Analyze the dividend policy of RIL for shareholders’ wealth maximization and advise on an optimal dividend policy to ensure shareholders’ wealth is maximized:
1. What type of dividend policy has RIL been following?
2. Does RIL look after its shareholders’ interests? How?
3. What factors should a company consider when planning its investment budget?

Study the impact of RIL’s dividend policy on its share price performance and discuss the relevance of dividend theory for RIL:
4. What factors affect the market price of a company?
5. Is RIL’s market performance guided by its dividend policy or by other factors as well? What is the evidence to support your conclusion?
6. In the long run, what quantum effect does a dividend policy have on a company’s share price?
Transcribed Image Text:THE RELEVANCE OF RELIANCE INDUSTRIES' DIVIDEND POLICY TO SHAREHOLDERS' VALUE On the wall of the boardroom hung the logo of Reliance Industries Limited (RIL), under which was printed the tagline "Growth is Life," which aptly described the company's strategy. RIL had made massive investments to support growth. As the largest private-sector conglomerate in India, it had ambitious plans to expand the capacity in its core oil refinery business, with billions in INR¹ budgeted for new plants. It also earmarked large amounts of capital for the launch of its fourth-generation mobile business in India. Before returns on these investments could be realized, it was the time again for Mukesh Ambani, chairman of the board and managing director, to lead the board in making a decision on its dividend policy for the year 2015-2016. (Since the company's founder died, his eldest son, Mukesh, had been chairman of RIL.) The company had consistently paid an increasing dividend to its shareholders between 2011 and 2015, yet its share price had fluctuated in a downward trend, in line with a steady decrease of the company's return on investment. The challenge for Mukesh was to balance the need for capital to support growth with the need to maximize shareholders' value through dividend payments. If the board decided to reduce dividend payments, would RIL's shareholders interpret this as a signal the company was in trouble? Would they react by selling RIL's shares? On the other hand, even though the company had steadily increased dividends, its share price had fallen during the same period. Mukesh knew he needed to work with the board to design a dividend policy that would boost investor confidence in RIL. Reliance Industries Limited Headquartered in Mumbai, RIL was the flagship company of Reliance Group and the largest private-sector conglomerate in India. The Group started as a textile business in 1966 and grew to become the largest producer of polyester yarn and fiber in the world, during which it also
Transcribed Image Text:diversified into other sectors. The four main businesses of RIL were, in descending order of business revenue: oil refinery, petrochemicals, oil and gas production, and retail. It was one of the biggest producers of petrochemical products and owned the largest oil refinery in the world, located in Jamnagar. In the financial year 2014-2015, its refining business achieved record pretax earnings of INR158bn.³ In the eyes of the shareholders, RIL was a blue-chip company that grew steadily over the years from a small textile business to the conglomerate that it had become. It was one of the most profitable companies in the country, the first private Indian company that made the Global Fortune 500 list, and a trusted, household name among Indian shareholders. At the end of January 2015, the market capitalization of RIL was over INR3trn.* Reliance's Public Issue RIL was listed on the Bombay Stock Exchange in 1977 to offer 28 million equity shares. The issue was oversubscribed by investors seven times.³ Between 1977 and 2009, the company had issued bonus equity shares three times, the last two of which offered bonus shares at a share- to-equity ratio of 1:1.6 It had also offered multiple share issues and implemented share buyback programs. In 1992, RIL became the first Indian company to raise capital on the foreign market through a global depositary receipt issue in Luxembourg. INR1,000 invested at the time of IPO in Reliance in 1977-78 has grown to INR7.78 lakhs (INR778,000) at a CAGR of 21.6%... Reliance has a unique track record of organic growth and value creation since it became a public company... For its large family of shareholders, we have created value by consistent profitable growth and continuous investment in business opportunities. 7 - Mukesh Ambani, Board Chairman and Managing Director of RIL Dividend Policy of Reliance RIL paid dividends consistently. Not only did it increase dividends to shareholders annually, from INR7 per share in 2010 to INR10 per share in 2015, but the global market downturn also did not seem to deter its commitment to making dividend payments. Even during the global financial crisis in 2008 and 2009, for two consecutive years it paid a dividend of INR13 for every INR10 share held in nominal value, the highest dividend it paid in the 2000s⁹ [see Exhibit 2]. In 2011, when RIL's share price fell 24% against the Sensex, the benchmark index of the Bombay Stock Exchange, it continued to increase its dividend.10

Question

Analyze the dividend policy of RIL for shareholders’ wealth maximization and advise on an optimal dividend policy to ensure shareholders’ wealth is maximized:
1. What type of dividend policy has RIL been following?
2. Does RIL look after its shareholders’ interests? How?
3. What factors should a company consider when planning its investment budget?

