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It is a Report on Impact of Dividend Distribution Tax (1997) and Impact of Increase in DDT (2007) on the 212 Companies of different sectors of BSE. It is contributed by Radhika Gupta, Shivi Aggarwal, Sweta Agarwal, Saket Kumar Singh and Madhusudan Partani

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Impact Of DDT Impact Of DDT Document Transcript

  • CORPORATE FINANCE II END TERM PROJECT Impact of Dividend Distribution Tax (DDT) on Dividend Payout Ratio (DPR) Submitted to: Prof Himanshu Joshi 2010 Submitted By Radhika Gupta (91041) Shivi Aggarwal (91051) Sweta Agarwal (91059) Saket Kumar Singh (91046) Madhusudan Partani (91029) GROUP 3- FMG 18A
  • Contents Acknowledgement .................................................................................................................................. 2 Executive Summary................................................................................................................................. 3 Objectives ............................................................................................................................................... 4 Methodology........................................................................................................................................... 5 Data Collection .................................................................................................................................... 5 Classification ....................................................................................................................................... 5 Adjustments ........................................................................................................................................ 6 Statistical Tools ................................................................................................................................... 6 Scope ....................................................................................................................................................... 7 Limitations: ......................................................................................................................................... 7 Introduction ............................................................................................................................................ 8 Dividend Tax considered to be Double Taxation ................................................................................ 8 Historical Background On Dividend Taxation ....................................................................................... 11 Introduction of Corporate Dividend Tax ............................................................................................... 12 Main Provisions Relating to Corporate Dividend Tax ........................................................................... 14 Review of Literature.............................................................................................................................. 15 Irrelevance of Dividends ................................................................................................................... 15 Relevance of Dividends ..................................................................................................................... 16 Payout Trend of Each Sector ................................................................................................................. 19 Empirical Findings (using T-Test) .......................................................................................................... 27 Payout Trend – Size Wise ...................................................................................................................... 30 Empirical Findings (using T-Test) .......................................................................................................... 33 Conclusion ............................................................................................................................................. 36 Endnotes ............................................................................................................................................... 36 References ............................................................................................................................................ 36 Appendix .............................................................................................................................................. 38 I.List of Different Sectors before clubbing ........................................................................................ 38 II.Details on Composition of Final 12 Sectors ................................................................................... 39 III.List of those 211 Companies ......................................................................................................... 40 1 Corporate Finance II END Term Project | Group 3- FMG 18A
  • Acknowledgement We take this opportunity to acknowledge & express our profound sense of gratitude and respect to all those who helped us and hence contributed significantly to the completion of this project. We would like to offer a sincere thanks to Prof. Himanshu Joshi, Faculty at FORE School of Management, New Delhi, for his support and guidance for the fulfillment of this term paper. Thank you. Group-3 Radhika Gupta Shivi Aggarwal Sweta Agarwal Saket Kumar Singh Madhusudan Partani 2 Corporate Finance II END Term Project | Group 3- FMG 18A
  • Executive Summary This study examines the dividend trends of 215 Indian companies over the period 1995-2009 of almost all the sectors like METAL & MINING, AUTO, CAPITAL GOODS, CONSUMER DURABLES, FINANCE, FMCG, IT, OIL & GAS, POWER, HEALTHCARE etc listed on BSE for which there was no missing financial information over the period of the study. Thereafter we have studied the impact of Dividend Distribution Tax (DDT) on dividend policy, specifically on Dividend Payout Ratio (DPR). Analysis was done for the immediate three years before and after the tax regime change in 1997 and also for immediate two years before and after increase in DDT in 2007. For the purpose of this study, the sample was classified on the basis of industry and size (according to market capitalization). According to tax preference or trade-off theory, favourable dividend tax should lead to higher payouts. The Union Budget of 1997 made dividends taxable in the hands of the company paying them and not in the hands of the investors receiving them. The corporate dividend tax aimed at improving the economic growth and flexibility by eliminating the tax bias against equity-financed investments thereby promoting saving and investment. The new system aimed at reducing the tax bias against capital gains in the earlier tax system, encouraging investment, and enhancing the long-term growth potential of the Indian economy. As compared to the earlier tax regime where the recipient shareholder paid the tax on the dividend received primarily on the basis of marginal tax slab rate applicable to him/her (varying between 0% to 30%), in the current structure of corporate dividend tax, the dividend paying companies pay dividend tax at a flat rate of 12.5 per cent as of financial year 2005-06. Implicitly, the present corporate dividend tax regime can be termed as a more favourable tax policy. The analysis of influence of changes in the tax regime on dividend behaviour reveals the following:  Though the results are somewhat mixed, it can be largely inferred that there is a significant difference in average dividend payout ratio in the two different tax regimes for medium sized companies  There are wide industry-wise and size-wise variations in empirical findings visible over the period of study.  As a result of the introduction of DDT in the year 1997, two sectors namely “Metal and Mining” and “Finance” had significant change in the average DPR. This may be because Metal and Mining sector is primarily controlled by the public sector undertakings wherein there is large employee and management ownership of shares and preference for dividends. After introducing DDT, the management cadre who fall in the high income group benefitted from lower tax on their dividend income. For the finance sector it can be reasoned that the East Asia crisis of 1997 may a played some 3 role. Finance companies might be trying to restore the confidence of HNIs who benefit from the introduction of DDT more than investors in lower income brackets. Corporate Finance II END Term Project | Group 3- FMG 18A
  • Objectives The primary Objectives of the study are To study the impact of implementation of Dividend Distribution Tax in the year 1997 on Payout Policy of Indian companies To study the impact of an increase in Dividend Distribution Tax to 15% in the year 2007 on the payout policies of Indian companies. The secondary Objectives are: To study payout behaviour of different sector over the years To study the impact of DDT on differently sized firms namely-small, medium and large 4 Corporate Finance II END Term Project | Group 3- FMG 18A
