A

Research Report

On
“TREND AND PROGRESS IN CORPORATE DIVIDEND OF SELECTED STEEL
COMPANY IN INDIA”

Submitted to

Kurukshetra University, Kurukshetra

In the partial fulfillment of the Master of Business Administration

(Session 2017-2019)

Submitted to: Submitted by:

Kurukshetra University DIVYA TAKKAR
Kurukshetra MBA 3rd Semester
Univ. Roll No…..

SETH JAI PARKASH MUKAND LAL INSTITUTE OF ENGINEERING

AND TECHNOLOGY, RADAUR (YAMUNA NAGAR)
1
 ACKNOWLEDGEMENT

With immense pleasure I acknowledgement my gratitude to all persons whose guidance have
helped me in carrying out this project work.I take this opportunity to express my profound sense
of sincere and deep gratitude to Mrs. Geeta saini my mentor his constant supervision and above
all extraordinary encouragement during the entire course of the project.

It is my proud privilege to express my profound gratitude to the Head of Department Ms. Anuja
Goel (H.O.D) and the entire faculty of department, Seth jai Prakash Mukand Lal Institute of
Management And Technology and teachers of department for providing me with opportunity to
avail the excellent facilities and infrastructure. The knowledge and values inculcated have proved
to be of immense help at very start of my career.

I would like to express my gratitude to all my friends for their invaluable support and co- operation
during the course of the project.

Last but not the least I would express my gratitude to all the members of JMIT for whom I got all
the necessary help whenever required.

Under The Guidance of (DIVYA TAKKAR)

Mrs. Geeta Saini

(A.P. Of Management Department)

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 SETH JAI PRAKASH MUKAND LAL INSTITUTE OF ENGINEERING & TECHNOLOGY
(JMIT)
A SELF FINANCED ISO 9000:2008 CERTIFIED INSTITUTE
APPROVED BY AICTE & AFFILIATED TO KURUKSHETRA UNIVERSITY,
KURUKSHETRA
(CHOTTA BANS) RADAUR-135133(YAMUNA NAGAR)
//TO WHOM SO EVER IT MAY CONCERN//

This is certify that Miss Divya Takkar d/o Mr Jagdish Takkar Bearing University Roll
No………………………...... University Registration No. 14-JMA-368 And class Roll No.
MBA/17/39 is a bonafide student of MBA ( 4th semester) has completed his work on research
project (CP-402) entitled “TREND AND PROGRESS IN CORPORATE DIVIDEND OF
SELECTED STEEL COMPANY IN INDIA” Under my Supervision.
His work is original, satisfactory and fit for the purpose of further evaluation toward the partial
fulfillment for the award to the degree of Master in Business Administration.

Signature of Guide Dr. Anuja

Goel

_______________
(HOD- MBA)
( Faculty-MBA)

3
 DECLARATION

I, Divya Takkar , Roll No MBA/17/39 , MBA(Semester- 4th) of the Seth Jai Parkash Mukand
lal Institute Of Engineering And Technology, Radaur hereby declare that the research project
entitled “TREND AND PROGRESS IN CORPORATE DIVIDEND OF SELECTED STEEL
COMPANY IN INDIA” prepared by me and submitted in partial fulfillment of the requirement
for the degree of Master of Business Administration from Kurukshetra University.

This work done by me and the information provided in the study is authentic to the best of any
knowledge. This report has not been submitted to any other Institute for the award of any degree.

(Divya Takkar)

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 TABLE OF CONTENTS

Sr. No Topics Page no

CHAPTER 1 Introduction to Industry 5 to 37
CHAPTER 2 Introduction to Topic 38 to 46
CHAPTER 3 Literature Review 47 to 52
CHAPTER 4 Research Methodology 53 to 54
CHAPTER 5 Objectives of Study 55 to 58
CHAPTER 6 Data analysis & Interpretation 59 to 68
CHAPTER 7 Findings 69 to 70
CHAPTER 8 Suggestions 71 to 72
CHAPTER 9 Conclusion 73 to 74
CHAPTER 10 Bibliography 75 to 76

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 CHAPTER-1

INTRODUCTION TO
INDUSTRY

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 INTRODUCTION

Steel is crucial to the development of any modern economy and is considered to be the backbone
of human civilization. The level of per capita consumption of steel is treated as an important index
of the level of socioeconomic development and living standards of the people in any country. It is
a product of a large and technologically complex industry having strong forward and backward
linkages in terms of material flows and income generation. All major industrial economies are
characterized by the existence of a strong steel industry and the growth of many of these economies
has been largely shaped by the strength of their steel industries in their initial stages of
development. Steel industry was in the vanguard in the liberalization of the industrial Sector and
has made rapid strides since then. The new Greenfield plants represent the latest in technology.
Output has increased, the industry has moved up i n the value chain and exports have raised
consequent to a greater integration with the global economy. The new plants have also brought
about a greater regional dispersion easing the domestic supply position notably in the western
region. At the same time, the domestic steel industry faces new challenges. Some of these relate
to the trade barriers in developed markets and certain structural problems of the domestic industry
notably due to the high cost of commissioning of new projects. The domestic demand too has not
improved to significant levels. The litmus test of the steel industry will be to surmount these
difficulties and remain globally competitive.

Increasing importance of financial planning decision making i.e. financing, investment, and
dividend in a company has been widely discussed among recent research. The present study is
focusing on issues related with earning and dividend pattern of various companies in steel industry
in India. Steel industry has made a rapid progress on strong fundamentals over the recent years.
The industry is getting all essential ingredients required for dynamic growth. The government is
backing the industry through favorable industrial reforms, while the private sector is supporting it
with investments worth billions of dollars. Even in the tough times of economic slowdown, the
industry succeeded to sustain its positive growth momentum on the strong fundamentals of
domestic demand from construction, automobile and infrastructure sectors. With an impressive
track record, the country has become a reputed name in the world steel industry. Global steel giants
from all over the world have shown interest in the industry because of its phenomenal performance.
Dividend decisions is considered as one of the most important decisions that the managers make,

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as it affects the resources available at the firms’ disposal for further growth and perhaps the wealth
of the shareholders. The profits of the firm can be used for reinvestment within the firms by
purchasing a new plant and machinery, investing in research and development, expanding
inventories and the like. Effectiveness of such decisions has been affecting the growth and future
interest of shareholders vis-à-vis market capitalization of the company. Dividends used as a signal
by the investors as if dividend per share drop and investors take it as the company is not doing
well financially. It could mean a drop in company’s market value as investors sell off share out of
fear and vice versa. India’s economic growth is contingent upon the growth of the Indian steel
industry. Consumption of steel is taken to be an indicator of economic development. While steel
continues to have a stronghold in traditional sectors such as construction, housing and ground
transportation, special steels are increasingly used in engineering industries such as power
generation, petrochemical sand fertilizers. India occupies a central position on the global steel map,
with the establishment of new state-of-the-art steel mills, acquisition of global scale capacities by
players, continuous modernization and upgradation of older plants, improving energy efficiency
and backward integration into global raw material sources.

