Essay on Theory of Dividend

Published: 2021-06-25 23:54:55
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There are different factors affecting the policy of dividend declaration and payment. These factors can be internal or external to the organization. The internal factors that determine the policy of dividend are the stability of earnings, the age of the corporation, the liquidity of funds, need for additional capital, and its ability to borrow funds. External factors that influence the dividend decision may comprise taxation policy, legal requirements, trade cycles and time for dividend payment with regularity and stability.

Dividend practice at Infosys Limited

The Infosys Limited has a policy of dividend payment in accordance with the provisions of the Companies Act 2013 (The legal enactment) and the SEBI (Securities Exchange Board of India) Regulations, 2015 for the listing obligations and disclosure requirements. Different terms have defined the Company which signify the similar meaning and importance in accordance to the legal enactment (Act) and SEBI Regulations requirements. The policy lays down the various terms and conditions which are considered by the Board of Directors of the Company in deciding the distribution of dividend to its shareholders and/or retaining profits earned by the Company. Under the unexpected state of affairs, the Board of Directors may deviate from these terms and conditions listed in the policy of dividend payment. (Jayesh Haresh - 2014)

Following circumstances are observed in the dividend policy of the Infosys Limited:

Shareholders may or may not receive dividend

Under this circumstance, the company shall conform to the appropriate legislative requirements that are valid to the company in the declaration of a dividend or to retain earnings. In general, the Board shall decide the dividend a period in particular by considering the financial position of the company, the advice of management executives and other conditions illustrated in the dividend policy

Consideration of internal/financial conditions in the declaration of dividend

Significant financial parameters are considered by the Board of Directors in the declaration or recommendation of dividend to the shareholders. It includes the following:

Allocation of capital: A plan to allocate capital includes the required cash to meet the working capital requirements, capital expenditures in infrastructure and technology of the company, investment needed to execute the strategy of the company, and the funds required for any acquisitions that the Board of Directors may commend including any plans on buy-back of shares.

Minimum requirement of cash for contingencies or unexpected affairs of the business

Funds to meet any outstanding loans

Liquidity and return ratios

Any other noteworthy expansion that needs cash investment

Consideration of external factors in the declaration of dividend

Following external factors are considered by the Board of Directors of the Company in the declaration or recommendation of dividend to the shareholders.

Any noteworthy transformations in the macro-economic environment that affect India or any other geographical regions in which the company operates or the business of the Company or its clients

Any modifications in the policies of the government, tax regulations and regulatory alterations in the geographical regions in which the Company operates

Any major transformation in the business or technological revolutions that would result in the company making major investments to achieve the required modifications to its business model

Any variations in the competitive environment that require considerable investment

Utilization of retained earnings

This policy speaks on effective utilization of retained earnings as the company makes consolidated earnings to meet the requirements of the above-said clause (2) or it can distribute it to the shareholders

Provisions on different types of shares.

The provisions relating to this policy applies to all types of the share of the company held by the Infosys Limited. Presently, company holds only one type of shares, that is Equity shares

Comments and review

The dividend policy of the company is allowed to be reviewed and modified by the Board of Directors as and when required considering the external and internal factors affecting the recommendations of the dividend. Under any circumstances in the cause of conflict between the legal enactment (Act) and the SEBI regulations and the provisions stated in this policy, the regulations win through this policy. Any successive modifications or alterations in the requirement of regulations, in this observation, will constantly apply to this policy.

Observations and judgement

Modigliani miller dividend irrelevant hypothesis is not adopted by any concerned companies. But the declaration of a dividend has not followed any model as we have seen in Dividend discount model. The amount of declared dividend depends on the share price along with other external factors affecting the declaration of dividend. In simple, theoretical model remain as an assumption and hard to find the model implications in companys dividend declaration provisions or practice of dividend declaration.

The share price is not always been positively correlated to Dividend. Under many circumstances, shareholders of Infosys Limited dont always expect dividend rather they want the companies to turn over the capital & increase the market capitalization. This, in turn, enhances the growth of the company through expansion. (Manoj kumar 2015)

Conclusion

The purpose of the dividend policy is to guarantee consistent return by way of dividend income to the shareholders and resulting in the capital appreciation for all the stakeholders in the long run. A well-formulated dividend policy assists the corporate to strike the perfect balance between a number of payouts and the profit amount retained for significant purposes to accomplish the goals of the organization. The company Act mandates that company has to expend at least 2 percent of its pre-tax profit on specified CSR activities. It is unique to India, that whether shareholders receive their share of return by way of dividend or not, corporate has to spend on Corporate Social Responsibility (CSR). In fact, good corporate governance insists a plain practice, that denotes a base on which dividends can be paid. (Chandrasekaran S. - 2016)

Possibly, corporate sometime consider to move a step forward to have a retention policy, in which they need shareholders approval to retain the profits of the business as retained earnings by disclosing how the corporate is going to spend the retained amount on different avenues of the investment for the growth of the company resulting in capital appreciation. Many companies, including Infosys, Dabur, HDFC and ONGC have their dividend distribution policy posted on their website, though it is not mandatory for them to do so. But it is done in order to maintain the transparency and practice code of ethics to reveal clarity on the earnings of the company. This helps investors to decide on investment and public gets more confidence on the affairs of the business.

Works cited

Chandrasekaran. S. (2016) Shareholders rights: Dividend Policy is dividend policy,

View point Corporate affairs, CFO Connect

Jayesh Haresh (2014) Dividend Decision A managerial approach (A survey of

Selected enterprises), Journal of Economics and Finance

Manoj kumar (2015) Dividend policy of Infosys and its impact on shares

International Journal of IT and Commerce (ISSN: 2319-194X) Volume

4, Issue-1

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