  • Methodology Data Collection For studying the impact of Dividend Distribution Tax on the trend of Payout Ratios of Indian corporate sector, we have collected data on the Payout Ratios of some selected companies for which data was available. For the study, from all the companies listed in BSE, the companies which are part of Sensex, BSE TECk, BSE-PSU, Sectoral, Bankex, BSE-Midcap were taken for further consideration. Initially, we had 512 companies. After deleting the companies which reoccurred, being part of more than one index, 345 Companies belonging to various sectors were shortlisted. For the shortlisted companies, data on Dividend Payout Ratio from the year 1995 to 2009 was collected. For the purpose of study only the data from 1995 to 2000 and from 2006 to 2009 was used (DPR for year ending March 2009 is regarded as 2009). Also the Market Capitalization as on 24th February, 2010 was collected. Finally, 211 companies were selected. The companies for which the data was not available even for a single year were rejected. Classification Since, a sector wise analysis is being done, the sector of each selected company was found out. There were a total of 38 different sectors. For ease of calculation and analysis, sectors which had less than 5 companies were clubbed under one common head. Finally 12 sectors were arrived at. The sector heads before and after clubbing and the composition of each sector after clubbing are provided in appendix. The objective of the study also includes determining the impact of DDT on different sizes of firms namely-small, medium and large. The Market Capitalisation as on 24 th February 2010 5 was used as sorting criteria. The companies having M-Cap less than Rs.5000 crore were termed as small sized companies, between Rs.5000 Crore and Rs.20000 Crore termed as medium sized and more than Rs.20000 Crore are termed as large sized companies. Corporate Finance II END Term Project | Group 3- FMG 18A
  • Adjustments For certain companies the Financial Year was changed from year ending December to year ending March, but this doesn’t need adjustment in DPR since DPR available is annualised. In certain cases DPR arrives at negative figure, since the formula used is DPR = . In certain cases Companies tend to pay Dividends even though they have made losses. Thus, even though DPS is positive, EPS turns out to be negative and finally DPR turns out to be negative. In this case absolute value of DPR has been taken ignoring the sign. Statistical Tools For analysing the impact of introduction and enhancement of DDT on the DPR, it is necessary to use some scientific methods and tools. The implementation of DDT, making dividend taxable in hands of companies, will change the behaviour of companies and their dividend payout policy. Thus to validate its influence, Paired T-test (Student’s test) has been used. The test has been used twice, once, to study the impact of the implementation of DDT in the year 1997 and secondly to study the influence of an increase in DDT to 15% in the year 2007. Thus, the Null Hypothesis is that there is no change in DPR i.e. payout policy of selected companies due to Implementation of DDT and also due to increase of DDT. Thus H0: Average DPR for the years 1995, 1996 and 1997 and Average DPR for years 1998, 1999 and 2000 are same. (DPR1=DPR2) H1: Average DPR for the years 1995, 1996 and 1997 and Average DPR for years 1998, 1999 and 2000 are not same. (DPR1≠DPR2) Also, H0: Average DPR for the years 2006 and 2007 and Average DPR for years 2008 and 2009 are same. (DPR1=DPR2) H1: Average DPR for the years 2006 and 2007 and Average DPR for years 2008 and 2009 are not same. (DPR1≠DPR2) 6 The level of Confidence is at 90% Corporate Finance II END Term Project | Group 3- FMG 18A
  • Scope The period of study is from the year 1995 to 2000 and from 2006 to 2009. The data related to year ending March 1995 (December 1994 in some cases) to year ending March 2009 (December 2008 in some cases) has been taken. The scope was restricted to the companies listed on the BSE (Bombay Stock Exchange). The study is done for a total of 215 companies belonging to 38 different Industries (sectors) and for ease of study the number of sectors was reduced to 12, and rest were clubbed into related sectors or “Others”. Limitations: The use of paired t-Test will just depict whether there was significance difference in payout trend o companies before and after introduction of DDT, but the positive impact or negative impact cannot be determined. Thus Graphs are used to depict the same. Many companies which are though significant for study were ignored on the basis of non-availability of data. 7 Corporate Finance II END Term Project | Group 3- FMG 18A
  • Introduction Dividend decision has been a subject of enquiry for the financial analysts, academicians, and researchers for about five decades now. The objective of such a decision is to determine the extent to which the earnings of a company should be distributed as ‘dividend’ among the shareholders and thereby also ascertain the retained earnings. The dividend decision is an integral part of a company’s financial decision-making as it is explicitly related to the other two major decisions — investment and financing decision. Corporate taxation influences the dividend decision in more than one way. On the one hand, it influences the net income-after-tax of the company, which, in turn, determines the capacity of the company to pay dividends, and, on the other hand, it may have implications for the net value received by the shareholders. In this sense, the structure and the rate of corporate tax play an important role in determining the dividend policy. Corporate tax is levied on the income of the company and corporate dividend tax, which is a form of corporate tax, is levied on the amount of dividend declared, distributed or paid by the company. In most of the countries, corporate tax has been in the form of tax levied on net profits/earnings of the company. However, in India, tax is also levied on the dividend paid by the company or what is termed as dividend tax. A zero-dividend payout is not uncommon for young rapidly growing companies with good investment opportunities (Hindustan Times, 2003). Dividend Tax considered to be Double Taxation On an average, dividend payout in the US1 has decreased to 30 per cent at present from 60 per cent 30 years ago. However, companies may also be discouraged from paying higher dividends when these are doubly taxed once in the hands of the company and again in the 8 hands of the shareholders. Tax exemption is desirable on both dividends and capital gains that reflect primarily the retained earnings of the company. Corporate Finance II END Term Project | Group 3- FMG 18A
  • There is a school of thought that argues for tax exemption for dividend income. The basis of their argument is that taxation of dividend income amounts to double taxation. The rationale behind this claim is that corporate profits are subject to corporate tax. Since dividends are paid out of profits, the argument is that the personal income tax paid on dividend income amounts to a second tax on corporate profits. This logic is challenged on two grounds. First, there is a legal and logical distinction between the corporation as an entity and the individual shareholders who own the company. Second, the tax rates currently in place were set with the knowledge that there was taxation both at the corporate and the individual level. This means that if there was a moral objection to ‘double taxation,’ then, the remedial action would also require an increase in the corporate tax rate. On the first point, a corporation is an entity apart from its shareholders for reasons that have historically been quite important. The law has, in effect, recognized corporations as legal entities that are distinct from the individuals who happen to own its stock. This is an important privilege granted by the government for many reasons. First, the limited liability provided to shareholders means that a corporation might end up imposing damage to others in pursuit of profit without the individual shareholders being held accountable. Without the privilege of limited liability granted by the government, every shareholder could be held fully responsible for all claims against the company. A second important benefit associated with the corporate form is that the corporation can act as a legal individual without directly involving its owners. This can be advantageous to individuals who may wish to earn profit from activities that they would prefer not to be publicly associated with such as manufacturing guns, selling tobacco, etc. The corporate form allows individuals to profit from actions that may be viewed by some as otherwise questionable while preserving their anonymity. 9 There are other benefits associated with the legal privilege of incorporation but the best evidence of the value to the individual shareholders of having corporations as separate entities is the fact that corporations exist. Individuals choose to set up corporations (with Corporate Finance II END Term Project | Group 3- FMG 18A