Steel production in India has increased by a compounded annual growth rate (CAGR) of 8 percent
over the period 2002-03 to 2006-07. Going forward, growth in India is projected to be higher than
the world average, as the per capita consumption of steel in India, at around 46 kg, is well below
the world average (150 kg) and that of developed countries (400 kg). Indian demand is projected
to rise to 200 million tones by 2015. Given the strong demand scenario, most global steel players
are into a massive capacity expansion mode, either through brownfield or Greenfield route. By
2012, the steel production capacity in India is expected to touch 124 million tones and 275 million
tones by 2020. While greenfield projects are slated to add 28.7 million tones, brownfield
expansions are estimated to add 40.5 million tones to the existing capacity of 55 million tones
Steel is manufactured as a globally tradable product with no major trade barriers across national
boundaries to be seen currently. There is also no inherent resource related constraints which may
significantly affect production of the same or its capacity creation to respond to demand increases
in the global market. Even the government policy restrictions have been negligible worldwide and
even if there are any the same to respond to specific conditions in the market and have always been
temporary. Therefore, the industry in general and at a global level is unlikely to throw up
substantive competition issues in any national policy framework. Further, there are no natural

8
monopoly characteristics in steel. Therefore, one may not expect complex competition issues as
those witnessed in industries like telecom, electricity, natural gas, oil, etc. This, however, does not
mean that there is no relevant or serious competition issue in the steel industry. The growing
consolidation in the steel industry worldwide through mergers and acquisitions has already thrown
up several significant concerns. The fact that internationally steel has always been an oligopolistic
industry, sometimes has raised concerns about the anticompetitive behaviour of large firms that
dominate this industry. On the other hand the set of large firms that characterize the industry has
been changing over time.

Trade and other government policies have significant bearing on competition issues. Matters of
subsidies, non-tariff barriers to trade, discriminatory customs duty (on exports and imports) etc.
may bring in significant distortions in the domestic market and in the process alter the competitive
positioning of individual players in the market. The specific role of the state in creating market
distortion and thereby the competitive conditions in the market is a well-known issue in this
country. This report proceeds as follows. Section 2 of the report provides a brief over view of the
performance and structure of the Indian steel industry by analysing published secondary time series
data on certain key indicators. Market structure is analyzed using indicators such as number of
players and their respective shares in total production, share of public and private players in the
total production/sales, production capacity of major players, etc. Given the heterogeneous nature
of the product this analysis is done for the various segments of steel that constitute the “relevant
market”. This analysis is a precursor in identifying segments where competition may be an issue
of concern to allow for a pointed analysis. Section 3 of the report documents policy and
institutional structure governing the steel industry in India and the role played by the Government
in the development of this industry. Section 4 of the report examines issues of competition of steel
industry in India, by identifying the structurally inherent and the market determined positions of
various steel firms specifically to see their market power, vis-à-vis both their final consumers as
also those within the steel industry.

The issues emerging out of the size and market shares, specifically taking into consideration the
investment aspects are also discussed in this section. The other issue of significant importance the
context of competition is the command over natural resources that a few players possess and 2 that
enable a significant cost advantage over the rest in the market. These are the result of government

9
policies of the past, to support growth of a particular industry. These preferential Policies and their
impact on competition are also analyzed in this section.

Section 5 concludes with a discussion on state of the competition in the Indian steel sector pointing
to a few key recommendations for the Competition Commission of India. Appendix I, II, III and
IV provide data on the sector, and briefly discuss international conditions, and provide an historical
overview. This study finds little evidence of any cartelization or joint pricing behavior on the part
of the incumbents. It finds that government intervention, and slow responsiveness to changing
conditions has contributed to shortages in the past, which in turn leads to action by the incumbents
that look like, but is not, anti-competitive behavior. Unequal access to raw material, as well as
export/import curbs, are the key issues affecting the creation of a level playing field. It is the last
two as well as ready availability of information on costs and prices across the value chain that
could warrant some action by the regulator.

HISTORY OF STEEL

Steel was discovered by the Chinese under the reign of Han dynasty in 202 BC till 220 AD. Prior
to steel, iron was a very popular metal and it was used all over the globe. Even the time period of
around 2 to 3 thousand years before Christ is termed as Iron Age as iron was vastly used in that
period in each and every part of life. But, with the change in time and technology, people were
able to find an even stronger and harder material than iron that was steel. Using iron had some
disadvantages but this alloy of iron and carbon fulfilled all that iron couldn‘t do. The Chinese
people invented steel as it was harder than iron and it could serve better if it is used in making
weapons. One legend says that the sword of the first Han emperor was made of steel only. From
China, the process of making steel from iron spread to its south and reached India. High quality
steel was being produced in southern India in as early as 300 BC. Most of the steel then was
exported from Asia only. Around 9th century AD, the smiths in the Middle East developed
techniques to produce sharp and flexible steel 26 blades. In the 17th century, smiths in Europe
came to know about a new process of cementation to produce steel. Also, other new and improved
technologies were gradually developed and steel soon became the key factor on which most of the
economies of the world started depending.

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Steel Industry in India: Overview, Performance and Structure

Background:

The establishment of Tata Iron and Steel Company (TISCO) in 1907 was the starting point of
modern Indian steel industry. Afterwards a few more steel companies were established namely
Mysore Iron and Steel Company, (later renamed Vivesvaraya Iron & Steel Ltd) in 1923; Steel
Corporation of Bengal (later renamed Martin Burn Ltd and Indian Iron & Steel Ltd) in 1923; and
Steel Corporation of Bengal (later renamed Martin Burn Ltd and Indian Iron and Steel Co) in
1939.1 All these companies were in the private sector.

Key Events:

1907*: Tata Iron and Steel Company set up.

1913: Production of steel begins in India.

1918: The Indian Iron & Steel Co. set up by Burn & Co. to compete with Tata Iron and Steel Co.

1923*: Mysore Iron and Steel Company set up

1939*: Steel Corporation of Bengal set up

1948: A new Industrial Policy Statement states that new ventures in the iron and steel industry are
to be undertaken only by the central government.

