৪৯তম বিসিএস ⎯ ফিন্যান্স ও ব্যাংকিং [৭১১]

The Board of Directors (BOD) decides whether to declare dividends and how much should be paid. This is one of their key responsibilities.

Basis of decision:
The board usually looks at the company’s most recent earnings (net profit) to decide if the business can afford to distribute cash without harming operations.

Other factors they consider:

⇒ Profitability – If the company earned enough profits.

⇒ Liquidity (cash position) – Even if the company is profitable, it must have cash available to pay dividends.

⇒ Future investment needs – The company may retain some earnings to reinvest in growth projects.

⇒ Debt obligations – Lenders may restrict dividend payments if the company has high borrowings.

⇒ Dividend policy – Some firms follow a stable dividend policy (paying a fixed amount or percentage regularly), while others pay variable dividends depending on earnings.

Approval:
Once the board recommends the dividend, shareholders approve it at the Annual General Meeting (AGM).

Dividends can be paid in cash, stock, or both depending on the company’s policy and financial situation.

The Board of Directors decides the form of dividend based on earnings, cash position, and future investment plans.

Mature, cash-rich companies (like banks, telecoms) often prefer cash dividends, while growing companies (like tech firms) may prefer stock dividends to conserve cash.

Announcement date: Dividends are announced by company management on the announcement date (or declaration date) and must be approved by the shareholders before they can be paid.

Ex-dividend date: The date on which the dividend eligibility expires is called the ex-dividend date or simply the ex-date. 

Record date: The record date is the cutoff date, established by the company to determine which shareholders are eligible to receive a dividend or distribution.

Payment date: The company issues the dividend payment on the payment date, which is when the money is credited to investors' accounts.

Share price may change to reflect a dividend payment.

For example, assume a company trading at $60 per share declares a $2 dividend. As the news becomes public, the share price may increase by $2 and hit $62.

The stock might trade at $63 one business day before the ex-dividend date. On the ex-dividend date, its price will likely fall below its previous price, such as $61, at the start of the trading session, because anyone buying on the ex-dividend date will not receive the dividend.

Companies pay dividends to reward shareholders, signal financial strength, attract investors, build reputation, and efficiently use profits when growth opportunities are limited.

Investors prefer high dividend stocks because they provide steady income, lower risk, strong returns, downside protection, and potential compounding growth.

A capital gain is the increase in the value of a capital asset (like stocks, bonds, or real estate) that is realized when the asset is sold for more than its purchase price.

Example:

You buy a share at $50.

Later, you sell it at $70.

Your capital gain = $70 – $50 = $20 per share.

Alternative to paying dividend:

Select positive NPV projects
Acquire other company.
Purchase financial assets
Repurchase share from market

A stable dividend policy is the easiest and most commonly used. The goal of this policy is to provide shareholders with a steady and predictable dividend payout each year, which is what most investors seek. Investors receive a dividend regardless of whether earnings are up or down.

♦ Residual Dividend Policy ♦

Residual Dividend Policy: The Residual Dividend Policy is also highly volatile, but some investors see it as the only acceptable dividend policy. With a residual dividend policy, the company pays out what dividends remain after the company has paid for capital expenditur(CAPEX) and working capital.
This approach is volatile, but it makes the most sense in terms of business operations. Investors do not want to invest in a company that justifies its increased debt with the need to pay dividends.

The Gordon Growth Model (GGM) is a tool used to determine the intrinsic value of a stock based on a series of dividends that grow at a consistent rate.

GGM is best applied to companies with stable dividend growth, as it assumes dividends will increase at a constant rate indefinitely.

Limitations include its reliance on stable dividend growth and potential issues in valuation when the required rate of return is lower than the growth rate.

If the calculated intrinsic value is higher than the current market price, the stock is considered undervalued, warranting a purchase; if lower, it's overvalued, suggesting a sale.

Cumulative Dividend: A type of dividend which, if not paid when due, accumulates until the next time the corporation pays dividends (with the oldest deferred payment made first). Cumulative dividends are only payable on preferred stock upto 6 years.

Dividend Yield: The dividend yield or dividend–price ratio of a share is the dividend per share divided by the price per share. It is also a company's total annual dividend payments divided by its market capitalization, assuming the number of shares is constant.

Clientele Effect: The clientele effect explains the movement in a company's stock price according to the demands and goals of its investors. These investor demands come in reaction to a tax, dividend or other policy change or corporate action which affects a company's shares.

