3 Dividend and Bonus

8/3/2019 3 Dividend and Bonus

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Dividend Decisions


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Dividend -Meaning

Dividend refers to that part of the profits of acompany which is distributed among its

shareholders.

It is the return that a shareholder gets fromthe company, out of its profits, on his

shareholdings

It is a distribution to shareholders out ofprofits or reserves available for this purpose


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Dividend Policy -Meaning

Dividend policy refers to the policyconcerning the quantum of profits to bedistributed as dividend

It implies that the BOD evolve a pattern ofdividend payments which has a bearing onfuture course of action

The finance manager cannot do much about

the dividend policy since he works only in anadvisory capacity and the power to declaredividends vests completely in the hands ofBODs


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Nature of Dividend Decisions

Dividend decision is of crucial importance asit determines the amount of profit to be

distributed among the shareholders and the

amount of profit to be retained in thebusiness for financing its long term growth.

There is a reciprocal relationship between

the cash dividends and retained earnings

The dividend decision is largely based on its

impact on the value of the firm


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Nature of Dividend Decisions

Dividend decision is of crucial importance asit determines the amount of profit to be

distributed among the shareholders and the

amount of profit to be retained in thebusiness for financing its long term growth.

There is a reciprocal relationship between

the cash dividends and retained earnings

The dividend decision is largely based on its

impact on the value of the firm


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Factors Affecting Dividend Policy

External factors

General state of the economy

State of capital market

Legal restrictions (after providing for

depreciation and reserves)

Contractual restriction- (after paying the

creditors)

Tax policy


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Factors Affecting Dividend Policy

Internal factors

Desire of the shareholders

Financial needs of the company

Nature of earnings

Desire of control

Liquidity position


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Types of Dividend Policy

Regular dividend policy

Stable dividend policy

Irregular dividend policy


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Forms of Dividend

Cash dividend

Bond/scrip dividend

Property dividend

Stock dividend


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Bonus Issue


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Bonus Issue

A company can pay bonus to its shareholders

either in cash or in form of shares.

Most of the times the company may not be in a

position to pay bonus in cash in spite of sufficient

profits because of unsatisfactory cash position oradverse effect on the working capital of the

company.

In such a case, if the AOA provides, the company

can pay bonus to its shareholders either byconverting partly paid shares into fully paid or by

issuing fully paid bonus shares


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Reasons for Issuing Bonus Shares

Bonus issue tends to increase the marketprice

It increases the number of shares andpromotes active trading

The share capital base would increaseleading to achieve a respectable size in theeyes of community

It gives a firm indication that the prospectsof the company is bright


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Advantages of Issue of Bonus Shares

Advantages to the company Conservation of cash

Keeps EPS at a reasonable level (Workers andconsumers feel unhappy when the EPS is more)

Wider marketability of companys shares Advantages to investors

Tax benefits

Indication of higher future profits Increase in future dividends

High psychological value


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SEBI Guidelines on Bonus Issue

1. The guidelines are applicable to existing listed

companies

2. The bonus issue should not dilute the rights of

partly and fully convertible debentures

3. Bonus issue to be made out of free reserves andshare premium only

4. Reserves created by revaluation of fixed assets

are not capitalised

5. Declaration of bonus issue, in lieu of dividend, is

not made


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SEBI Guidelines on Bonus Issue

6. The bonus issue is not made unless the partly-

paid shares, if any, are made fully paid-up7. The company has not defaulted any statutory

payments to debenture holders and employees

8. A company announcing the bonus issue after the

approval should implement within six months9. There should be a provision in the AOA for

capitalisation of reserves

10. Consequent to the issue of bonus shares, if the

subscribed and paid up capital exceed theauthorised share capital, a resolution shall bepassed at its general body meeting forincreasing the share capital


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Stock Split

Stock split is reducing the par value of the

shares by increasing the number of shares

proportionately.


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Bonus Issue. VS. Stock Split

Bonus Issue

1. Par value is unchanged

2. Part of reserve is

capitalised

Stock Split

1. Par value is reduced

2. No capitalisation of

reserves


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Rights Issue

The shareholders of joint stock company

are given the pre-emptive right to

purchase additional issues of common

stock

This right gives the option to the existing

shareholders an option to buy a security at

a specified price during the specified

period. It preserves the power of control of present

shareholders


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Advantages of Rights Issue

It ensures equitable distribution of shares without

disturbing the existing equilibrium of

shareholders

The expenses of public issue can be avoided

There is a certainty of the shares being sold tothe existing shareholders

It betters the image of the company

It ensures that the directors do not issue theshares to their relatives to get more controlling

power


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Rights and Small Shareholders

On account of their inability to raise funds,the small shareholders are not in aposition to take advantage of the rightsissue

On account of ignorance and lack ofinterest, they even fail to make profit byrenouncing their rights in favour of otherpersons

After rights issue, the price of thecompanys share may fall. The smallshareholders may panic and sell their

shareholding during such time

Documents

3 Dividend and Bonus