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Dividend Policy

TATA motors

TATA motors has a very balanced dividend policy since 1955 (Exhibit 1 & 9). In all, but two years the

company has paid a healthy dividend. Dividend smoothing has enabled the company so pay dividendeven at the cost of negative retained earnings. Despite being a growth company expanding in new

sectors the company has continued to strike a balance between retained earnings and dividend pay-

outs. In times when the company has been in crisis they have looked at others measures of satisfying

the needs for liquidity for shareholders like issue of Bonus shares.

Automobile market is cyclic and the effect can be seen in the earnings of TML as well. Whenever the

profits of the company have exceeded expectations, the company has declared an interim dividend

while continuing with the existing pay-out ratio for regular dividends. Outside India the company is

also listed on the NYSE. The dividend policy of TML has helped build a special relationship with retail

customers who comprise more than 7 per cent of the shareholders.

Rights Issue

A rights issue is a way in which a company can sell new shares in order to raise capital. Shares are

offered to existing shareholders in proportion to their current shareholding, respecting their pre-

emption rights. The price at which the shares are offered is usually at a discount to the current share

price, which gives investors an incentive to buy the new shares if they do not, the value of their

holding is diluted.

A rights issue by a highly geared company intended to strengthen its balance sheet is often a bad

sign. Profits are already low (or negative) and future profits are diluted. Unless the underlying

business is improved, changing its capital structure achieves little. A rights issue to fund expansioncan usually be regarded somewhat more optimistically, although, as with acquisitions, shareholders

should be suspicious because management may be empire-building at their expense (the usual

agency problem with expansion). The rights are normally a tradable security themselves (a type of

short dated warrant). This allows shareholders who do not wish to purchase new shares to sell the

rights to someone who does. Whoever holds a right can choose to buy a new share (exercise the

right) by a certain date at a set price.

Rights Issue in 2001

The Board of Directors of approved the simultaneous Issue of Convertible Debentures and Non-

Convertible Debentures with Detachable Warrants on a rights basis in the ratio of one CD and oneNCD for every five shares (1:5) of the Company held. The Company expected to raise approximately

Rs. 1,228 crores - Rs. 1,382 crores from the proposed rights issue. The proceeds of the rights issue

was planned to be used for essential capital expenditure and new product development programs and

repayment/ prepayment of expensive borrowings of the Company. The infusion of long term funds, by

way of this rights issue, was expected improve the cash flows and the debt equity ratio.

Rights Issue in 2008

In May 2008 the company announced its long term financing plan for Jaguar-Land Rover acquisition.

At that time, the Company had announced that a part of the total funds required would be raised

through a Rights Issue to the shareholders of three simultaneous but unlinked securities namely a) an

issue of Ordinary Shares of a total amount of about Rs.2,200 crores; b) an issue of A Ordinary

Shares having differential voting rights (viz. 1 vote for every 10 shares held) of a total amount of about

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Rs.2,000 crores and c) an issue of 0.5% 5-year Convertible Preference Shares of a total amount of

about Rs.3,000 crores, which would be convertible into A Ordinary Shares at any time after 3 years

but before 5 years from the date of allotment.

Changes in Capital Market and the level of prices in the stock markets led the Board of Directors to

decide to keep the increase in Share Capital as low as possible, the Board decided - 1.To restrict the

Rights Issue only to two simultaneous but unlinked securities namely (a) an issue of OrdinaryShares and (b) an issue of A Ordinary Shares having differential voting rights, as already

announced; and 2. In place of the issue of Convertible Preference Shares, it is now proposed to raise

the required resources by monetizing a part of the Companys investments through a phased

divestment of certain investments (preferably as inter-group sales wherever feasible) at prevailing

market prices over the next 6 to 8 months. The funds released from such future divestments together

with those already sold during the current financial year, will form part of the resources to be raised for

repaying the bridging loan taken for the Jaguar-Land Rover acquisition.