  • full knowledge of the tax laws) because they view the benefits as outweighing the costs. The shareholders who feel that the corporate tax is too great a burden have the option of choosing a partnership or a sole proprietary form of business set-up. In this case, their income would only be subject to personal income tax. The decision to create a corporation is a proof of the fact that the benefits associated with this status outweigh the costs in having corporate income subject to taxation. Since the corporation is legally and logically a separate legal entity from its shareholders, there is no logic in the claim that the taxation of dividends amounts to double taxation. The corporation is subject to taxation in exchange for the privileges granted to it by the government. The shareholders are subject to tax on their dividend income just as employees are subject to tax on their salary income. The same income— that is, income to the same people or entity — is not being taxed twice. Beyond this logical point on double taxation, there is the obvious practical point that while setting the corporate tax rate, the government has been well aware of the fact that dividends are subject to taxation. In other words, the corporate tax rate was set at its current level with the expectation that the portion of profits paid out as dividends would also be subject to taxation. If there is a concern now that the taxation of dividends is an inappropriate form of double taxation, then the remedy should include raising the corporate tax rate. If the purpose of a cut in the tax rate on dividends was simply to eliminate the ‘double taxation’ of dividends, then it would be coupled with an increase in the corporate tax rate. If there is no accompanying increase in the corporate tax rate, then the intention must be to increase the amount of money going to the relatively small number of families who have a significant dividend income. Thus, the claim that dividends are subject to double taxation is questionable. In the Indian context, the imposition of corporate dividend tax on companies making payment of dividends has in a way resulted in the increase of the corporate tax rate on that portion of the corporate profit which is distributed among the shareholders. In other words, corporate 10 profits which are retained are subjected to a lower rate of corporate tax as compared to the corporate profits that are distributed. Corporate Finance II END Term Project | Group 3- FMG 18A
  • Historical Background On Dividend Taxation Till the year 1958-59, an imputation system of taxation was followed in India with respect to dividends. According to this system, the dividend received by the shareholders was included in their income after being grossed up and the shareholders were granted credit with respect to the amount deemed to have been paid by the company on their behalf. In other words, shareholders had to pay tax on dividend at the rate applicable to them but the government credited the tax paid by the company on this part of income to the investors. Thus, that part of the corporate earnings, which was declared as dividend, was taxed only in the hands of investors. This system of single taxation on dividend was abolished in 1959-601 and dividends were taxed for the second time separately in the hands of shareholders. Over the years, the investors and the corporate sector complained to the government against double taxation of income and the government eventually provided a partial relief to shareholders having low amount of dividend income in the form of deduction under Section 80L from the year 1968-69. As per Section 80L2 of the Income Tax Act, 1961, non-corporate individual shareholders were granted relief on dividend and certain other income like interest received from government securities, bank deposits, etc., subject to a ceiling. The limit, which was increased from time to time, stood at Rs. 12,000 in 1997. In this way, small investors whose income included income from different eligible savings including investments in shares were not required to pay any tax on their income if the total income from all such savings was below Rs. 12,000. Dividend income in excess of this limit was taxed under the normal rate applicable to the investors. The rate of tax ranged from 15 per cent to 40 per cent as of 1997 (10% to 30% from 1998 to 2004) depending on the tax bracket in which the income of the investor fell.3 Companies having dividend income also enjoyed relief in the form of Section 80M from the financial year 1968-69. According to this section, in case a company received dividend income from another company and also declared dividend to its shareholders, the positive difference between the dividend inflow and the dividend outflow alone was recognized as an income for the company. In other words, if the amount of dividends paid by a company exceeded its dividend income, the 11 dividend income was exempted from tax. To summarize, till 1997, dividend income was taxed in the hands of the shareholders subject to a small relief available to the small investors. Corporate Finance II END Term Project | Group 3- FMG 18A
  • Introduction of Corporate Dividend Tax Both the investors and the corporate sector were expecting the abolition of double taxation on dividend income ever since the Government of India had initiated financial reforms in 1991. In the budget of 1997, the Finance Minister announced the abolition of tax on dividend income in the hands of the shareholders. However, the budget proposed a new tax on the companies when they declared, distributed or paid dividend. While proposing this new ‘corporate dividend tax,’ or dividend distribution tax, the government had stated that the objective of this tax was to discourage companies from increasing the dividend outflow significantly leading to lower capital formation. While the new tax system exempted the investors from direct payment of any tax on dividend, it required an indirect payment of tax on dividend at a prescribed rate. It is difficult to determine whether the tax department collected a higher amount from dividend distribution tax compared to the earlier regime. There is no published data available on the amount raised by the government through tax on dividend income when the recipient shareholders paid tax on it. But, because of the exemption limits for tax payers in the lower income levels and poor personal tax administration, the revenue under the earlier system of taxation would be lower than that collected under the new system. Since the new tax system shifted the responsibility of paying tax to the companies, administration of the tax on dividend has now become more efficient and effective. While double taxation of dividends is pervasive, partial to full relief from this is prevalent in some countries. In most countries, the shareholders have to pay taxes on the dividends received. The corporate dividend tax aimed to improve economic growth and flexibility by eliminating the tax bias against equity-financed investments thereby promoting saving and investment. The new system aimed at reducing the tax bias against capital gains in the earlier tax system encouraging investment and enhancing the long term growth potential of the Indian economy. Dividend exclusion, combined with the elimination of the double taxation of retained earnings, 5 provides an important step toward reducing tax-based distortions of economic decisions. The change in dividend 12 taxation has implications for dividend payout policy, debt versus equity financing, organizational form (including corporate governance), and current versus future consumption (i.e., saving). A neutral tax policy toward dividends would also provide Corporate Finance II END Term Project | Group 3- FMG 18A
  • important benefits for corporate governance. Reducing tax barriers to dividend payments would help provide investors with improved information about the corporate prospects and reduce the tax-motivated build-up of cash left to the managers’ discretion. Recognition of the desirability of providing relief from double tax on corporate income is not new. The impetus behind the past proposals to integrate the individual and the corporate taxes was to reduce the economic distortions created by the double tax on corporate income. In addition, higher investment due to the lower tax on capital income would promote higher wages in the long run. The proposal would also be expected to enhance near-term economic growth. While the earlier policy called for tax payments to be made by investors based on the marginal tax rates applicable to them, the new policy taxed the dividends of the companies at a uniform rate. The investors now received their dividends ‘tax-free’ in the sense that they need not declare their income from dividends in their tax returns or pay a tax on them. In fact, the investors are implicitly paying a tax since the company pays the dividend tax and this reduces the amount of funds available for dividend payment by the company. 13 Corporate Finance II END Term Project | Group 3- FMG 18A