1954: Hindustan Steel is created to oversee the Rourkela plant.

1959: Hindustan Steel is responsible for two more plants in Bhilai and Durgapur.

1964: Bokaro Steel Ltd. is created.

1973: The Steel Authority of India Ltd. (SAIL) is created as a holding company to oversee most
of India's iron and steel production.

1989: SAIL acquired Vivesvata Iron and Steel Ltd.

At the time of independence, India had a small Iron and Steel industry with production of about a
million tonnes (mt). In due course, the government was mainly focusing on developing basic steel
industry, where crude steel constituted a major part of the total steel production. Many public

11
sector units were established and thus public sector had a dominant share in the steel production
till early 1990s. Mostly private players were in downstream production, which was mainly
producing finished steel using crude steel products. Capacity ceiling measures were introduced.
Basically, the steel industry was developing under a controlled regime, which established more
public sector steel companies in various segments.

Till early 1990s, when economic liberalization reforms were introduced, the steel industry
continued to be under controlled regime, which largely constituted regulations such as large plant
capacities were reserved only for public sector under capacity control measures; price regulation;
for additional capacity creation producers had to take license from the government; foreign
investment was restricted; and there were restrictions on imports as well as exports. Undoubtedly
there has been significant government bias towards public sector undertakings. But not all
government action has been beneficial for the public sector companies. Freight equalization
policies of the past were one example. The current governmental ‘moral-suasion’ to limit steel
price increases is another.

However, after liberalization—when a large number of controls were abolished, some immediately
and others gradually—the steel industry has been experiencing new era of development. Major
developments that occurred at the time of liberalization and thenceforth were:

1. Large plant capacities that were reserved for public sector were removed;

2. Export restrictions were eliminate.

3. Import tariffs were reduced from 100 percent to 5 percent;

4. Decontrol of domestic steel prices;

5. Foreign investment was encouraged, and the steel industry was part of the high priority
industries for foreign investments and implying automatic approval for foreign equity participation
up to 100 percent.

6. System of freight ceiling was introduced in place of freight equalization scheme.

As a result, the domestic steel industry has since then, become market oriented and integrated with
the global steel industry. This has helped private players to expand their operations and bring in
new cost effective technologies to improve competitiveness not only in the domestic but also in

12
the global market. Private sector contribution in the total output has since been increasing in India.
Development of private sector has caused high growth in all aspects of steel industry that is
capacity, production, export and imports. During the last decade more than 12 mt of capacity has
been added in the steel industry, this is mostly in the private sector. Recently, the steel industry is
receiving significant foreign investments such as POSCO—South Korean steel producer—and
Arcelor-Mittal Group—UK/Europe based steel producer—announcing plans for establishing
about 12 mt production units each in India.

The Indian steel industry, with a production of about 1 mt at the time of independence, has come
long way to reach the production of about 57 mt in 2006-07. Moreover, the steel industry is
showing promising future growth as major players in the industry have announced their plans for
significant investments in expanding their capacities. Impressive development of the steel industry
with active participation of private sector and integration of India steel industry with the global
steel industry has also induced the government to come up with a National Steel Policy in 2005.
The National Steel Policy 2005 was drafted with the aim of establishing roadmap and framework
for the development of the steel industry. The policy envisages steel production to reach at 110 mt
by 2019-20 with annual growth rate of 7.3 percent. As later sections will show these expectations
are not excessively high. With increasing need for large investments in the industry private sector’s
role would be crucial in

the development of the steel industry.

There is a key factor behind the predominance of large units and oligopolistic industry structure.
And that is the production process. The following section discusses the process and underlying
technology.

Steel Production Processes:

Last furnace/basic oxygen furnace (BF/BOF): BF basically converts iron ore into liquid form
of iron. Iron produced by BF contains high amount of carbon and other impurities, this iron is
called pig iron. Pig iron due to its high carbon content has limited end use application such as
covers of manholes. To make steel products out of pig iron it is further processed into BOF where
its carbon content and other impurities are burnt or removed through slag separation. Main inputs

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to BF are iron ore and coal/coke. BOF is also called oxygen furnace because oxygen is the only
fuel used in the process. Generally, integrated milling use BF/BOF routes to produce finished steel.
Producers that use this technology include SAIL, RINL, TSL and JSWL.

Electric Arc Furnace (EAF):

Basic purpose of the EAF is remelting sponge iron, melting scrap, its main inputs, to produce
finished steel. It uses electricity as much as 400-500 kWh/ton. ISPAT, ESSAR, and the Jindal
group are examples of producers, which use this technology.

COREX or Cipcor Process:

COREX is an advance process of making steel. Though few use this process, it is possible to use
non-coking coal directly in smelting work and it also makes it possible to use lump ore and pellets
as inputs. These two advantages allow steel producers to eliminated coking plants and sinter plants.
Purpose of coking plant is to convert non-coking coal into more efficient fuel and purpose of sinter
plant is purify lump ore or pellets for further 5processing. Basic inputs to COREX are iron-ore and
coal. Jindal Iron & Steel Company (JISCO) uses COREX technology to produce finished steel.

Induction Arc Furnace (IAF):

is one of the most advance processes of making steel. Like EAF it uses electricity as its main fuel.
IAF is most environment friendly and efficient way of producing steel. However, its lack of
refining capacity requires clean products as its inputs. Large numbers of small steel companies use
this technology. The high weight of the product significantly pushes up transport and movement
costs. Therefore large integrated plants are the norm for cost efficient production. For specialized
steel and alloys efficient production by smaller plants is possible.

Steel Producers:

Broadly there are two types of producers in India viz. integrated producers and secondary
producers. Integrated steel producers have traditionally integrated steel units have captive plants
for iron ore and coke, which are main inputs to these units. Currently there are three main
integrated producers of steel namely Steel Authority of India Limited (SAIL), Tata Iron and Steel
Co Ltd (TISCO) and Rashtriya Ispat Nigam Ltd (RINL). SAIL dominates amongst the three owing
to its large steel production capacity plant size.

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Secondary producers use steel scrap or sponge iron/direct reduced iron (DRI) or hot briquetted
iron (HBI). It comprises mainly of Electric Arc Furnace (EAF) and Induction Furnace (IF) units,
apart from other manufacturing units like the independent hot and cold rolling units, rerolling units,
galvanizing and tin plating units, sponge iron producers, pig iron producers, etc. Secondary
producers include Essar Steel Ltd., Ispat Industries Ltd., and JSW Steel Ltd. There are 120 sponge
iron producers; 650 mini blast furnaces, electric arc furnaces, induction furnaces and energy
optimizing furnaces; and 1,200 re-rollers in India.

