A CASE STUDY

ON

DIVIDEND POLICY

OF

SARAS DAIRY

PREFACE

With the increasing trend of globalization the market competition are

increasing day by day. In this competition the customer attitude has also

change.

Consumer’s attitude has been of prime importance in the marketing

of every product. As marketer it is important to recognize why and how

individual make better strategic marketing decision. If marketers understands

consumer’s buying behavior than they are able to shape their marketing

strategies accordingly. No doubt, marketer’s who understand consumer’s

behavior’s have great competitive advantage in the market palace.

Today, In competitive edge, choice of alternative is available in the

market and consumers are also influenced by their informational and

environmental clues that can persuade the consumer. So the usability

patterns of SARAS milk consumers become more important for company to

understand and retain subscribe.

This report is an effort from the researcher to find out the attitude

of the SARAS consumer in the competitive changing scenario. The report

has been prepared in four chapters consisting “Introduction to the

company, survey profile, project profile, conclusion, and suggestion”

respectively.

Dividend Policy

Abstract:

The literature on dividend policy has produced a large body of theoretical

and empirical research, especially following the publication of the dividend

irrelevance hypothesis of Miller and Modigliani (1961). No general consensus has

yet emerged after several decades of investigation, and scholars can often

disagree even about the same empirical evidence.

This paper aims at providing the reader with a comprehensive

understanding of dividends and dividend policy by reviewing the main theories

and explanations of dividend policy including dividend irrelevance hypothesis of

Miller and Modigliani, bird-in-the-hand, tax-preference, clientele effects,

signalling, and agency costs hypotheses. The paper also attempts to present the

main empirical studies on corporate dividend policy.

However, due to the enduring nature and extensive range of the debate

about dividend policy which has spawned a vast amount of literature that grows

by the day, a full review of all debates is not feasible. The paper reaches at a

conclusion that the famous statement of Fisher Black about dividend policy "the

harder we look at the dividends picture, the more it seems like a puzzle,with

pieces that just do not fit together" (Black, 1976, p. 5) is still valid.

Introduction

Dividend policy still remains an academic debate amid the clouding picture

of its importance among the financial economists till today. There are few aspects

of corporate financial policy where the gap between the academics and the

practitioners is larger than that of the dividend policy.

From Miller & Modigliani (1961)

There exists a vast body of empirical research on the dividend behaviour of

SARAS DAIRY. However, much less is known about the dividend policy of firms

based elsewhere. The literature is even sparser on the link between dividends and

control across the world, and in particularminority shareholder expropriation via

the dividend policy.

As DeAngelo et al. (2008, p.218) state, “there is much yet to be learned

about the nature and scope of minority stockholder exploitation”. This lack of

evidence is highly surprising given that theory predicts that there should be a link

between dividend policy on one side and control and the danger of the minority

shareholders being expropriated on the other side. In corporate finance, the

finance manager is generally thought to face two operational decisions: the

investment (or capital budgeting) and the financingdecisions.

The capital budgeting decision is concerned with what real assets the firm

should acquire while the financing decision is concerned withhow these assets

should be financed. A third decision may arise, however, when the firm begins to

generate profits. Should the firm distribute all orproportion of earned profits in

the form of dividends to the shareholders, or should it be ploughed back into the

business? Presumably, in taking any courseof action, managers should

concentrate on how to maximise the wealth of shareholders for whom the 172

firm is being managed.

Managers must not only consider the question of how much of the

company’s earnings are needed for investment, but also take into consideration

the possible effect of their decisions on share prices. The term ‘dividend policy’

refers to “the practice that management follows in making dividend payout

decisions or, in other words, the size and pattern of cash distributions over time

to shareholders”. This issue of dividend policy is one that has engaged managers

since the birth of the modern commercial corporation. Surprisingly then dividend

policy remains one of the most contested issues in finance. The study of dividend

policy has captured the attention of finance scholars since the middle of the last

century. They have attempted to solve several issues pertaining to dividends and

formulate theories and models to explain corporate dividend behaviour.