  • Main Provisions Relating to Corporate Dividend Tax The following are the salient features of corporate dividend tax as per Section 115-0 of the Income Tax Act, 1961:  Corporate dividend tax is in addition to the corporate tax paid by the company on its profits.  Such taxes are levied on any amount declared, distributed or paid by the domestic company (in India by way of dividends in cash).  The dividend may be declared out of current or accumulated profits.  Corporate dividend tax is payable even if no corporate tax is payable by a company or its income.  The principal officer of the domestic company and the company shall be liable to pay the tax on distributed profits to the credit of the central government within 14 days from the date of declaration, distribution or payment of any dividend whichever is the earliest.  The tax on distributed profits so paid by the company shall be treated as the final payment of tax in respect of the amount declared, distributed or paid as dividends and no further credit, therefore, shall be claimed by the company or by any other person in respect of the amount of tax so paid.  No deduction under any other provision of Income Tax Act, 1961, shall be allowed to the company or a shareholder in respect of the amount which has been charged to tax or the tax thereon. Thus, the above provisions are mandatory and binding on the companies in order to avoid payment of penal interest and other stringent aspects of law. 14 Corporate Finance II END Term Project | Group 3- FMG 18A
  • Review of Literature There are variations in the tax codes across countries. In many countries, the corporate source of income (dividend and capital gains) is subjected to double taxation. The double taxation of corporate income has been criticized on the following grounds: • It distorts the allocation of capital and other resources between corporate and non- corporate forms of business (Harberger, 1962; Ballentine and McLure, 1980). • It encourages high profit retention and thus avoids the test of marketplace (Poterba, 1987). • It encourages debt over equity financing (Litzenberger and Van Horne, 1978). • It increases the cost of equity financing and thus reduces investment and capital formation (Poterba and Summers, 1985). There are primarily two views on dividend taxation. As per one view, the dividend policy including the tax factor is irrelevant, i.e., it has no influence on the value of the company. The alternate view holds that dividend decision is, in fact, relevant and does affect the shareholders’ wealth. Irrelevance of Dividends In a world with no taxes, the Miller and Modigliani (1961) proposition suggests that dividend policy is irrelevant to the value of the company. However, when personal taxes are introduced with a capital gains rate, which is less than the rate on ordinary income, the picture changed. Friend and Puckett (1964) use cross section data to test the effect of dividend payout on share value and find that the value of the company is independent of dividend yield. The Black and Scholes (1974) study presents strong empirical evidence that the before tax returns on common stocks are unrelated to corporate dividend payout policy. They adjust for risks by using the capital asset pricing model (CAPM) and come up with a strong conclusion that it is not possible to demonstrate, even by using the best empirical 15 methods that the expected returns on high yield common stocks differ from the expected returns on low yield common stocks either before or after taxes. Corporate Finance II END Term Project | Group 3- FMG 18A
  • Miller and Scholes (1977) argue that even with the existing laws (where the tax on ordinary personal income is greater than the capital gains tax), there is no need for the individuals ever to pay more than the capital gains rate on dividends. The implication is that individuals could be indifferent towards payments in the form of dividends or capital gains (if the company decides to repurchase shares). Thus, the companies’ value will be unrelated to its dividend policy. Both the Friend and Puckett (1964) and Black and Scholes (1974) studies tend to support the conclusion that the value of the company is independent of the dividend yield. Relevance of Dividends Before 1997, there was double taxation of profit earned by the companies once in the hands of the company through corporate tax and then in the hands of the investors in the form of income tax. In such a case, the investor should prefer to get less dividend paid and the earnings to be retained by the company as they can always get the amount by selling the shares in the equity market in the form of ‘home made dividend’ (Black, 1976). Taking this argument, the taxation policy is considered a key determinant of dividend payout in the developed countries and the dividend decision is a relevant decision (Short, Keasey and Duxbury, 2002). Three important studies (Bhattacharya, 1979; Miller and Rock, 1985; and John and William, 1985) focusing on the relationship between dividend payout and corporate tax questioned the rationale of the old view that dividend taxation affects the shareholders’ optimal dividend payout ratios. Dividend results in an immediate tax liability for shareholders. These studies emphasized the need to distribute dividend even if it leads to higher tax liabilities for shareholders. The primary explanation for this was that dividend sends a signal to the shareholders about the future prospects of the company. Another study (Hakansson, 1982) strengthened the view that “the raising and lowering of dividends communicates 16 information (to shareholders) over and beyond what is provided by earnings reports, forecasts, and other announcements.” However, no study seems to have any explanation as to why dividends are better (and more expensive!) signals regarding future prospects (Black Corporate Finance II END Term Project | Group 3- FMG 18A
  • and Scholes, 1974; Black, 1976; and Ambarish, et al., 1987). Another rationale behind dividend distribution in spite of tax implication is provided by the view that shareholders are not sufficiently well informed about whether or not management is acting in their best interests (Crockett and Friend, 1988). Dividend distribution is further justified in the study by Easterbrook (1984). He observed that dividend payouts ensure that companies go to the capital markets to seek funds for new capital requirements. Market mechanisms ensure that managers are acting in the best interests of shareholders. Ofer and Thakor (1987) offer another explanation for dividend distribution: If managers are shareholders, they personally prefer dividends to share repurchases since most companies forbid managers from tendering their shares. Thus, the only way managers can get cash disbursement from their shares is through dividends and they may be willing to impose a tax cost on other shareholders (and themselves) to get the cash. Perhaps the most widely tested explanation of dividends is known as the clientele hypothesis (Gordon and Bradford, 1980). Some important groups of shareholders may prefer dividends to capital gains because dividends provide cash flow and, for these shareholders, there is little or no tax advantage from capital gains. The most important group comprises the non-taxable institutions but individuals with low marginal tax rates and other corporate shareholders are also in the ‘low-tax clientele.’ These shareholders will own stocks in the companies with high dividend payout ratios while other shareholders (the ‘high-tax clientele’) will invest in companies with low payout ratios. Empirical evidence regarding the clientele hypothesis has been mixed. Studies that find clientele effects include Pettit (1977), Gordon and Bradford (1980), and Scholz (1989). The studies providing contradictory evidence include Long (1978), Litzenberger and Ramaswamy (1979, 1982), Hess (1982), Auerbach (1983), Poterba and Summers (1984), Poterba (1987), and Blume and Friend (1987). The contemporary literature on dividend policy offers evidence of irrelevance of dividend tax in dividend policy. It is argued that dividend taxes get capitalized into the value of the company (King, 1977 and Bradford, 1981). The major drawback in this theory is that it fails to deal adequately with the possibility of periodic share repurchases. However, contradictory empirical evidence is provided by the study of Poterba and Summers (1985). The controversy between these 17 views continues to be the main focus of research on dividend taxation. In India, this issue has not received adequate attention of researchers so far. It is Lintner’s model (1956) which Corporate Finance II END Term Project | Group 3- FMG 18A