Dividend Signaling: Dividend signaling is a theory that suggests that a company's announcement of an increase in dividend payouts is an indication of positive future prospects. It also suggests that companies that pay the highest dividends are, or should be, more profitable than those paying smaller dividends.

Homemade Dividends: Homemade dividends are a form of investment income generated from the sale of a portion of an individual's investment portfolio. These differ from the traditional dividends that a company’s board of directors distributes to certain classes of shareholders.

A bond is a fixed-income instrument issued by companies, governments, or organizations to raise capital.


Fixed interest (coupon): The bondholder receives periodic interest payments at a predetermined rate.

Principal repayment: The face value of the bond is repaid at maturity.

Fixed maturity: Bonds have a set term (e.g., 5, 10, 20 years).

Nasdaq is a pioneering global electronic marketplace that revolutionized the buying and selling of securities. Originally an acronym for the National Association of Securities Dealers Automated Quotations, Nasdaq was established by the National Association of Securities Dealers (now known as FINRA) in 1971, ushering in the world's first automated stock exchange.

The regulatory authority that oversees the capital/stock market of Bangladesh is the Bangladesh Securities and Exchange Commission (BSEC).


BSEC-
Regulates and supervises the capital market.

Protects investors’ interests.

Ensures fair and transparent trading on stock exchanges.

Monitors corporate governance of listed companies.

The Dhaka Stock Exchange (DSE) and Chittagong Stock Exchange (CSE) operate under the regulation and supervision of the BSEC.

Saudi Aramco priced its shares at 32 Saudi riyals (approximately $8.53) each, selling 1.5% of its shares and raising $25.6 billion. The IPO was oversubscribed by 4.65 times, reflecting strong investor demand. The company commenced trading on the Tadawul stock exchange on December 11, 2019, with shares rising 10% to 35.2 riyals, giving the company a market capitalization of about $1.88 trillion, making it the world's largest listed company at that time.

A bear market is marked by falling prices and pessimism.

Bear Market: When the overall market or a particular asset experiences a prolonged decline in prices, typically by 20% or more from recent highs.

Characteristics:

Investor pessimism dominates.

Trading volume may decrease.

Economic slowdown or recession often accompanies it.

In 1995, the CSE emerged as the second major stock exchange in Bangladesh, located in the port city of Chittagong.

This exchange serves as a vital platform for investors in the southern region, broadening the accessibility of the stock market beyond the capital.

Diverse Investment Universe: Similar to the DSE, the CSE facilitates the trading of various financial instruments, creating opportunities for investors to diversify their portfolios and engage with different sectors of the economy.

Number of listed companies – 628.

Three Index: CSE Shariah Index(CSI), CSE 50 Index (CSE50) and CSE All Share Price Index (CASPI)

The stated goals of the International Organization of Securities Commissions (IOSCO) are to develop, implement, and promote internationally recognized standards for securities regulation in order to:

Protect investors – Ensure fair treatment and safeguard their interests.

Ensure fair, efficient, and transparent markets – Promote integrity in securities markets.

Reduce systemic risk – Enhance the stability of financial systems.

Founded in 1954, at that time DSE was in the name of East Pakistan Stock Exchange Association Ltd.

In 1962, the name was revised to East Pakistan Stock Exchange Ltd. After two years it  became DSE, which stands as Bangladesh’s principal stock exchange.

Situated in the bustling capital city of Dhaka, it acts as a marketplace where investors and companies intersect to trade financial instruments. Total Company List:  655

These instruments include equities (also known as stocks or shares), bonds, mutual funds, and more.

Empowering Investment Opportunities: The DSE provides an avenue for businesses to raise capital by issuing shares to the public. Investors, in turn, gain the opportunity to become partial owners of these companies, sharing in their profits and losses.

Three index of DSE: DSE Shariah Index(DSES), DSE 30 Index (DSE30), DSE Board Index (DSEX)-listed.

Initial Public Offering (IPO): An IPO is the process through which a company offers equity to investors and becomes a publicly-traded company.

Right Issue: A rights issue is when a company offers its current shareholders the chance to buy more shares at a discounted price. Rights issues are typically employed when a company needs to raise funds for various objectives, such as expansion or debt repayment.

Private Placement: A private placement is a sale of stock shares or bonds to pre-selected investors and institutions rather than on a public exchange. It is an alternative to an initial public offering (IPO) for a young company seeking to raise money to expand.