The dividend enigma has not only been an enduring issue in finance, it also

remains unresolved. Almost three decades ago Black (1976) described it as a

“puzzle”, and since then an enormous amount of research has occurred trying to

solve the dividend puzzle. Allen, Bernardo and Welch (2000, p.2499) summarised

the current consensus view when they concluded “Although a number of theories

have been put forward in the literature to explain their pervasive presence,

dividends remain one of the thorniest puzzles in corporate finance”. The enduring

nature and extensive range of the debate about dividend policy has spawned a

vast amount of literature that grows by the day.

Introduction Of The Industry

India is the highest milk producer in the entire globe. India is well known as

the 'Oyster' of the global dairy industry, with opportunities galore for the

entrepreneurs globally. It might be dream for any nation in the world to capitalize

on the largest and fastest growing milk and mil products' market. The dairy

industry in India has been witnessing rapid growth with liberalization. As the

economy provides good opportunities for MNCs and foreign investors to release

the full potential of this industry. The main objective of the Indian Dairy Industry

is to manage the national resources in a manner to enhance milk production and

upgrade milk processing using innovative technologies.

The crossbred technology in the Indian Dairy Industry has further augmented with

the viability of the dairy units by increasing the milk production per animal. Then

subsequently milk production has also increased at an exponential rate while the

benefits of an increase in milk production also reached the consumers from a

relatively lower increase in the price of milk. The favorable price environment for

milk producers for the Dairy Industry in India however appeared to have

weakened during the 90's, a decline in the real price of milk being noticed after

the year 1992. And then slowly regained it is glory after 1992 to till now.

In India dairying from very much earlier is regarded as an instrument for

social and economic development. The country's milk supply comes from millions

of small producers, who are dispersed throughout the rural areas. All these

farmers maintain an average herd of one or two milch animals, comprising cows

and/or buffaloes. Mostly ample labour and a small land base encourage farmers

to practice dairying as an occupation subsidiary to agriculture. As income from

crop production is seasonal instead dairying provides a stable which is a year-

round income and also an important economic incentive for the small farmer.

Brief Introduction

India had tremendous milk production in 40 years and has become the

world's largest milk-producing nation with a gross output of 84.6 million tons in

2001. The Indian Dairy Industry has achieved this strength of a producer-owned

and professionally-managed cooperative system, despitethe facts that a majority

of dairy farmers are illiterate and run small, marginal operations and for many

farmers, selling milk is their sole source of income. More than 10 million dairy

farmers belong to 96,000 local dairy cooperatives, who sell their products to one

of 170 milk producers' cooperative unions who in turn are supported by 15 state

cooperative milk marketing federations.

In India dairy business has been practiced as rural cottage industry over the

years. Semi-commercial dairy started with the establishment of military dairy

farms and co-operative milk unions throughout the country towards the end of

the 19th century. Since Independence this Industry has made rapid progress. A

large number of modern milk and milk product factories have since been

established.The organized dairies in India have been successfully engaged in the

routine commercial production of pasteurized bottled milk for Indian dairy

products.

The growth of Indian Dairy Industry during the last three decades has been

impressive, at more than 5% per annum; and in the 90's the country has emerged

as the largest producer of milk. This is not a small achievement when we consider

the fact that dairying in India is largely stringent that farmers in general keep dairy

animals in proportion to their free crop and also are available for family labor with

little or no purchased inputs and a minimum of marketed outputs. The existence

of restrictive trade policy milk in the Diary Industry and the emergence of Amul

type cooperatives have changed the dairy farming practices in the country.

Farmers have gained the favorable price for their milk and for their production

which was essentially a self-reliant one is which is now being transformed into a

commercial proposition.

In India Milk production is dominated by small and marginal land-holding

farmers and also by landless labourers who in aggregate own 70% of the national

milch animal herd.And as the crop production on 78% of the agricultural land still

depends on rain, which is prone to both drought and floods, rendering

agricultural income is very much uncertain for most of the farmers. Dairying, as a

subsidiary source of income and occupation, is real relief to most of the farmers in

the society. Usually one or two milch animals enable the farmers to generate

sufficient income to break the vicious subsistence agricultural-debt cycle.

