Question What is dividend and why it is distributed annually to the shareholders who are the owners of the company?

? Explain the factors affecting the dividend policy of the firm in case of pharmaceutical sector. What do you sense about the inclination of the Indian corporate regarding dividend? Is there any universally accepted theory for this purpose?

Answer : The Indian companies act does not define the term dividend but in common sense , dividends are the divisible profits of a company distributed amongst members in proportion to their shares According to S.M.Saha Dividends are profits of a trading company divi ded amongst members in proportion to their shares. According to the Supreme court of India Dividend is the portion of profits of the company which is allocated to the holdness of the shares in the company. Usually a company distributes dividends amongst shareholders if it earns profits, but here one thing should be made clear that the shareholders have claim ones surpluses of the company but they cannot force the company to declare and distribute dividend. Dividend is distributed to the shareholders because dividends are earnings for shareholders and they expect reasonable earnings from their investments. Therefore company should declare reasonable dividends regularly and if this does not happen then shareholders are disheartened and market price of share fall. So declaration and distribution of dividends is necessary for the continuous growth of the company and for increasing the wealth maximisation of the firm. Factors affecting dividend policy : 1.Stability of earnings : The nature of business has an important bearing on the dividend policy. pharmaceutical units having stability of earnings may formulate a more consistent dividend policy. 2.Age of the corporation : Age of the corporation counts much in deciding the dividend policy , a newly established company may require much of its earnings for expansion and may adopt a rigid dividend policy . While on the other hand , an older company can formulate a clear cut and more consistent policy regarding dividend. 3.liquidity of funds : Availability of cash and sound financial position is also an important factor in dividend decision. A dividend represents a cash outflows , the greater the funds and the liquidity of the firm ,the better the ability to pay dividend. If a company , can position is weak , stock dividend will be preferred and if cash position is good , company can distribute cash dividend. 4.Need for additional capital : Companies retain a part of their profits for strengthening of their financial position small companies usually find difficulties in raising finance for their needs of increased working capital for expansion programmes. Thus such companies distribute dividend at low rates and retain a big part of profits. 5.Trade cycles : A company during the boom , prudent management creates good reserves for contingencies , higher rates of dividend can be used as a tool for marketing the securities in an otherwise depressed market. The financial solvency can be proved and maintained by the companies in dull years if the adequate reserves have been built up.

6.Government policies : The earning capacity of the enterprise is widely affected by the change in fiscal , industrial , labour, control and other government policies. Sometimes government restricts the distribution of dividend beyond a certain percentage in a particular industry , so the dividend policy has to be modified or formulated accordingly. 7.taxation policy : High taxation reduces the earnings of the companies and consequently the rate of dividend is lowered down , sometimes government levies dividend tax on distribution of dividend beyond a certain limit. 8.Legal requirement : In deciding on the dividend the directors take the legal requirements too into consideration. In order to protect the interest of creditors and outsiders , the companies act 1956 prescribes certain guidelines in respect of the distribution and payment of dividend for example payment of dividend on preference shares in priority over ordinary dividend. 9.Past dividend rates : While formulating the dividend policy , the directors must keep in mind the dividend paid in past years. The current rate should be around the average past rate. 10.Ability to borrow : Well established and large firms have better access to the capital market than the new companies and may borrow funds firm other external sources if there arises any need. Such companies may have a better dividend pay-out ration. 11.Policy of Control : Policy of control is another determining factor in so far as dividends are concerned if the directors want to have control on company, they would not like to add new shareholder and therefore, declare a dividend at low rate. Thus control is an influencing factor in framing the dividend policy. 12.Repayment of loan :- A company having loan indebtedness are vowed to a high rate of retention earnings, unless some other arrangements are made for the redemption of debt on maturity. It will naturally lower down the rate of dividend. Sometimes, the lenders (mostly institutional lenders) put restriction on the dividend distribution till such time their loan is outstanding. 13.Regularity and stability in dividend payment:- Dividends should be paid regularly because each investor is interested in the regular payment of dividend. The management should ,in spite of regular payment of dividend ,consider that the rate of dividend should be all the most constant. 14.Time for payment for dividend :- When should the dividend be paid is another consideration. Payment of dividend means outflow of cash. It is, therefore, desirable to distribute dividend at a time when it is least needed by the company because their are peak times as well as lean period of expenditure. INCLINATION OF THE INDIAN CORPORATE REGARDING DIVIDEND The Indian companies Act,1956 has the following important provision in this respect. 1. Under section 923,, A company may ,if so authorized by its articles ,pay dividends in proportion to the amount paid up on each share ,where a large amount is paid up on same share than on other.

2. u/s 205 (1) , no dividends may be declared a paid except out of the profits of a company or out of funds provided for the purpose by the central or a state government. 3. u/s 205(3),all dividends must be paid in cash but this requirement does not prohibit the capitalization of profits or reserves by the issue of fully paid bonus shares or by making the existing party paid share fully paid up. 4. u/s 206. A dividend must be paid to a registered share holder or to his order or to his bankers or ( in the case of bases share) to the holder of this share warrant. 5. u/s 207, Where a dividend has been declared by a company and the dividend has not been paid with in 42 days form the date or of its declaration , the officers of the company ,who are in the default are punishable with imprisonment up to 7 days and also with fine.. 6. The company is general meeting may declare dividends but no dividend shall exceed the amount recommended by the board of the company directors.. 7. When a dividend has been declared by the company , it becomes a liability of the company to the shareholders form the date of its declaration , but it does not carry any interest against the company. At the end there is no universally accepted theory regarding the payment of dividend..it is on the will of the company and corporate norms which decides rather to pay dividend or not and up to what extent.. So it can be said that in Indian law and Indian companies act 1956 there is no universally accepted theory regarding declaration of dividend.