Study the impact of RIL’s dividend policy on its share price performance and discuss the relevance of dividend theory for RIL:
4. What factors affect the market price of a company?
5. Is RIL’s market performance guided by its dividend policy or by other factors as well? What is the evidence to support your conclusion?
6. In the long run, what quantum effect does a dividend policy have on a company’s share price?

Transcribed Image Text:THE RELEVANCE OF RELIANCE INDUSTRIES' DIVIDEND POLICY TO SHAREHOLDERS' VALUE On the wall of the boardroom hung the logo of Reliance Industries Limited (RIL), under which was printed the tagline "Growth is Life," which aptly described the company's strategy. RIL had made massive investments to support growth. As the largest private-sector conglomerate in India, it had ambitious plans to expand the capacity in its core oil refinery business, with billions in INR¹ budgeted for new plants. It also earmarked large amounts of capital for the launch of its fourth-generation mobile business in India. Before returns on these investments could be realized, it was the time again for Mukesh Ambani, chairman of the board and managing director, to lead the board in making a decision on its dividend policy for the year 2015-2016. (Since the company's founder died, his eldest son, Mukesh, had been chairman of RIL.) The company had consistently paid an increasing dividend to its shareholders between 2011 and 2015, yet its share price had fluctuated in a downward trend, in line with a steady decrease of the company's return on investment. The challenge for Mukesh was to balance the need for capital to support growth with the need to maximize shareholders' value through dividend payments. If the board decided to reduce dividend payments, would RIL's shareholders interpret this as a signal the company was in trouble? Would they react by selling RIL's shares? On the other hand, even though the company had steadily increased dividends, its share price had fallen during the same period. Mukesh knew he needed to work with the board to design a dividend policy that would boost investor confidence in RIL. Reliance Industries Limited Headquartered in Mumbai, RIL was the flagship company of Reliance Group and the largest private-sector conglomerate in India. The Group started as a textile business in 1966 and grew to become the largest producer of polyester yarn and fiber in the world, during which it also

diversified into other sectors. The four main businesses of RIL were, in descending order of
business revenue: oil refinery, petrochemicals, oil and gas production, and retail. It was one of
the biggest producers of petrochemical products and owned the largest oil refinery in the world,
located in Jamnagar. In the financial year 2014-2015, its refining business achieved record
pretax earnings of INR158bn.³
In the eyes of the shareholders, RIL was a blue-chip company that grew steadily over the years
from a small textile business to the conglomerate that it had become. It was one of the most
profitable companies in the country, the first private Indian company that made the Global
Fortune 500 list, and a trusted, household name among Indian shareholders. At the end of
January 2015, the market capitalization of RIL was over INR3trn.*
Reliance's Public Issue
RIL was listed on the Bombay Stock Exchange in 1977 to offer 28 million equity shares. The
issue was oversubscribed by investors seven times.³ Between 1977 and 2009, the company had
issued bonus equity shares three times, the last two of which offered bonus shares at a share-
to-equity ratio of 1:1.6 It had also offered multiple share issues and implemented share buyback
programs. In 1992, RIL became the first Indian company to raise capital on the foreign market
through a global depositary receipt issue in Luxembourg.
INR1,000 invested at the time of IPO in Reliance in 1977-78 has grown to
INR7.78 lakhs (INR778,000) at a CAGR of 21.6%... Reliance has a unique
track record of organic growth and value creation since it became a public
company... For its large family of shareholders, we have created value by
consistent profitable growth and continuous investment in business
opportunities. 7
- Mukesh Ambani, Board Chairman and Managing Director of RIL
Dividend Policy of Reliance
RIL paid dividends consistently. Not only did it increase dividends to shareholders annually,
from INR7 per share in 2010 to INR10 per share in 2015, but the global market downturn also
did not seem to deter its commitment to making dividend payments. Even during the global
financial crisis in 2008 and 2009, for two consecutive years it paid a dividend of INR13 for
every INR10 share held in nominal value, the highest dividend it paid in the 2000s⁹ [see
Exhibit 2]. In 2011, when RIL's share price fell 24% against the Sensex, the benchmark index
of the Bombay Stock Exchange, it continued to increase its dividend.10

Accepted Answer

We have to analyze the current dividend policy of Reliance Industries Limited (RIL) and answer…