The integrated producers constitute most of the mild steel production in India. Their main products
include flat steel products such as Hot Rolled, Cold Rolled and Galvanised steel. They also produce
long and special steel in small quantities. On the other, secondary producers largely produce long
steel products.

Re-rollers are the units that come under secondary producers’ category, and produce small quantity
of steel like long and flat products. These units either procure their inputs from the market or
through their backward integrated plants. They use sponge iron, pig iron or combination to produce
finished steel or ingots.

Types of Steel:

Steel is an iron based mixture containing two or more metallic and/or non metallic elements usually
dissolving into each other when molten. Since it is an iron based alloy—as per its end use
requirements—other than iron it may contain one or more other elements such as carbon,
manganese, silicon, nickel, lead, copper, chromium, etc. For example, stainless steel (a type of
steel) mainly contains chromium that is normally more than 10.5 percent with/without nickel or
other alloying elements. Steel is produced using Steel Melting Shop that includes converter, open
hearth furnace, electric arc furnace and electric induction furnace. There are broadly two types of
steel according to its composition: alloy steel and non-alloy steel.

Alloying steel is produced using alloying elements like manganese, silicon, nickel, chromium, etc.
Non-alloy steel has no alloying component in it except that are normally present such as carbon.
Non-alloy steel is mainly of three types viz. mild steel (contains upto 0.3% carbon), medium
steel(contains between 0.3-0.6% carbon) and high steel (contains more than 0.6% carbon).

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All types of steel other than mild steel are called special steel. It is mainly because a special care
is taken in order to maintain particular level of chemical composition in such steel. This process
gives different properties to the steel according to its composition. In India, non-alloying steel
constitutes about 95 percent of total finished steel production, and mild steel has large.

According to shape/size/form steel is categorized into different types such as liquid steel, ingots,
semis (semi-finished steel) and finished steel. Liquid steel is a first product that comes out from
Steel Melting Shop. Liquid steel further goes into ingots, and then ingots advance to semis. Semis
are called semi-finished steel products because they are further subject to forging/rolling in order
to produce finish steel products such as flat steel products and long steel products. Crude steel
generally includes ingots and semis.

According to end use, steel is categorized into structural steels, construction steel, deep drawing
Steel, forging quality, rail steel, etc. The following chart depicts various types of steel products
according to different categories.

STEEL INDUSTRY IN INDIA

Steel has been the key material with which the world has reached to a developed position. All the
engineering machines, mechanical tools and most importantly building and construction structures
like bars, rods, channels, wires, angles etc. are made of steel for its feature being hard and
adaptable. Earlier when the alloy of steel was not discovered, iron was used for the said purposes
but iron is usually prone to rust and is not so strong. Steel is a highly wanted alloy over the world.
All the countries need steel for the infrastructural development and overall growth. Steel has a
variety of grades i.e. above 2000 but is mainly categorized in divisions – steel flat and steel long,
depending on the shape of steel manufactured. Steel flat includes steel products in flat, plate, sheet
or strip shapes. The plate shaped steel products are usually 10 to 200 mm and thin rolled strip
products are of 1 to 10 mm in dimension. Steel flat is mostly used in construction, shipbuilding,
pipes and boiler applications. Steel long Category includes steel products in long, bar or rod shape
like reinforced rods made of sponge iron. The steel long products are required to produce concrete,
blocks, bars, tools, gears and engineering products. After independence, successive governments

16
placed great emphasis on the development of an Indian steel industry. In Financial Year 1991, the
six major plants, of which five were in the public sector, produced million tons.

DEMAND OF STEEL IN INDIA:

Driven a booming economy and concomitant demand levels, consumption of steel has grown by
12.5 per cent during the last three years, well above the 6.9 percent envisaged in the National Steel
Policy. Steel consumption amounted to 58.45 tm in 2006-07 compared to 50.27 tm in 2005-06,
recording a growth rate of 16.3 per cent, which is higher than the world average. During the first
half of the current year, steel consumption has grown by 16 per cent. A study done by the Credit
Suisse Group says that India's steel consumption will continue to grow by 17 per cent annually till
2012, fuelled by demand for construction projects worth US$ 1 trillion. The scope for raising the
total consumption of steel in the country is huge, as the per capita steel consumption is only 35
kegs compared to 150 kg in the world and 250 kg in China. With this surge in demand level, steel
producers have been reporting encouraging results. For example, the top six companies, which
account for 70 percent of the total production capacity, have recorded a year-on-year growth rate
of 13.4 per cent, 15.7 per cent and 11.7 per cent in net sales, operating profit and net profit,
respectively, during the second quarter of 2007-08 We expect strong demand growth in India over
the next five years, driven by a boom in construction (43%-plus of steel demand in India). Soaring
demand by sectors 30 like infrastructure, real estate and automobiles, at home and abroad, has put
India's steel industry on the world steel. The Indian Steel Association expects growth in steel
demand to slow down to 7.2 per cent for the next two fiscal due to relatively slow growth in major
consuming sectors such as automotive and consumer durables. Steel demand had grown by 8 per
cent in 2018.India’s steel consumption is expected to cross 100 million tonnes this year, it
added.The World Steel Association had estimated steel demand in India to touch 103 million
tonnes this year, against 96 mt logged in 2018. It would further grow up to 110.2 mt in 2020, it
had said. Steel demand from the consumer durables sector is expected to normalise after a strong
growth was logged last year. Among consumer durables, air-conditioner, washing machine and
refrigerator sales were boosted by a cut in GST rates.The growth in both automotive and consumer
durables sectors are expected to slow down to seven per cent each for the next two years from 16
per cent and 22 per cent clocked last year. Intermediate goods, which is driven by both investments
and consumption, will see some moderation in demand on account of weaker growth in the

17
automotive sector, said ISA.The growth in the Indian economy slowed down in the second half of
last year due to weak rural demand, high oil prices and rupee depreciation against dollar.Going
ahead, revival in private investment is expected to support the economy with consumption demand
improving driven by concessions extended to farmers, unorganised sector and government
employees.