A platform where non-listed securities are traded is called an Over-The-Counter (OTC) market.


Securities are traded directly between parties rather than on a formal stock exchange.

Typically used for unlisted stocks, bonds, derivatives, and other financial instruments.

Prices and terms are often negotiated privately.

Forward Contract:

A customized agreement between two parties to buy or sell an asset at a specific price on a future date.

Traded OTC, not on formal exchanges, so terms (quantity, price, delivery date) are negotiable.

Used for hedging (protecting against price fluctuations) or speculation.

Larger, established companies with predictable profits are often the best dividend payers. Companies within the following industry sectors maintain a regular record of dividend payments:

Basic materials
Oil and gas
Banks and financial
Healthcare and pharmaceuticals
Utilities

Source: Investopedia

Economists Merton Miller and Franco Modigliani argued that a company's dividend policy is irrelevant and has no effect on its stock price or cost of capital.

A shareholder may be indifferent to a company's dividend policy, especially if the dividend is used to buy more shares. If a dividend payout is seen as inadequate, an investor can sell shares to generate cash.

Source: Investopedia

The dividend yield is the amount of money a company pays shareholders for owning a share of its stock divided by its current stock price.
Mature companies are the most likely to pay dividends.
Companies in the utility and consumer staple industries often have relatively higher dividend yields.
Real estate investment trusts, master limited partnerships, and business development companies pay higher-than-average dividends; however, the dividends from these companies are taxed at a higher rate.
Higher dividend yields don't always indicate attractive investment opportunities because the dividend yield of a stock may be elevated as a result of a declining stock price.

Source: Investopedia

Source: Investopedia

Effect of dividend payment:

Assets decrease – Usually cash goes out when dividends are paid.

Equity decreases – Specifically, retained earnings (a part of shareholders’ equity) is reduced.

Liabilities – No immediate effect if dividend is paid directly. If declared but not yet paid, it creates a liability (Dividends Payable).

প্রাথমিক বাজারে লেনদেনের মাধ্যমে প্রাপ্ত তহবিল সরাসরি কোম্পানি বা ইস্যুকারীর কাছে যায়। এই অর্থ কোম্পানিগুলো নতুন সিকিউরিটিজ বিক্রি করে (যেমন IPO-এর মাধ্যমে) বাজার থেকে সংগ্রহ করে এবং তাদের ব্যবসায়িক বৃদ্ধি, অবকাঠামো উন্নয়ন বা ঋণ পরিশোধের জন্য ব্যবহার করে। 

প্রাথমিক বাজারে শেয়ার কেনার জন্য আপনার একটি বিও (বেনিফিশিয়ারি ওনার্স) হিসাব বা ডিম্যাট অ্যাকাউন্ট খোলা বাধ্যতামূলক। এই বিও হিসাবই ব্যাংক অ্যাকাউন্টের মতো কাজ করে এবং ব্রোকারেজ হাউসের মাধ্যমে খোলা যায়। বিও হিসাব ছাড়া আপনি কোনো শেয়ার কেনা-বেচা করতে পারবেন না, সেটা প্রাথমিক বাজারের আইপিও হোক বা সেকেন্ডারি বাজারের শেয়ারই হোক না কেন। 

অবশিষ্ট লভ্যংশ নীতিতে প্রথমে প্রতিষ্ঠানের বিনিয়োগের সুযোগ ও প্রকল্পগুলোতে অর্থায়ন করা হয়। সব প্রয়োজনীয় বিনিয়োগ সম্পন্ন হওয়ার পর অবশিষ্ট আয় শেয়ারহোল্ডারদের মধ্যে লভ্যাংশ হিসেবে বিতরণ করা হয়।

রাইট শেয়ার ইস্যুর ফলে শেয়ারহোল্ডারের মালিকানা স্বত্বের কোনো পরিবর্তন হয় না

→ কারণ, রাইট শেয়ার বিদ্যমান শেয়ারহোল্ডারদের প্রোপোরশনাল ভিত্তিতে (অনুপাত অনুযায়ী) প্রদান করা হয়।
→ প্রত্যেক শেয়ারহোল্ডার তাদের বর্তমান শেয়ারের অনুপাতে নতুন শেয়ার কেনার অধিকার পায়।
→ তাই মালিকানা কাঠামো অপরিবর্তিত থাকে, কেবল মোট শেয়ারের সংখ্যা বেড়ে যায়।