  • has been the focus of empirical studies in the Indian context. Much work does not seem to have been carried out on other aspects of dividend policy in India. However, a few studies have been carried out including those of Majumdar (1959), Nigam and Joshi (1961), Purnanandam (1966), Rao and Sharma (1971), Gupta (1973), Krishnamurthy and Shastry (1975), Dhameja (1976), Murty (1976), Bhat and Pandey (1994), Ojha (1978), Khurana (1980), and Mishra and Narender (1996). Most of these studies have primarily focused on identifying the factors influencing dividend payouts in the Indian corporate sector and only indirect references have been made to the impact of tax on dividend policy. However, Narasimhan and Asha (1997) discuss the impact of dividend tax on dividend policy of companies. They observe that the uniform tax rate of 10 per cent on dividend as proposed by the Union Budget, 1997-98, alters the demand of investors in favour of high payouts rather than low payouts as the capital gains are taxed at 20 per cent in the said period. A study by Reddy (2002) has shown that the trade-off or tax preference theory does not appear to hold true in the Indian context. Another study by Narasimhan and Krishnamurti (2004) finds no clear evidence that companies altered their dividend payout policy in response to the introduction of corporate dividend tax in India. Being able to precisely spell out the relation between corporate tax and dividend policy would be advantageous to most of the diverse groups which are likely to be affected in the process. For instance, the shareholders may be able to understand the dividend behaviour of a company in response to any proposed change in corporate taxation. In addition, the shareholders may be able to anticipate the amount which they are likely to receive as dividend. It will also help the management in identifying and evaluating potential growth strategies, expansion opportunities or prepare a defence against possible future adverse developments. As far as the policy-makers are concerned, the study may provide the much needed respite that introduction of corporate dividend tax in India in 1997 has contributed positively towards the declaration of dividends. The change in tax policy with respect to dividends can be considered as an interesting experiment in corporate finance with few parallels. The policy change may have a bearing on the wealth of investors on the one hand 18 and the cost of equity of the companies on the other. This may, in turn, influence dividend payout policy and capital structure of the companies. Corporate Finance II END Term Project | Group 3- FMG 18A
  • Payout Trend of Each Sector Of the total 211 Companies selected for the study, these have been divided into 12 sectors, namely Auto, Capital Goods, Consumer Durables, Finance, FMCG, Health care, IT, Metal and Mining, Oil and Gas, Others, Power and Realty. The composition of each sector is as follows Sector Composition Power, 6 Realty, 9 Auto, 15 Capital Others, 50 Goods, 31 Consumer Durables, 6 Finance, 34 IT, 9 FMCG, 14 Oil & Gas, 11 Metal & Mining, 12 Healthcare, 14 The “Others” Sector has 50 companies because many sectors are clubbed into that. The details of clubbing are provided in appendix. 19 Corporate Finance II END Term Project | Group 3- FMG 18A
  • Auto 50% 40% 30% 20% DPR(%) 10% 0% 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 The average Dividend payout ratio in this sector is between 25% and 40%. Since there are many capital expenses and also availability of growth opportunities, payment of dividend is low which minimises the DPR. There has been a steep rise in average DPR of the sector in the year 2002 because Escorts Ltd, which was a non payer earlier, started paying dividends and also Maruti Suzuki, which used to pay around 8% DPR, has now moved to 40%. The steep increase in the year 2002 and minor fall in the 2003 could be due to Abolishment of DDT in 2002 and reintroduction of the same in 2003. Capital Goods 50% 40% 30% 20% DPR(%) 10% 0% 1996 1995 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 One of the basic features of capital goods sector is that it has large growth opportunities. Thus The DPR seems to be in a range of 18% to maximum of 47% in year 2002. The steep increase is due to special dividends declared by Shree Cements. This has lead to increase in DPR to 644%. This implies the company has paid 6.44 times the earnings it has actually made, as dividends to its shareholders. This signifies that there was no investment 20 opportunity, so the management decided to go for huge dividends. Also abolishment of DDT could also be the reason. Corporate Finance II END Term Project | Group 3- FMG 18A
  • Consumer Durables 70% 60% 50% 40% 30% DPR(%) 20% 10% 0% 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 The DPR trend has been more or less constant. The increase in the year 2001 is because of recession. During the recession, the companies go for dividends payout so that the interest of shareholders can be retained and the morale can be boosted. Also the absence of investment opportunities makes the management to go for dividend payout. In the year 2002 Tata Communications had the DPR of 209% further leading to increase in median DPR. Finance 140% 120% 100% 80% DPR-Large 60% DPR-Medium 40% 20% DPR-Small 0% 2009 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 The average DPR in all the three sectors is more or less consistent at 20%. There has been steep increase in Large Companies DPR; this is because of IFCI paying out 557% as its DPR. Also in the case of Medium companies, the steep increase in DPR in the year 2003 is 21 because of JM Financials paying 1037% of its earnings as dividends. Corporate Finance II END Term Project | Group 3- FMG 18A
  • If Inter-size comparison is made, in the year 1997, when the DDT i.e. Dividend Distribution Tax was implemented making dividends taxable for companies paying them, the payment of dividend fell for medium and small companies. But this trend was not visible in dividend payout ratio of large companies. But in the year 2003 and 2007, where the DDT was re- introduced at 12.5% and further 15%, respectively, there has been no influence in payout ratio and the trend. FMCG 60% 50% 40% 30% DPR(%) 20% 10% 0% 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 The average DPR of this sector, unlike other sectors like Capital goods, Auto etc, is high. The reason is simple that, the FMCG is not a growth sector and also the capital investment requirement is low. Thus the average DPR is in range of 37% to 57%. In the year 2001, FMCG firms were regarded as the top dividend paying firms. Companies like Nestle India Ltd, Colgate Palmolive (India) Ltd. paid DPR of as high as 118% and 219% respectively. 22 Corporate Finance II END Term Project | Group 3- FMG 18A
  • Healthcare 45% 40% 35% 30% 25% 20% DPR(%) 15% 10% 5% 0% 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 The average DPR for Healthcare sector is ranging between 20% and 40%. It is observable that the dividends are very much fluctuating, which implies that the industry takes dividend as passive, and the dividends are paid only when there is no investment opportunities. Thus the DPR ranges from as high as 114% to as low as 6%. The continuous fall after 2007 may be because of increase in DDT to 15% and also investment opportunities in R&D. IT 250% 200% 150% 100% DPR(%) 50% 0% 2004 1995 1996 1997 1998 1999 2000 2001 2002 2003 2005 2006 2007 2008 2009 Information Technology, which is regarded as one of the growing sector with very attractive investment opportunities, has a very low average DPR. This is also visible from the DPR of 23 the companies. It is in the range of 6% to 34%. In the year 2006, there has been steep increase in the DPR. This is because Moser Bear had DPR of 359%, GTL had 486% and TechMahindra also had a DPR of 500%. Thus, leading to an overall sector average of 200%. Corporate Finance II END Term Project | Group 3- FMG 18A
  • Metal and Mining 30% 25% 20% 15% 10% DPR(%) 5% 0% 1996 1995 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 There have been no steep increases or falls. The DPR has been consistent and ranging from 15% to 25%. This signifies that the fixed dividend payout policy is in practice. But the implementation of DDT has no impact on the sector. In fact no other sector has the impact. The fall in the year 2003 could be credited to the fact that the DDT after its abolishment in 2002 was re-introduced by Finance Act, 2003. Oil&Gas 35% 30% 25% 20% 15% DPR(%) 10% 5% 0% 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 No steep increases in this sector. The range of DPR is 13% to 28%. Since there is necessity to 24 maintain reserves for unseen uncertainties, these companies prefer paying low dividends and have a high retention ratio. Corporate Finance II END Term Project | Group 3- FMG 18A
  • Others 70% 60% 50% 40% 30% DPR(%) 20% 10% 0% 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Since many sectors like Textile, Agriculture, Plastic goods, Diversified are part of this sector, no conclusion can be made out of this DPR trend. But the DPR had risen in the year 1999 because of Century Textiles which had payout of 1037% and in the year 1999, the increase is credited to Kesoram cements which paid 1700% of its EPS as DPS. Power 40% 35% 30% 25% 20% 15% DPR(%) 10% 5% 0% 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Being a high growth sector, the DPR of this sector is ranging between 18% and 36%. But in this sector too there has been no impact of either implementation of DDT and increase in 25 DDT rate. Corporate Finance II END Term Project | Group 3- FMG 18A