SUPPLY OF STEEL IN THE INDIAN MARKET:

Over the past ten years India‘s crude steel output rose nearly 7% per year to 55.3 million tons ,
while global crude steel output increased by 4% (Germany managed an increase of just under
1%p.a.) Although India is the world‘s eighth largest steel producer, its3%-plus share of global
steel output is still very low; it is roughly the same as Ukraine‘s share of world steel production.
China, the world‘s biggest steelmaker, produces nearly ten times as much as India. In 2005 India‘s
crude steel output of 46.5 million tons was 8%higher than in 2004; only in China was the growth
rate considerably higher at 15%. By contrast, production volumes fell in the US and the EU-25 by
nearly 5% and roughly 4% respectively. In the first five months of 2006 Indian steel production
continued to expand unabated, rising 10% yoy. We forecast a significant increase in output by the
Indian steel industry over the medium term. The entire industry‘s contribution to gross domestic
product should rise in the coming years to more than 30% – compared to just fewer than 27% at
present. The growth drivers are the expanding client industries automotive engineering (production
up 16% p.a. between 2000 and 2005), mechanical engineering (up 10% p.a.) and construction (up
6% p.a.).India was the world’s third-largest steel producer and third-largest steel consumer in
2017. The growth in the Indian steel sector has been driven by domestic availability of raw
materials such as iron ore and cost-effective labour. Consequently, the steel sector has been a major
contributor to India’s manufacturing output. The Indian steel industry is very modern with state-
of-the-art steel mills. It has always strived for continuous modernization and up-gradation of older
plants and higher energy efficiency levels. Indian steel industries are classified into three
categories such as major producers, main producers and secondary producers. India’s finished steel
consumption grew at a CAGR of 5.69 per cent during FY08-FY18 to reach 90.68 MT. India’s
crude steel and finished steel production increased to 102.34 MT and 104.98 MT in 2017-18,
respectively. In 2017-18, the country’s finished steel exports increased 17 per cent year-on-year to
9.62 million tones (MT), as compared to 8.24 MT in 2016-17. Exports and imports of finished

18
steel stood at 4.33 MT and 5.41 MT, during Apr-Nov 2018. India’s finished steel consumption
grew at a CAGR of 5.69 per cent during FY08-FY18 to reach 90.68 MT.India’s crude steel and
finished steel production increased to 102.34 MT and 104.98 MT in 2017-18, respectively.In 2017-
18, the country’s finished steel exports increased 17 per cent year-on-year to 9.62 million tonnes
(MT), as compared to 8.24 MT in 2016-17. Exports and imports of finished steel stood at 4.33 MT
and 5.41 MT, during Apr-Nov 2018.

Sales

1st Qtr
2nd Qtr
3rd Qtr
4th Qtr

RISK FACTORS :

Even though India is now one of the world‘s top ten steelmakers its domestic output is insufficient
to meet the demand in all segments. In 2005, some 4.7 million tons of steel were imported,
compared with only 2.2 million ten years earlier (an annual increase of 8%). The 31 growth in
Indian import demand in 2005 of around 2 million tons is roughly equivalent to the total annual
output of Hungary. Low steel prices smooth the way for imports from Russia, Ukraine and
Kazakhstan. The geographical proximity of Japan, South Korea and China makes them important
suppliers as well. We do not expect India to be self-sufficient in many segments over the medium
term. There are several reasons for this: firstly, steel consumption is rising very fast as a

19
consequence of the prospective dynamic economic growth. Secondly, there is demand for high-
quality products which India will not be able to supply in sufficient quantities for the foreseeable
future. These include products with surface finishing that helps them to be more durable and retain
their value for longer. In general, the trend towards weight-optimized components persists; this
improves the prospects for Western European exporters in the Indian market. As a member of the
WTO (since 1995) India is obliged to gradually abolish import restrictions, so importing steel
should be far less problematic in future.

MAJOR PLAYERS OF STEEL IN INDIA:

1. Public Sector
(A) Steel Authority of India Limited (SAIL) Steel Authority of India Limited (SAIL) is a
company registered under the Indian Companies Act, 1956 and is an enterprise of the Government
of India. It has five integrated steel plants at Bhili (Chhattisgarh), Rourkela (Orissa), Durgapur
(West Bengal), Bokhara (Jharkhand) and Burnout (West Bengal). SAIL has three special and alloy
steel plants viz. Alloy Steels Plant at Durgapur (West Bengal), Salem Steel Plant at Salem
(Tamilnadu) and Visvesvaraya Iron & Steel Plant at Bhadravati (Karnataka). In addition, a Ferro
Alloy producing plant Maharashtra Elektrosmelt Ltd. at Chandrapur, is a subsidiary of SAIL. SAIL
has Research & Development Centre for Iron & Steel (RDCIS), Centre for Engineering &
Technology (CET), SAIL Safety Organisation (SSO) and Management Training Institute (MTI)
all located at Ranchi; Central Coal Supply Organization (CCSO) at Dhabi; Raw Materials Division
(RMD), Environment Management Division (EMD) and Growth Division (GD) at Kolkata. The
Central Marketing Organization (CMO), with its head quarters at Kolkata, coordinates the country-
wide marketing and distribution network.

2. Private Sector
The private sector of the Steel Industry is currently playing an important and dominant role in
production and growth of steel industry in the country. Private sector steel players have contributed
nearly 67% of total steel production of 38.08 million tones to the country during the period April-
December, 2007. The private sector units consist of both major steel producers on one hand and
relatively smaller and medium units such as Sponge iron plants, Mini Blast Furnace units, Electric
Arc Furnaces, Induction Furnaces, Rerolling Mills, Cold-rolling Mills and Coating units on the

20
other. They not only play an important role in production of primary and secondary steel, but also
contribute substantial value addition in terms of quality, innovation and cost effective.

(A) TATA STEEL LTD.

Tata Steel has an integrated steel plant, with an annual crude steel making capacity of 5 million
tones located at Jamshedpur, Jharkhand. Tata Steel has completed the first six months of fiscal
2007-08 with impressive increase in its hot metal production. The hot metal production at 2.76
million tones is 4.6%more compared to the corresponding period of the previous year. The crude
steel production during the period was 2.43 million tones which is marginally lower than the
production of 2.45 million tons last year. The saleable steel production was at a lower level during
the period April September, 2007 (2.34 million tons) compared to the corresponding period of last
year (2.36 million tons). Tata Steel is continuing with it’s programmed of expansion of steel
making capacity by 1.8 million tones to reach a rated capacity of 6.8 million tones. The Project is
reported to be moving ahead of schedule and is likely to be commissioned by May 2008 against
the original schedule of June 2008. The Company has planned to take the capacity to 10 million
tons by the fiscal year 2010. Tata Steel‘s Greenfield projects in Orissa and Chhattisgarh are
progressing on schedule with placement of equipment order for Kalinganagar Project in Orissa
and commencement of the land acquisition process. Jharkhand Project is awaiting announcement
of Relief & Rehabilitation policy of the State Government.