তবে যদি কোনো শেয়ারহোল্ডার রাইট শেয়ার গ্রহণ না করেন, তাহলে তার মালিকানার শতকরা অংশ কমে যেতে পারে।

স্থিতিশীল লভ্যাংশ নীতির প্রধান বৈশিষ্ট্য হলো শেয়ারহোল্ডারদের প্রতি বছর একই পরিমাণ লভ্যাংশ প্রদান করা হয়, যা কোম্পানির লভ্যাংশ প্রদানকে একটি নির্দিষ্ট ও অনুমানযোগ্য করে তোলে এবং শেয়ারহোল্ডারদের আস্থা বৃদ্ধিতে সহায়ক হয়। এটি এমন একটি নীতি যেখানে লাভ কম হলেও পূর্বের স্থিতিশীল লভ্যাংশ প্রদান করা হয়, এবং লাভ বেশি হলে ন্যূনতম স্থিতিশীল লভ্যাংশের সাথে অতিরিক্ত লভ্যাংশ দেওয়া হয়, যা একটি আদর্শ ও নমনীয় নীতি হিসেবে বিবেচিত হয়। 

MM Theory suggests dividend policy does not affect firm value under perfect markets. 
​
​
​Source: Miller, M., & Modigliani, F. (1961). Dividend Policy, Growth, and the Valuation of Shares.

Bonus shares reward shareholders without cash outflow, converting reserves into equity.

Bonus shares are free, right shares require payment at discounted price.

Payout ratio = Dividend / Net Income, shows what portion of profit is distributed.

In the primary market, securities are issued for the first time and proceeds go to the issuing company. In the secondary market, securities are traded among investors, and proceeds go to the selling investor, not the company. Here, the IPO = primary, and the resale = secondary.

Source: Fabozzi, F. J. (2020). Capital Markets: Institutions and Instruments.

Residual dividend policy states that firms should first fund positive NPV projects (where project return > cost of capital). Since 20% > 12%, investing is beneficial. Dividends are paid only from residual earnings after investment.

Source: Brigham & Ehrhardt (2017). Financial Management: Theory and Practice.

MM theory assumes no market imperfections: no taxes, no transaction costs, rational investors, and symmetric information. However, agency problems (managers acting against shareholder wealth) are excluded from their assumptions.

Source: Miller, M. & Modigliani, F. (1961). Dividend Policy, Growth, and the Valuation of Shares.

In a 2:1 bonus issue, shareholders get 2 additional shares for every 1 held. For 1,000 shares, this equals 2,000 new shares. Ownership percentage remains unchanged since all shareholders receive shares proportionately.
​
​Source: Khan & Jain (2018). Financial Management: Text, Problems, and Cases.

A 1:1 bonus issue doubles the number of shares while earnings remain unchanged. EPS = Earnings ÷ Shares, so EPS is halved. Market price typically adjusts downward to reflect the dilution, but total shareholder wealth remains the same. 
​
​Source: Pandey, I. M. (2015). Financial Management.

 Dividend signaling theory suggests that dividends convey information. A high dividend in the face of declining earnings may signal management’s desperation or lack of growth opportunities, which investors may interpret negatively. 
​
​Source: Bhattacharya, S. (1979). Imperfect Information, Dividend Policy, and the Bird in the Hand Fallacy.

A stable dividend policy assures investors of predictable income, which reduces uncertainty, especially for risk-averse investors, though it may reduce reinvestment flexibility. 
​
​Source: Lintner, J. (1956). Distribution of Incomes of Corporations.

 Bonus shares are issued by capitalizing reserves. This reduces retained earnings, increases share capital, but total net worth (equity) remains unchanged. Hence, shareholder wealth is unaffected. 
​
​Source: Pandey, I. M. (2015). Financial Management.

If an investor does not exercise rights, the relative ownership stake decreases, as other shareholders (or new investors) take up the new shares. 
​
​Source: Khan & Jain (2018).

 A reduction in payout ratio can signal management’s confidence in future investment opportunities. If markets trust management, this is viewed positively. However, if earnings are already weak, it could signal distress (context matters). 
​
​Source: Bhattacharya, S. (1979).

 Without a liquid secondary market, investors would hesitate to purchase new issues (IPO, rights issue) since they couldn’t easily exit. Thus, a strong secondary market indirectly strengthens the primary market. 
​
​Source: Fabozzi, F. J. (2020). Capital Markets.