  • Realty 40% 35% 30% 25% 20% 15% DPR(%) 10% 5% 0% 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 The realty sector saw a transition from low growth sector to a very high growth sector. The DPR trend too depicts the same. The DPR in the year 1995 was at 34% and then it kept on falling and reached to 10% in the year 2009. The companies in this sector retain the earnings and reinvest the same in the business instead of paying it out. The actual rate of return on investments is more than the opportunities cost to the shareholder. 26 Corporate Finance II END Term Project | Group 3- FMG 18A
  • Empirical Findings (using T-Test) For 1997(Introduction of DDT) To determine the impact of the introduction of the Dividend Distribution Tax in the Union Budget of 1997, the paired sample T-test was conducted on 211 firms categorized in 12 sectors. On the basis the comparison between the calculated and the critical T-values, any significant impact of Dividend Distribution Tax on the Dividend Payout Ratio (DPR) can be seen. Significance Level is 90%. Accordingly, α = 0.10 General rule: If P-value>α; Accept the null hypothesis If P-value<α; Reject the null hypothesis P- Sector 1997 N Mean SD T-value T-value(critical) value Before 15 25.63 13.54 -1.761 to Auto -0.82 0.426 After 15 29.09 20.6 +1.761 Before 31 24.31 13.15 -1.697 to Capital Goods -1.03 0.312 After 31 30.04 29.28 +1.697 Consumer Before 6 23.6 21.6 -2.015 to -1.64 0.162 Durables After 6 34.3 36.9 +2.015 Before 34 17.82 15.37 -1.694 to Finance -1.83* 0.076* After 34 27.56 31.85 +1.694 Before 14 39.29 23.18 -1.771 to FMCG -0.15 0.882 After 14 39.91 26.86 +1.771 Before 14 22 13.49 -1.771 to Healthcare -1.55 0.145 After 14 33.96 25.5 +1.771 Before 9 22.44 18.96 -1.860 to IT 0.73 0.654 After 9 18.74 25.1 +1.860 Before 12 16.55 9.12 -1.796 to Metal n Mining -1.94* 0.079* After 12 20.72 11.76 +1.796 Before 11 15.1 11.47 -1.812 to O&G -1.81 0.101 After 11 18.94 10.03 +1.812 Before 50 36.6 50.6 -1.676 to Others -0.74 0.464 After 50 47.2 86.4 +1.676 Before 6 25.03 8.47 -2.015 to Power 0.63 0.559 After 6 21.89 16.6 +2.015 27 Before 9 29.51 21.7 -1.860 to Realty 0.75 0.474 After 9 23.74 10.73 +1.860 Corporate Finance II END Term Project | Group 3- FMG 18A
  • For all the 10 sectors we find that the P-value>α. Therefore, we accept the null hypothesis that there is no significant change in the average DPR Before due to the change in the tax regime policy in 1997. For the 2 sectors namely, “Metal and Mining” and “Finance” the P-value<α. Therefore, we reject the null hypothesis and accept the alternate hypothesis i.e. there is significant difference in the average DPR before and after the 1997 tax regime change. The above conclusion is also corroborated by comparing the calculated T- value with the critical T- value. For “Metal and Mining” the calculated value (-1.94) is outside the permissible range (-1.796 to +1.796) at significance level of 90%. Similarly for, “Finance” the calculated value (-1.83) lies outside the critical range (-1.694 to +1.694). For 2007(Increase in DDT to 15%) T- Sector 2007 N Mean SD T-value value(critical) P-value Before 15 25.65 14.91 -1.761 to Auto -0.75 0.464 After 15 27.92 21.25 +1.761 Before 31 22.98 14.71 -1.697 to Capital Goods 0.51 0.611 After 31 21.82 11.32 +1.697 Consumer Before 6 24.31 17.58 -2.015 to -0.38 0.723 Durables After 6 25.09 16.05 +2.015 Before 34 22.42 10.08 -1.694 to Finance -0.01 0.988 After 34 22.44 15.26 +1.694 -1.771 to FMCG Before 14 49.46 24.29 -0.49 +1.771 0.629 After 14 51.5 26.99 Before 14 33.57 33.22 -1.771 to Healthcare 1.2 0.25 After 14 23.68 14.28 +1.771 Before 9 106.8 105.3 -1.860 to IT 2.31* 0.05* After 9 27.4 16.4 +1.860 Before 12 19.36 11.81 -1.796 to Metal n Mining 1.36 0.202 After 12 15.44 8.21 +1.796 Before 11 26.82 13.68 -1.812 to O&G 2.36* 0.04* After 11 20.13 12.71 +1.812 Before 50 29.76 21.64 -1.676 to Others -0.39 0.7 After 50 31.12 34.44 +1.676 28 Before 6 32.7 30.2 -2.015 to Power -0.82 0.448 After 6 35.6 37.7 +2.015 Before 9 14 9.01 -1.860 to Realty 1.3 0.23 After 9 10.65 10.65 +1.860 Corporate Finance II END Term Project | Group 3- FMG 18A
  • For 10 sectors where the P-value > alpha, we can say that the null hypothesis is accepted, i.e. there is no significant change in the average DPR after the introduction of dividend distribution tax. But, in IT and O&G sector, we see that P-value< alpha, so we reject the null hypothesis, i.e. there is significant difference in the average DPR after the introduction DDT. IT sector: The Return on equity of IT sector is very high compared to other sectors of Indian economy. Before 2003 the profitability of the IT firms was scanty and consequently this sector was at the bottom of the list in terms of dividend payment. The average payout of the IT sector during this period was 21.53%.This can be attributed two factors .Firstly, the industry presented immense growth opportunities for the companies hence the managers were of opinion that they can provide the investors better returns if they plough back the earnings into business. Secondly, most firms in Industry were facing volatile earnings stream which deterred them from paying more dividends. After 2003, there was a substantial spurt in dividend payout ratios of the IT companies. Infosys Technologies, Wipro Technologies, HCL Technologies were among the highest dividend paying companies. Infosys Technologies paid as high dividend as 2590% in the year 2004.This surge in dividend can be attributed to high profitability and subsequently high liquidity of IT companies. IT sector is a human intensive sector and do not require huge capital asset base like manufacturing companies for their operations. The major asset of this sector is manpower. Therefore the funds required for recruitment and retention of manpower is comparatively less than funds required for purchasing capital assets. So these firms can easily release funds for payment of dividends. Thus, we can conclude that IT firms in India have high liquidity and it is an important determinant of dividend payout ratio. Since the profitability of the companies is also very high so even if there is year to year variability in the earnings of the firms they can easily pay huge dividends. 29 Corporate Finance II END Term Project | Group 3- FMG 18A
  • Payout Trend – Size Wise Size-wise Composition Large, 41 Small, 113 Medium, 57 The shortlisted companies which are further divided into large sized segment, medium sized segment and small sized segment based the Market capitalization criteria. The companies with less than Rs 5000 Crs. were sorted as Small size, with market capitalization of Rs. 20000 Crs as large size and rest into medium size. 30 Corporate Finance II END Term Project | Group 3- FMG 18A
  • Large 40% 35% 30% 25% 20% 15% Large 10% 5% 0% 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 The Companies in this sector have the market capitalisation of more than Rs. 20000 Crores. The DPR of these is more or less constant in between the range of 19% to 37%. There has been increase in Dividends payment and DPR in the year 2001. This is because of downturn faced during that time. The companies prefer paying the dividends because of lack of investment opportunities and also to boost up the morale of investors. The DPR is also high because of low denominator in the form of Earnings but the numerator in form of dividends is either constant or increases. Also there has been no impact of Introduction of DDT in the year 1997 and increase in DDT rate in the year 2007. In fact there has been increase in payout in the year 1997 and onwards. The Increase in DPR Trend in the year 2002 is because of abolishment of DDT i.e. Dividends are taxable in hands of investors and not the company. There is fall in Payout trend in the year 2003; this could be due to re-introduction of DDT by Finance Act 2003. 31 Corporate Finance II END Term Project | Group 3- FMG 18A
  • Medium 60% 50% 40% 30% Medium 20% 10% 0% 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 The range of Dividend Payout ratio for this sector, which has companies with market capitalisation in between Rs. 5000 Crores and Rs.20000 Crores, is between 25% and 48%. Small 40% 35% 30% 25% 20% 15% Small 10% 5% 0% 1996 1995 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 The companies with market capitalization less than Rs. 5000 crores are comprised in this segment. The Payout trend of these firms is very much fluctuating. This is because the companies are characterised by low cash reserves and there is high co-relation between Cash profits and dividends of the companies. Thus this leads to fluctuating payout ratio. In the year 1997, the fall can be credited to the account of introduction of Dividend Distribution Tax, making the dividends taxable in the hands of companies paying them. In 32 the year 2001, where large and medium sized firms preferred paying dividends, the small firms paid low dividends because of non availability of cash profits. Corporate Finance II END Term Project | Group 3- FMG 18A