STEEL PRODUCTION IN INDIA:

India is one of the few countries where the steel industry is poised for rapid growth. India‘s share
in world production of crude steel increased from 1.5% in 1981 to around 3.5 % in 2004. While
plant closures and privatization are rare in India, the private sector is considered to be the engine
of growth in the steel industry and technological changes and modernization are taking place in
both the public and the private sector integrated steel plants in India. Steel production of India
accounted for 14.33 million tons in 1990-91, which gradually increased to 36.12 million tonnes in
2003-04, as shown in Table III. The Indian steel industry got a giant importance in the recent past
when the Tata Steel purchased the Corus steel. Today India plays a significant role in the
production of steel in the world. The Indian steel industry is growing at 8.74 % of CAGR. Steel

21
demand continued to remain upbeat in 2008-2009 with consumption of finished steel growing by
a decent 6.8% during April-may 2008. During a same period import surged by a healthy 10 % to
0.7 million tonnes. While export reported a 33% decline to 0.6 million tonnes. While imports and
consumption of finished steel reported a healthy rise, production of the steel continued to rise at a
tepid pace. During April 2008 finished steel output rose by a modest 3.8 %. Further in may it
increased by 5.2%. Aggregate production growth during April-may stood at 5.1 % In view of no
major capacities coming on-stream we estimate finished steel production to touch 60 million
tonnes in 2008-2009. On the basis for last year of 52.7 million tonnes, the steel 32 production
growth for 2008-2009 comes to around 14 %. However the joint plant committee has been revising
its annual figures upwards for the last 2-3 years. In the event of an upward revision in the figures
of 2007-2008, the actual growth in steel production in 2008-2009 would turn out to be less as
compared to our estimate.

4
Series 1
3 Series 2
Series 3
2

0
Category 1 Category 2 Category 3 Category 4

PRODUCTION FUNCTION AND INPUTS:

Production of a product (or a set of products) is generally based on a technological relationship—
amounts of certain factors of production (inputs) are converted into a product based on some
technological constraints. The technological relationship is termed by economists as the
"production function." In more technical terms, the production function can be defined as the

22
function that shows the most output that existing technology permits the manufacturing firm to
extract from each quantity of inputs.

FIXED AND VARIABLE INPUTS :

Primarily, there are two kinds of inputs—fixed and variable. A plant and a factory shed are
examples of fixed inputs (or factors) of production. These inputs are called "fixed" inputs as the
quantities needed of these inputs remain fixed, up to point, as the quantity produced of the product
(the output) increases. Using the steel industry as an example, a blast furnace used in producing
steel is considered a fixed input—Better Steel Corporation can produce more steel by using more
raw materials, and get more production out of the existing blast furnace. It should be noted that
fixed input does remain fixed for all levels of output produced. As the scale of production
increases, the existing plant may no longer suffice. Suppose that the blast furnace chosen by the
steel firm can, at the very maximum, produce 100,000 tons of steel per day. If Better Steel
Corporation needs to supply 150,000 tons of steel per day (on average), it has to add to capacity—
that is, it has to install a new blast furnace. Thus, even a "fixed input" does not remain fixed forever.
The period over which a fixed input remains fixed is called the "short run." Over the "long run,"
even a fixed input varies.
Inputs that vary even in the short run are called "variable" inputs. In the above example of
steel manufacturing, iron ore serves as a variable input. Given the fixed input (the blast furnace in
this case), increasing the quantity of the variable input (iron ore) leads to higher levels of output
(steel).
For a manufacturing firm, it is not important what combination of fixed and variable inputs
is used. As a firm is interested in maximizing profits, it would like to minimize costs for any given
level of output produced. Thus, costs associated with inputs (both fixed and variable) are the main
concern of the firm engaged in the production of a particular commodity. teristics of existing
technology at a given time.
Primarily, there are two kinds of inputs—fixed and variable. A plant and a factory shed
are examples of fixed inputs (or factors) of production. These inputs are called "fixed" inputs as
the quantities needed of these inputs remain fixed, up to point, as the quantity produced of the
product (the output) increases. Using the steel industry as an example, a blast furnace used in
producing steel is considered a fixed input—Better Steel Corporation can produce more steel by

23
using more raw materials, and get more production out of the existing blast furnace. It should be
noted that fixed input does remain fixed for all levels of output produced. As the scale of
production increases, the existing plant may no longer suffice. Suppose that the blast furnace
chosen by the steel firm can, at the very maximum, produce 100,000 tons of steel per day. If Better
Steel Corporation needs to supply 150,000 tons of steel per day (on average), it has to add to
capacity—that is, it has to install a new blast furnace. Thus, even a "fixed input" does not remain
fixed forever. The period over which a fixed input remains fixed is called the "short run." Over the
"long run," even a fixed input varies.
Inputs that vary even in the short run are called "variable" inputs. In the above example of steel
manufacturing, iron ore serves as a variable input. Given the fixed input (the blast furnace in this
case), increasing the quantity of the variable input (iron ore) leads to higher levels of output (steel).
For a manufacturing firm, it is not important what combination of fixed and variable inputs is used.
As a firm is interested in maximizing profits, it would like to minimize costs for any given level
of output produced. Thus, costs associated with inputs (both fixed and variable) are the main
concern of the firm engaged in the production of a particular commodity.

TOTAL AND AVERAGE COSTS:

A manufacturing firm, motivated by profit maximization, calculates the total cost of producing
any given output level. The total cost is made up of total fixed cost (due to the expenditure on fixed
inputs) and total variable cost (due to the expenditure on variable inputs). Of course, the total fixed
cost does not vary over the short run—only the total variable cost does. It is important for the firm
also to calculate the cost per unit of output, called the "average cost." The average cost also is
made up of two components—the average fixed cost (the total fixed cost divided by the number
of units of the output) and the average variable cost (the total variable cost divided by the number
of units of the output). As the fixed costs remain fixed over the short run, the average fixed cost
declines as the level of production increases. The average variable cost, on the other hand, first
decreases and then increases—economists refer to this as the U-shaped nature of the average
variable cost. The U-shape of the average variable cost (curve) occurs because, given the fixed
inputs, output of the relevant product increases more than proportionately as the levels of variable
inputs used increase—this is caused by increased efficiency due to specialization and other
reasons. As more and more variable inputs are used in conjunction with the given fixed inputs,

24
however, efficiency gains reach a maximum—the decline in the average variable cost eventually
comes to a halt. After this point, the average variable cost starts increasing as the level of
production continues to increase, given the fixed inputs. First decreasing and then increasing
average variable cost leads to the U-shape for the average variable cost (curve). The combination
of the declining average fixed cost (true for the entire range of production) and the U-shaped
average variable cost results in the U-shaped behavior of the average total cost (curve), often
simply called the average costs.