2001- 2002 Crisis

Ten years ago, after a decade of strong revenue and margin growth, Tata Motors plunged into ancrisis when the demand for its trucks suddenly collapsed. The lost sales compounded by heavy

investment for its entry into the passenger car business, the cost of complying with new emissions

standards, and an increasing threat from overseas competitors caused Tata Motors to shock the

markets with a loss of Rs. 500 crores for the fiscal year ending March 2001. During this period for

the first time since 1956 Tata motors didn't declare a dividend. Average share price of TML dropped

from Rs. 217 in 1999-2000 to Rs. 102 in 2001-02.

Over the next two years, the company shaved around 8 billion rupees from its cost base and nursed

itself back to corporate health. The company count not show positive figures for PAT in 2001-02 and

didn't declare a dividend in that year. Average share prices fell to Rs 90 in 2001-02Today Tata Motors

ranks as the world's fifth-largest manufacturer of medium and heavy trucks. Even while keeping atight grip on costs, Tata Motors moved to the offensive by refocusing its investments on less cyclical

products, including light commercial vehicles, buses, and spare parts; making a successful entry into

passenger cars; and responding to opportunities presented by favourable social and economic trends.

2008 - 2009 Crisis

TMs original core business in the passenger car division (small cars in India) was mildly influenced by

the crisis as TMs passengercar sales decreased by only 5%. The company was much more

negatively affected by the decline in sales of its commercial vehicle division which represented not

yet taking into account the JLR acquisition some 2/3 of its turnover. However, the financial crisis

had a much more serious impact [in the last quarter of 2008 and the first quarters of 2009] because ofthe burden of two major strategic initiatives. The shift of the production site and postponement of the

full Nano launch which was originally scheduled for launch in March 2008 by two years led to

unexpected resource needs (new manufacturing site) and a shortfall of otherwise expected 2008-09

revenues. While this burden was not caused or much exacerbated by the crisis in the global car

industry, the acquisition of JLR only few months before the onset of the crisis actually affected TM

much more: the dramatic decrease in JLRs

sales (JLR being fully exposed to European and US markets) significantly increased the heavy losses

of the new combined company in FY 2008/09; even more importantly, the refinancing of the short

term bridging loan of $ 3 billion for the acquisition became much more complicated and costly in a

situation of dried up capital markets. The refinancing difficulties and increasing financing cost

contributed to a serious debt overload of TM which might have led to bankruptcy (and a take-over) if

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the TM would have been a stand-alone company and would not have been protected and supported

by its affiliation to the Tata group and its well-connected chairman.

While it is no surprise that the crisis caused (temporary) problems and challenges for TMs business it

seems much more remarkable how little effect it had on the companys strategy. TM steered through

the crisis without much change in its path-changing (Nano) as well as its path-breaking (JLR) strategyinitiatives.

The constancy of purpose as well as a continuous and consistent execution of strategic plans was

maintained despite highly sceptical capital market markets which had temporarily withdrawn support

from TM. The unwavering pursuit of a transformational strategy of TM in the face of the financial crisis

can be ultimately explained only by the affiliation of the company to a very strong and supportive

conglomerate with a particular mode of operation: TM is one of the few strategic companies of the

Tata group; it is guided personally by the Chairman of the Tata Group who has committed the group

to a course of globalization and innovation while relying on Indias comparative location advantages; it

allows the company to sustain long periods of low profitability and significant investments in resource

and capability accumulation; TM profits from the value and attraction of the TATA brand in its dealingswith suppliers, customers and the Government, as well as in attracting talented staff; it also profits

from various group support services like the groups excellence model, its acquisition and finance

expertise and its training efforts. This inherent affiliation strength enabled TM to even use the crisis

as an accelerator for the implementation of its strategies by legitimizing a more swift course towards

cost cutting in the JLR operations (announced closure of one plant and shift of significant supply

sources to India). It may also have facilitated the far-reaching changes in TMs top management as

experienced top managers were available due to the crisis and a change of top management seemed

to be justified in view of TMs difficulties and temporary low performance. It can therefore be

concluded that the financial crisis has not much affected TMs transformational change or even

reinforced and accelerated it.

Dividend and stock price snapshot of Tata Motors of last 10 years

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PAT, Retained Earnings and equity dividend snapshot of Tata Motors of last 10 years

Vehicle Production in India

EXHIBITS

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mmmmmmmm

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