858,566.64 883,774.77 694,948.84 803,991.92 371,737.36

Bills for collection 64,457.72 47,864.06 38,597.36 36,678.71 29,377.55
Book Value (Rs) 524.01 478.31 463.01 444.94 417.64

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