The Operation Flood which is the successful Indian dairy development

programmed has analyzed that how food aid can be utilized as aninvestment in

building the type of institutional infrastructure that can bring about national dairy

development. Programmes like this, with similar policy orientations, may prove to

be appropriate to dairy development in in India.

India in the early 1950's was commercially importing around 55000 tonnes

of milk powder annually to meet the urban milk demand. Most of the significant

developments in dairying have taken place in India in this century only.

India's Milk Product Mix

Fluid Milk 46.0%

Ghee 27.5%

Butter 6.5%

Curd 7.0%

Khoa (Partially Dehydrated Condensed Milk) 6.5%

Milk Powders, including IMF 3.5%

Paneer & Chhana (Cottage Cheese) 2.0%

Others, including Cream, Ice Cream 1.0%

Total contribution to the economy/ sales

The Indian Dairy Industry engages in the production and processing of milk & cream. This

industry is involved in the manufacture of various dairy products like cheese, curd, yoghurt

etc. The Indian Dairy Industry specializes in the procurement, production, processing,

storage and distribution of dairy products. India as nation stands first in its share of dairy

production in the international scenario. The industry contributes about Rs 1,15,970 to the

national economy.

Employment opportunities

The Indian Diary industry which is in the developing stage provides gainful

employment to a vast majority of the rural households. It employs about 8.47 million people

on yearly basis out of which 71% are women.

Jobs in Indian dairy industry are mainly in the fields of production and processing of

dairy products. An individual with minimum of 60% marks who has bachelor's degree

course in the dairy technology can easily be availing an opportunity to work in this industry.

For the graduation course in Dairy technology one has to qualify the All India Entrance Test

that is affiliated to the Indian Council of Agricultural Research. After that the person can

continue with his masters in dairy technology. Jobs would be for the following positions.

Dairy Scientists: The main job of the dairy scientists is to deal with collection of milk

and taking care of the high yielding variety of animals.

Dairy Technologists: the work of Dairy technology requires procurement officers who

take the responsibility of collecting milk from farmers, milk booths ad cattle-rearers.

This particular procurement officer should well understand the latest technology that

is applicable in maintaining the quality of milk of the process of transporting it to the

desired location.

Dairy Engineers: dairy engineers are usually appointed is to set up and maintain

dairy plants.

Marketing Personnel: These individuals deal with the sale and marketing of milk

together with milk products.

Introduction of The Company

Registered  March 1975

Plant commissioned June 1981

APS  April 1984

Coverage Jaipur & Dausa

Started with  25 DCS

Towards fulfillment of the national objective of making India self sufficient in milk

production, a small step was taken in March 1975 and Jaipur Zila Dugdh Utpadak Sahakari

Sangh Ltd., Jaipur (popularly known as Jaipur Dairy) was registered under Cooperative Act

1965 to work in then Jaipur District. Initially this union did not have the processing facilities.

It started with a modest beginning of procuring 250 liters of milk per day.

The initial handling capacity of the dairy plant was 1.5 Lakh Lt. per day with a powder

plant of 10 MT per day capacity, which was commissioned in the year 1981 under

Operation Flood Program 1 by National Dairy Development Board for service of thousands

of rural farmers families of Jaipur.

Over the years, there has not been looking back for Jaipur Dairy and the significant

growth has been made in all fields i.e. procurement, processing and production of various

milk and milk products and marketing thereof under the brand name of SARAS. The plant is

managed and operated by well-qualified, competent and experienced managerial cadre and

highly motivated work force to provide highest quality of products and best of the services to

our esteemed customers.

To further improve the efficiency and effectiveness of the plant performance, Jaipur

Dairy (Jaipur Zila Dugdh Utpadak Sahakari Sangh Ltd., Jaipur) had earlier obtained the

Quality Management Systems Certification as per ISO 9002:1994 in combination with IS:

15000 (HACCP) in the year 2000. Now the dairy has upgraded the system in accordance

with ISO: 9001: 2000 in combination with (HACCP) as per IS: 15000: 1998.