  • Empirical Findings (using T-Test) For 1997(Introduction of DDT) Sector 1997 N Mean SD T-value P-value Before 41 20.67 14.83 Large -2.97* 0.005* After 41 26.85 19.87 Before 57 26.74 18.58 Medium -2.14* 0.036* After 57 32.53 25.23 Before 113 27.88 36.22 Small -0.16 0.87 After 113 29.02 62.79 From the results of t-Test it is clearly visible that there has been no influence in Payout ratio of Small sized companies due to introduction of DDT. Since the p-Value of large sized and Medium sized companies are less than α (0.1), this implies that the null hypothesis of there is no significant influence of DDT on DPR is rejected. Thus we can infer that there has been significant influence of DDT on the Payout trend of these companies. For 2007(Increase in DDT to 15%) Sector 2007 N Mean SD T-value P-value Before 41 29.79 19.15 Large 1.03 0.311 After 41 28.75 22.44 Before 57 36.85 37.66 Medium 1.81* 0.076* After 57 28.64 19.71 Before 113 27.2 33.89 Small 1.07 0.288 After 113 23.56 26.33 From the Table of results of T-test, it is clearly noticeable that the p-value of Medium sized companies is less than 0.1 (α). This entails that there was significant influence of increase in DDT to 15% on the payout trend of these companies. Also there was no impact of the same 33 on payout trend of large and small sized companies. Corporate Finance II END Term Project | Group 3- FMG 18A
  • Conclusion Successive Finance Ministers have realised that measured spraying of DDT - Dividend Distribution Tax - in Budgets is like providing a huge tax net over an entire corporate sector. DDT is a tax on distributed dividend and not exactly on income. Since its introduction in 1997, DDT has been in the thick of controversy. After exempting dividend income in the hands of shareholders, the loss in revenue is being made good by collecting DDT from companies. A shareholder would prefer his overall tax liability computed after taking all aspects into account rather than be taxed under the thumb-rule, that is, DDT. Otherwise, one sector which is perennially cash-strapped is made to pay DDT, when, in fact, it need not pay. The profit-making government-owned companies declare dividends and pay the same to the Government. As the Government is not a taxable entity, no tax is deducted at source when dividend income is distributed (when dividend income was taxable). Since DDT is a measure consequent to the exemption of dividend income from taxation, to offset the revenue loss, the measure should have been confined to dividend distributed among taxable shareholders. To make the public sector pay, DDT on dividend distributed to the Government is unreasonable and illogical. Public sectors companies, such as Bank of India, Canara Bank, State Bank of India, ONGC, VSNL, MTNL, IOC and HAL, have been made to shell out huge sums as DDT. For obvious reasons, these companies will not protest. Moreover, after the amendments introduced by the Finance (No.2) Act, 2004, as far as a shareholder is concerned, he is indifferent between equity dividend income and long-term capital gains on equity shares as both are exempt in his hands. However, from the company’s point of view, retentions are still better as in such a scenario the company can avoid payment of Corporate Dividend Tax. One of the strongest arguments in the favour of DDT is that it doesn’t let shareholders having huge stakes in the company go off without paying taxes on their incomes. 34 Corporate Finance II END Term Project | Group 3- FMG 18A
  • Thus we can conclude that, though the Dividends were made taxable in the hands of companies paying the dividends, thus has no impact on the payout trend of the companies. Only few sectors had the impact of the same. Thus the tax-Preference theory which states that companies and also share holders prefer to have capital gain instead of dividends. Because the capital gains on equity shares are exempted from Taxes whereas dividends are taxable at 15%. The argument extended against DDT is that it leads to double taxation. First, as income tax on the profits earned by the companies, then secondly, as DDT on dividends which is paid out of profits lest after paying the income tax. The profits of a company are supposed to be the income of shareholders. This way they, as part owners i.e. the shareholders, have already been taxed. Under the current Taxation system, when a subsidiary company pays dividend to its parent company, it pays dividend distribution tax. When the parent company pays dividend to its shareholders, probably utilizing all of its dividend receipts, it further pays dividend distribution tax again on the same funds. This leads to double taxation, which should have been resolved by taxing dividend in the hands of the shareholder. The worst hit is the group companies or the chain investment companies, which will be subject to DDT more than once to distribute its profits to the ultimate shareholders. It is important that shareholders get fair returns on their equity holdings in a company. Otherwise they would prefer to choose investing through other alternative means. Moreover, it creates a bias in favor of undistributed profits against distributed profits. India needs to reduce the overall incidence so as to make Indian companies competitive in the international market. DDT encourages retention of profits in the hands of the company. It severely effects the capital formation and development in a country where capital is scarce and liquidity is one of the essential requirements of an economy. But it is equally important that shareholders get fair return on their equity holdings. Also keeping in mind the present policy of globalization, high corporate tax and less investment will make Indian companies suffer in the international market. 35 Corporate Finance II END Term Project | Group 3- FMG 18A
  • Endnotes 1. Sections 67 and 68 of Part B of the Union Budget 1959-60 of the Government of India. 2. Section 80L was inserted by the Finance (No.) 2 Act, 1967 with effect from assessment year 1968-69. 3. Even if the dividend income along with other qualified income exceeds Rs. 12,000, for individual investors, whose income from all sources including dividend income is equal to or below Rs. 60,000, no tax is levied and these small investors thus escape from any tax on dividend income. References 1. Monica Singhania (2006), “Taxation and Corporate Payout Policy”, Vikalpa (Volume 31 No. 4). 2. Monica Singhania (2005),”Trends in Dividend Payout, Journal of Management Research (Volume 5, No. 3). 3. Bhat, R and Pandey, I M (1994). “Dividend Decision: A Study of Managers’ Perceptions,” Decision, 21(1/2), 67-86. 4. Hindustan Times (2003). “Dividend Taxation Slows Corporate Growth,” January 20. 5. The Economic Times (2010). “Should dividends be taxed in investors' hands?” January 28. 6. Business Standard (2010), “A case for withdrawal of dividend distribution tax” February 25. 7. Baker, H. Kent, E.T. Veit and G.E. Powell (2001), Factors Influencing Dividend Policy Decisions of Nasdaq Firms, The Financial 8. Review 36(3): 19-38. 9. Narasimhan, M S and Krishnamurti (2004). “The Role of Personal Taxes and Ownership Structure on Corporate Dividend Policy,” unpublished paper. 36 10. Reddy, Y Subba (2002). “Dividend Policy of Indian Corporate Firms: An Analysis of Trends and Determinants,” NSE Research Initiative, Serial No.19. 11. Dividend Tax, “Wikipedia.com” Corporate Finance II END Term Project | Group 3- FMG 18A
  • 12. Ebscohost.com 13. Capitaline.com 14. http://www.thehindubusinessline.com/2007/03/09/stories/2007030901060900.htm 15. http://www.thehindubusinessline.com/2000/04/01/stories/120164su.htm 16. http://www.legalserviceindia.com/article/l187-Does-Dividend-Distribution-Tax- amount-to-Double-taxation.html 37 Corporate Finance II END Term Project | Group 3- FMG 18A
  • Appendix I. List of Different Sectors before clubbing Sector No. of Sector No. of Companies Companies Agriculture 1 Logistics 2 Agro Chem 2 Media and 4 Entertainment Auto 13 Metal 8 Auto Ancillary 1 Mining 4 Banks 3 Misc. 5 Capital Goods 22 Oil & Gas 10 Cement 2 Others 8 Chemicals 5 Packaging 1 Consumer Durables 3 Paints 2 Diversified 5 Petrochemicals 1 Edible Oil 1 Pharma 5 Fertilizers 5 Plastic products 1 Finance 33 Power 8 FMCG 14 Realty 8 Gas Distribution 1 Retail 1 Healthcare 14 Shipping 1 Hotels 3 Steel 1 Housing related 2 Telecom 3 IT 10 Transport 2 38 Corporate Finance II END Term Project | Group 3- FMG 18A
  • II. Details on Composition of Final 12 Sectors Assigned Sector Actual Sector Assigned Actual Sector Sector Auto Auto Others Agriculture Auto ancillaries-Electrical Agro Chemicals Chemicals Capital Goods Capital Goods Diversified Cement Edible Oil Housing Related Fertilizers Steel Gas Distribution Transport Services Hotels Logistics Consumer Durables Consumer Durables Media & Entertainment Telecom Miscellaneous Others Finance Banks Packaging Finance Paints Petrochemicals FMCG FMCG Pharma Plastic Products Healthcare Healthcare Retail Shipping IT Information Technology Power Power Metal & Mining Metal Metal, Metal Products & Realty Realty Mining Oil & Gas Oil & Gas 39 Corporate Finance II END Term Project | Group 3- FMG 18A