AVERAGE COST AND ECONOMIES OF SCALE:

Economies of scale are defined in terms of the average cost per unit of output produced. When the
average cost is declining, the producer of the product under consideration is reaping efficiency
gains due to economies of scale. So long as the average cost of production is declining the firm
has an obvious advantage in increasing the output level (provided, there is demand for the product).
Ideally, the firm would like to be at the minimum average cost point. However, in the short run,
the firm may have to produce at an output level that is higher than the one that yields the minimum
average total cost
When a firm has to add to production capacity in the long run, this may be done by either
duplicating an existing fixed input (for instance, a plant) or increasing the size of the plant. Usually,
as the plant size increases, a firm is able to achieve a new minimum average cost point (lower than
the minimum average cost achieved with the previous smaller capacity) plant. For example, in the
case of Better Steel Corporation, the average cost per ton of steel at the minimum average cost
point with the larger blast furnace may be 20 percent less than the average cost at the minimum
average cost point with smaller blast furnace. Thus, in the long run, a firm may keep switching to
larger and larger plants, successively reducing the average cost. One should, however, be warned
that due to technological constraints the average cost is assumed to start rising at some output level
even in the long run—that is, the average cost curve is U-shaped even in the long run. Therefore,
while looking at the average cost per unit of output is the key to understanding economies of scale,
it is useful to remember that the average cost declines up to a point in the short run, and it may
decline even more in the long run (also up to a point), as higher and higher levels of output are
produced.

25
ECONOMIES OF SCALE AND OLIGOPOLY:
An oligopoly is a market form in which there are only a few sellers of similar products. Low costs
of production (cost per unit or the average cost) can only be achieved if a firm is producing an
output level that constitutes a substantial portion of the total available market. This, in turn, leads
to a rather small number of firms in the industry, each supplying a sizable portion of the total
market demand.

ECONOMIES OF SCALE AND INTERNATIONAL TRADE:

Participating in foreign trade is considered an important way to reap advantages of unrealized
potential of economies of scale. Usually, foreign trade is based on specialization—each country
specializing in production of goods and services in which it has the comparative advantage. With
the possibility of the benefits from economies of scale, there are advantages in engaging in
specialization and foreign trade even if there is no difference among countries with respect to the
economic efficiency with which they produce goods and services. As an example, suppose that a
country may experience economies of scale in producing a particular commodity (for instance,
steel). However, this country is producing this commodity at such a low output level that the
average cost per unit of the output is high. Due to the high average cost it does not have the
comparative advantage in exporting this product to foreign countries. Now, assume that this
country specializes in production of this commodity and exports to another country. The other
country does the same—it specializes in the production of another product (say, aluminium) and
exports to the first country. Thus, the first country specializes in the production of steel and the
second country specializes in the production of aluminium. If economies of scale exist in steel and
aluminum industries, firms can serve the combined markets of both countries and supply both
goods at lower prices (assuming some of the advantages of lower costs are passed on) than if they
only reach their respective domestic markets. This is a major argument for an international
economic association such as the European Common Market. In addition to the pure economies
of scale in production, there are "economies of scale" in learning associated with specialization in
the foreign trade context. In this the average cost per unit goes down as economic efficiencies
increase due to learning. In the aircraft and machine tool industries, manufacturers are well aware
of reductions in average costs due to learning. It has been estimated that the average cost per unit
of new machine tools tends to decline by 20 percent each time the cumulated output is doubled,

26
due to improvement in efficiency through learning by individuals and organizations. In an industry
where learning is an important factor in causing economies of scale, there are advantages in one
country specializing in the production of that product. In such a case, specialization can reduce
average costs and retail prices to lower levels than if each nation attempts to be self-sufficient in
the products subject to economies of scale in learning.

EXPORT AND IMPORT OF STEEL FROM INDIA:

The steel exports of India over the decade have the compounded annual growth rate (CAGR) of
22.27% against CAGR of imports of steel, which accounted 14.20% in the respective period. In
1991-92, very inception of the Liberalization, the steel exports amounted to 368 thousand tons,
which increased year-by-year and reached to 5221 thousand tonnes in 2003-04. It accounted for
thirteen-fold increase over the period. The Annual growth rates of exports of steel for the period
showed the fluctuating trend, which ranged between –14.41% in 1994-95 and 101.36 in 1992-93.
In 2003-04, the growth rate was 15.87 %.

SUBSIDIES AND ISSUES OF COMPETITIVENESS:

Government support to the steel sector has been substantially reduced in India. A bulk of the state
support came in the form of Freight Equalisation Scheme (FRS), whereby the domestic steel prices
were sought to be uniform by a system of cross-subsidisation of transportation cost. However, FRS
was abolished in 1992. Programmes such as the steel development Fund were also alleged to have
conferred benefits and have been countervailed in countries. India does not provide direct subsidies
for exports, although indirect subsidies on the nature of exemption from tax and import duty are
provided. The government has established some schemes to reduce or remove the anti export bias
inherent in the system on indirect taxation. Some of the schemes administered with the above
purpose, allow importer to benefit from tariff exemption, especially on imports. The detail of some
of such schemes, and how they are treated by select countries, are detailed below. The Government
of India implements the Export Promotion of Capital Goods (EPCG) scheme which provides for
a reduction or exemption of customs duties and an exemption from excise taxes on imports of
capital goods. Under this programme, producers may equipment at reduced rates of duty by
meeting certain export commitments. The EPCG scheme has been countervailed in the US,
Canada, as well as the EU. Countervailing duty investigating agencies have also determined the

27
Indian income-tax exemption scheme providing income-tax exception on profits from export sales
as a countervailing subsidy. The income-tax benefits-related export activities are incorporated in
secyions 80HHC, 10A and 10B of the Income Tax Act. Export credit on more favourable terms
has been a long prevailing export-incentive programme in India.
The reserve bank of India has accordingly issued directions to commercial Banks to provide export
credit both at pre- and post-shipment stages. Pre-shipment credit ,also known as packaging credit,
is advanced by commercial banks to exporters for purchase of raw material or the finished product
upon the presentation of confirmed export orders or letters of credit. In the case of post-shipment
credit, the credit is granted to an exporter against either shipping bills or drawback claims. India
also administers a number of duty drawback schemes that allow for the remission or drawback of
import charges levied on inputs that are consumed in the production of an exported product.
Schemes such as duty Entitlement pass book Scheme (DEPB) and Duty free Replenishment
certificate (DFRC) fall under this category. The 40 rationale for operating such schemes is to
ensure that manufacturers should not be made to bear the costs of import charges on imported
goods that are never sold within the manufacturer‘s domestic market. These duty drawback
schemes cannot be classified as export subsidies per se. However, the administration of the
schemes in certain cases have been determined or confer export subsidy by various countervailing
duty investigations to the extent they have resulted in a remission or drawback of import charges
in excess of those levied on inputs that are consumed in the production of the exported product.