Background of Corporate Dividend Policy

The issue of corporate dividends has a long historyand, as Frankfurter and

Wood (1997) observed, is bound up with the development of the corporate

formitself. Corporate dividends date back at least to the early sixteenth century in

Holland and Great Britain when the captains of sixteenth century sailing ships

started selling financial claims to investors, which entitled them to share in the

proceeds, if any, of the voyages. At the end of each voyage, the profits and the

capital were distributed to investors, liquidating and ending the venture’s life.

By the end of the sixteenth century, these financial claimsbegan to be

traded on open markets in Amsterdam andwere gradually replaced by shares of

ownership. It is worth mentioning that even then many investors would buy

shares from more than one captain to diversify the risk associated with this type

of business. At the end of each voyage, the enterprise liquidation of the venture

ensured a distribution of the profits to owners and helped to reduce the

possibilities of fraudulent practice by captains. However, as the profitability of

these ventures was established and became more regular, the process of

liquidation of the assets at the conclusion of each voyage became increasingly

inconvenientand costly.

The successes of the ventures increasedtheir credibility and shareholders

became more confident in their management (captains), and this was

accomplished by, among other things, the payment of “generous dividends”

(Baskin, 1988). As a result, these companies began trading as going concern

entities, and distributing only the profitsrather than the entire invested capital.

The emergence of firms as a “going concern” initiated the fundamental practice of

firms to decide what proportion ofthe firms’ income (rather than assets) to return

toinvestors and produced the first dividend payment regulations (Frankfurter and

Wood, 1997). Gradually, corporate charters began to restrict the paymentsof

dividends to the profits only. The ownership structure of shipping firms

graduallyevolved into a joint stock company form of business. But it was

chartered trading firms more generally that adopted the joint stock form.

In 1613, the British East India Company issued its first joint stock shares

with a nominal value. “No distinction was made, however, between capital and

profit” (Walker, 1931, p.102). In the seventeenth century, the success of this type

of trading company seemed poised to allow the spread of this form of business

organization to include other activities such as mining, banking, clothing, and

utilities. Indeed, in the early 1700’s, excitement about the possibilities

ofexpanded trade and the corporate form saw a speculative bubble form, which

collapsed spectacularly when the South Sea Company went into bankruptcy.

The Bubble Act of 1711 effectively slowed, but did not stop, the

development of the corporate form in Britain for almost a century (Walker, 1931).

In the early stages of corporate history, managers realized the importance of high

and stable dividend payments. In some ways, this was due to the analogy

investors made with the other form of financial security then traded, namely

government bonds.

Bonds paid a regular and stable interest payment, and corporate managers

found that investors preferred shares that performed like bonds (i.e. paid a

regular and stable dividend). For example, Bank of North America in 1781 paid

dividends after only six months of operation, and the bank charter entitled the

board of directors to distribute dividends regularly out of profits. “Paying

consistent dividends remained of paramount importance to managers during the

first half of the 19th century” (Frankfurter and Wood, 1997, p.24) In addition to

the importance placed by investors on dividend stability, another issue of modern

corporate dividend policy to emerge early in the nineteenth century was that

dividends came to be seen as an important form of information. The scarcity and

unreliability of financial data often resulted in investors making their assessments

of corporations through their dividend payments rather than reported earnings.

In short, investors were often faced with inaccurate information about the

performance of a firm, and used dividend policy as a way of gauging what

management’s views about future performance might be. Consequently, an

increase in divided payments tended to be reflected in rising stock prices. As

corporations became aware of this phenomenon, it raised the possibility that

managers of companies could use dividends to signalstrong earnings prospects

and/or to support a company’s share price because investors may read dividend

announcements as a proxy for earnings growth. To summarise, the development

of dividend payments to shareholders has been tied up with the development of

the corporate form itself. Corporate managers realized early the importance of

dividend payments in satisfying shareholders expectations. They often smoothed

dividends over time believing that dividend reductions might have unfavourable

effects on share price and therefore, used dividends as a device to signal

information to the market.

Moreover, dividend policy is believed to have an impact on share price.

Since the 1950’s, the effect of dividend policy on firm value and otherissues of

corporate dividend policy have been subjected to a great debate among finance

scholars. The next section considers these developments from botha theoretical

and an empirical point of view.