  • III. List of those 211 Companies Sr. No Code Name Sector 1 523204 Aban Offshore Ltd. Oil & Gas 2 500002 ABB Ltd. Power 3 500410 ACC Ltd. Capital Goods 4 505885 Alfa Laval (India) Ltd. Capital Goods 5 532480 Allahabad Bank Finance 6 520077 Amtek Auto Ltd. Auto 7 532418 Andhra Bank Finance 8 500013 Ansal Properties & Infrastructure Ltd Realty 9 508869 Apollo Hospitals Enterprises Ltd. Healthcare 10 500877 Apollo Tyres Ltd. Auto 11 500477 Ashok Leyland Ltd. Auto 12 531847 Asian Star Co. Ltd. Others 13 506820 Astrazeneca Pharma Ltd. Others 14 526991 Atlas Copco (India) Ltd. Capital Goods 15 524804 Aurobindo Pharma Ltd. Healthcare 16 500674 Aventis Pharma Ltd. Others 17 532215 AXIS Bank Ltd. Finance 18 500032 Bajaj Hindustan Ltd. Others 19 500490 Bajaj Holdings & Investment Ltd. Auto 20 500038 Balrampur Chini Mills Ltd. Others 21 532134 Bank of Baroda Finance 22 532149 Bank Of India Finance 23 532525 Bank of Maharashtra Finance 24 500041 Bannari Amman Sugars Ltd. Others 25 506285 Bayer Cropscience Ltd. Others 26 500048 BEML Ltd. Capital Goods 27 509480 Berger Paints India Ltd. Others 28 503960 Bharat Bijlee Ltd. Capital Goods 29 500049 Bharat Electronics Ltd. Capital Goods 30 500493 Bharat Forge Ltd. Auto 31 500103 Bharat Heavy Electricals Ltd. Capital Goods 32 500547 Bharat Petroleum Corp. Ltd. Oil & Gas 40 33 500055 Bhushan Steel Ltd. Capital Goods 34 526853 Bilcare Ltd. Healthcare 35 500335 Birla Corporation Ltd. Capital Goods Corporate Finance II END Term Project | Group 3- FMG 18A
  • Sr. No Code Name Sector 36 526612 Blue Dart Express Ltd Others 37 500067 Blue Star Ltd. Consumer Durables 38 523457 BOC India Ltd. Others 39 500530 Bosch Ltd. Auto 40 500825 Britannia Industries Ltd. FMCG 41 532483 Canara Bank Finance 42 500870 Castrol India Ltd. Others 43 500040 Century Textiles & Industries Ltd. Others 44 500084 CESC Ltd. Power 45 500085 Chambal Fertilisers & Chemicals Ltd. Others 46 500110 Chennai Petroleum Corporation Ltd. Oil & Gas 47 500087 Cipla Ltd. Healthcare 48 500830 Colgate Palmolive (India) Ltd. FMCG 49 531344 Container Corporation of India Capital Goods 50 506395 Coromandel International Ltd. Others 51 532179 Corporation Bank Finance 52 500092 CRISIL Ltd. Others 53 500093 Crompton Greaves Ltd. Power 54 500480 Cummins India Ltd. Auto 55 500096 Dabur India Ltd. FMCG 56 532121 Dena Bank Finance 57 532868 DLF Ltd. Realty 58 500124 Dr Reddy's Laboratories Ltd. Healthcare 59 523618 Dredging Corporation of India Capital Goods 60 500125 E.I.D. Parry (I) Ltd. Others 61 500840 EIH Ltd. Others 62 505700 Elecon Engineering Co. Ltd. Capital Goods 63 531162 Emami Ltd. FMCG 64 532178 Engineers India Ltd. Others 65 530323 Era Infra Engineering Ltd. Realty 66 500495 Escorts Ltd. Auto 67 500134 Essar Oil Ltd Oil & Gas 68 500086 Exide Industries Co. Ltd. Auto 69 500469 Federal Bank Ltd. Finance 41 70 526881 Financial Technologies (I) Ltd. IT 71 532155 Gail (India) Ltd. Oil & Gas 72 509550 Gammon India Ltd. Capital Goods Corporate Finance II END Term Project | Group 3- FMG 18A
  • Sr. No Code Name Sector 73 500676 GlaxoSmithKline Consumer Healthcare FMCG 74 500660 GlaxoSmithKline Pharmaceuticals Ltd. Healthcare 75 500163 Godfrey Phillips India Ltd FMCG 76 500164 Godrej Industries Ltd. Others 77 500300 Grasim Industries Ltd. Others 78 500620 Great Eastern Shipping Co. Ltd. Others 79 500160 GTL Ltd. IT 80 500173 Gujarat Fluorochemicals Ltd Others 81 523477 Gujarat Gas Company Ltd. Others 82 532181 Gujarat Mineral Development Corp. Metal & Mining 83 500670 Gujarat Narmada Val Fer Co. Ltd. Others 84 517354 Havells India Ltd. Capital Goods 85 500010 HDFC Finance 86 500180 HDFC Bank Ltd. Finance 87 500182 Hero Honda Motors Ltd. Auto 88 500183 Himachal Futuristic Comm. Consumer Durables 89 500440 Hindalco Industries Ltd. Metal & Mining 90 500185 Hindustan Construction Co Ltd Realty 91 500186 Hindustan Oil Exploration Co. Ltd. Oil & Gas 92 500104 Hindustan Petroleum Corp Ltd. Oil & Gas 93 500696 Hindustan Unilever Ltd. FMCG 94 500188 Hindustan Zinc Ltd. Metal & Mining 95 500193 Hotel Leela Venture Ltd. Others 96 500710 ICI India Ltd. Others 97 532174 ICICI Bank Ltd. Finance 98 500106 IFCI Ltd. Finance 99 530005 India Cements Ltd. Capital Goods 100 500850 Indian Hotels Co. Ltd. Others 101 530965 Indian Oil Corporation Ltd. Oil & Gas 102 532388 Indian Overseas Bank Finance 103 532187 IndusInd Bank Ltd. Finance 104 500116 Industrial Dev Bank of India Finance 105 500209 Infosys Technologies Ltd. IT 106 531807 ING Vysya Bank Ltd. Finance 42 107 524494 Ipca Laboratories Ltd. Healthcare 108 500875 ITC Ltd. FMCG 109 530773 IVRCL Infrastructures & Projects Ltd. Realty Corporate Finance II END Term Project | Group 3- FMG 18A
  • Sr. No Code Name Sector 110 512237 Jai Corp Ltd. Metal & Mining 111 500219 Jain Irrigation Systems Ltd Others 112 500378 Jindal Saw Ltd. Metal & Mining 113 523405 JM Financial Ltd Finance 114 500228 JSW Steel Ltd Metal & Mining 115 530019 Jubilant Organosys Ltd. Others 116 513250 Jyoti Structures Ltd. Capital Goods 117 526209 K.S.Oils Ltd. Others 118 522287 Kalpataru Power Transmission Capital Goods 119 500165 Kansai Nerolac Paints Ltd. Others 120 532652 Karnataka Bank Ltd. Finance 121 502937 Kesoram Industries Ltd. Others 122 500241 Kirloskar Brothers Ltd. Capital Goods 123 500243 Kirloskar Oil Engines Ltd. Capital Goods 124 500247 Kotak Mahindra Bank Ltd. Finance 125 500252 Lakshmi Machine Works Ltd. Capital Goods 126 500510 Larsen & Toubro Limited Capital Goods 127 500253 LIC Housing Finance Ltd Finance 128 500257 Lupin Ltd. Healthcare 129 500260 Madras Cements Ltd. Capital Goods 130 500108 Mahanagar Telephone Nigam Ltd. Consumer Durables 131 500265 Maharashtra Seamless Ltd. Capital Goods 132 500520 Mahindra & Mahindra Ltd. Auto 133 500109 Mangalore Refinery & Petro Ltd. Oil & Gas 134 531642 Marico Limited. FMCG 135 532500 Maruti Suzuki India Ltd. Auto 136 500271 Max India Ltd. Others 137 513377 MMTC Ltd. Others 138 524084 Monsanto India Ltd. Others 139 517140 Moser-Baer (India) Ltd. IT 140 517334 Motherson Sumi Systems Ltd. Auto 141 526299 Mphasis Ltd. IT 142 500290 MRF Ltd. Auto 143 500294 Nagarjuna Construction Co Ltd. Realty 43 144 500075 Nagarjuna Fertiliser & Chem. Ltd. Others 145 532234 National Aluminium Co. Ltd. Metal & Mining 146 500790 Nestle India Ltd. FMCG Corporate Finance II END Term Project | Group 3- FMG 18A
  • Sr. No Code Name Sector 147 500304 NIIT Ltd. IT 148 500308 Nirma Ltd. FMCG 149 526371 NMDC Ltd. Metal & Mining 150 500672 Novartis India Ltd. Others 151 532555 NTPC Ltd. Power 152 500312 ONGC Ltd. Oil & Gas 153 532466 Oracle Financial Services Software Ltd. IT 154 524372 Orchid Chemicals Pharmaceuticals Healthcare 155 500315 Oriental Bank of Commerce Finance 156 523574 Pantaloon Retail (India) Ltd. Others 157 531120 Patel Engineering Ltd. Realty 158 503031 Peninsula Land Ltd. Realty 159 500680 Pfizer Ltd. Healthcare 160 500331 Pidilite Industries Ltd. Others 161 500302 Piramal Healthcare Ltd. Healthcare 162 532898 Power Grid Corporation of India Ltd. Power 163 522205 Praj Industries Ltd. Capital Goods 164 500459 Procter & Gamble Hygiene & Health FMCG 165 532461 Punjab National Bank Finance 166 531500 Rajesh Exports Ltd. Consumer Durables 167 500359 Ranbaxy Laboratories Ltd. Healthcare 168 524230 Rashtriya Chem & Fert. Ltd. Others 169 523445 Reliance Industrial Infrastructure Ltd. Capital Goods 170 500325 Reliance Industries Ltd. Oil & Gas 171 500390 Reliance Infrastructure Ltd. Power 172 500366 Rolta India Ltd. IT 173 500368 Ruchi Soya Industries Ltd. FMCG 174 500295 Sesa Goa Ltd. Metal & Mining 175 523598 Shipping Corp. Of India Ltd. Capital Goods 176 500387 Shree Cements Ltd. Capital Goods 177 532498 Shriram City Union Finance Ltd. Finance 178 511218 Shriram Transport Fin Co. Ltd. Finance 179 500550 Siemens Ltd Power 180 523838 Simplex Infrastructure Limited Realty 44 181 502742 Sintex Industries Ltd. Others 182 500472 SKF India Ltd. Capital Goods 183 501061 State Bank of Bikaner & Jaipur Finance Corporate Finance II END Term Project | Group 3- FMG 18A
  • Sr. No Code Name Sector 184 500112 State Bank of India Finance 185 532200 State Bank of Mysore Finance 186 532191 State Bank of Travancore Finance 187 512531 State Trading Corporation of India Others 188 500113 Steel Authority of India Ltd. Metal & Mining 189 512299 Sterling Biotech Ltd. Healthcare 190 500900 Sterlite Industries Ltd. Metal & Mining 191 524715 Sun Pharmaceutical Inds Ltd. Healthcare 192 500770 Tata Chemicals Ltd. Others 193 500483 Tata Communications Ltd. Consumer Durables 194 501301 Tata Investment Corporation Ltd. Finance 195 500570 Tata Motors Ltd. Auto 196 500400 Tata Power Co. Ltd. Power 197 500470 Tata Steel Ltd. Metal & Mining 198 500800 Tata Tea Ltd. FMCG 199 532755 Tech Mahindra Ltd. IT 200 532299 Television Eighteen India Ltd. Others 201 500411 Thermax Ltd. Capital Goods 202 500413 Thomas Cook (India) Ltd. Others 203 500114 Titan Industries Ltd. Consumer Durables 204 500420 Torrent Pharma Ltd. Others 205 532477 Union Bank of India Finance 206 507878 Unitech Ltd. Realty 207 512070 United Phosphorus Ltd. Others 208 517146 Usha Martin Ltd. Capital Goods 209 532401 Vijaya Bank Finance 210 500575 Voltas Ltd. Others 211 507410 Walchandnagar Industries Ltd. Capital Goods 45 Corporate Finance II END Term Project | Group 3- FMG 18A