SWOT ANALYSIS OF THE INDUSTRY:

28
Strengths
1. Availability of iron ore and coal
2. Low labor wage rates
3. Abundance of quality manpower
4. Mature production base

Weaknesses
1. Unscientific mining
2. Low productivity
3. Coking coal import dependence
4. Low R&D investments
5. High cost of debt
6. Inadequate infrastructure

Opportunities
1. Unexplored rural Market
2. Growing domestic demand
3. Exports
4. Consolidation

Threats
1. China becoming net exporter
2. Protectionism in the West
3. Dumping by competitors.

FACTORS HOLDING BACK THE INDIAN STEEL INDUSTRY

The growth of the Indian steel industry and its share of global crude steel production could be even
higher if they were not being held back by major deficiencies in fundamental areas. Investment in
infrastructure is rising appreciably but remains well below the target levels set by the government.

29
1. Energy supply Power shortages hamper production at many locations. Since 2001 the Indian
government has been endeavoring to ensure that power is available nationwide by 2012. The
deficiencies have prompted many firms with heavier energy demands to opt for producing
electricity with their own industrial generators. India will rely squarely on nuclear energy for its
future power generation requirements. In September 2005 the 15th and largest nuclear reactor to
date went on-line. The nuclear share of the energy mix is likely to rise to roughly 25% by 2050.
Overall, India is likely to be the world‘s fourth largest energy consumer by 2010 after the US,
China and Japan.
2. Problems procuring raw material inputs Since domestic raw material sources are insufficient
to supply the Indian steel industry; a considerable amount of raw materials has to be imported. For
example, iron ore deposits are finite and there are problems in mining sufficient amounts of it.
India‘s hard coal deposits are of low quality. For this reason hard coal imports have increased in
the last five years by a total of 40% to nearly 30 million tons. Almost half of this is coking coal
(the remainder is power station coal). India is the world‘s sixth biggest coal importer. The rising
output of electric steel is also leading to a sharp increase in demand for steel scrap. Some 3.5
million tons of scrap have already been imported in 2006, compared with just 1 million tons in
2000. In the coming years imports are likely to continue to increase thanks to capacity increases.
3. Inefficient transport system: In India, insufficient freight capacity and a transport
infrastructure that has long been inadequate are becoming increasingly serious impediments to
economic development. Although the country has one of the world‘s biggest transport networks –
the rail network is twice as extensive as China‘s – its poor quality hinders the efficient supply of
goods. The story is roughly the same for port facilities and airports. In the coming years a total of
USD 150 ban is to be invested in transport infrastructure, which offers huge potential for the steel
industry. In the medium to long term this capital expenditure will lay the foundations for seamless
freight transport.

RECENT FINACIAL CRISIS OF INDIAN STEEL INDUSRRY:

We have witnessed in last few months, the unfolding of financial crises starting from United States
and expanding world over. The exact magnitude and extent of the crises is fiercely debated among
the financial experts. However, this real impact on economy can easily be observed across many,
if not all sectors. The steel industry has not been spared with the impacts of the financial crises.

30
The total market valuation of Arcelor Mittal ,Nippon steel and JEE has dropped by approx $165
billion. The price of billet in Dubai market has dropped from its height of $125/ton in June 2008
to a recent low of $350 /ton. One of the steepest drops witnessed in recent history. The wide spread
drop in demand for all types of steel required companies to cur production globally. Arcelor Mittal,
one of the largest steel producers, alone has recently announced more than 30% reduction in
production. It is only human to be frustrated and uncertain of the future. However, over long term,
do we really need to be? We explored the steel production data going back to 1900 during last 100
years the worst drop (13.52%) in steel industry accrued between 1979-82. This four year drop in
global steel production is horrendous. However, if we look at year over year growth changes in
steel industry during a 100 year period from 1900 to 2000 a more optimistic picture emerges. There
is not even one instance when industry saw a consecutive four year of negative year over year
growth. The worst case situation is three years of declining year over year growth during 1930-32,
1944-46, and 1980-82. Extending the past patterns of data to predict future is fraught with peril. It
is none the less an important reminder to us that during tumultuous 100 year period the steel
industry has been able to successfully weather world wars ,recession and crises of all the genre.
Steel is a resilient industry. It is not to say that the current financial crises should not be taken
seriously. It should be however, if history holds the chances the impact of current crises extending
beyond 2009 are low. The leading steel companies should take these opportunities to improve their
operational efficiency and effectiveness to better prepare themselves for impending growth in
coming years.

Policy regime for the Steel sector in India:

Under the new industrial policy, iron and steel has been made one of the high priority industries.
Price and distribution controls have been removed as well as foreign direct investment up to 100%
(under automatic route) has been permitted. The Trade Policy has also been liberalized and import
and export of iron and steel is freely Allowed with no quantitative restrictions on import of iron
and steel items. Tariffs on various items of iron and steel have drastically come down since 1991-
92 levels and the government is committed to bring them down to the international levels. With
the abolishing of price regulation of iron and steel in 92, the steel prices are market determined.
The Government announced the National Steel policy in 2005. The policy targets indigenous
production of 110 million tonnes (mt) by 2019-20 from the 2004-05 level of 38 mt at a

31
Compounded annual growth of 7.3 percent per annum. Similarly targeted consumption is 90 mt
by2019-20 from the 2004-05 level of 36 mt, implying a CAGR of 6.90 percent.
The policy devises a multi-pronged strategy to achieve these targets with following focus areas -
removal of supply constraints especially availability of critical inputs like iron ore; improve cost
competitiveness by expanding and strengthening the infrastructure in roads, railways, ports a
power; increase exports; meet the additional capital requirements by mobilizing financial
resources; promote investments by removing procedural delays. In addition the policy also
addresses challenges arising out of environmental concerns, human resource requirements, R&D,
volatile steel prices and the secondary sector. The Eleventh plan working group for steel
recommends the following for effective development ofthe steel industry:

1. Full utilization of the existing policy framework of Public-Private Partnerships (PPPs)

in development of infrastructure like Railways.
2. Set up an R&D Mission in order to provide accelerated thrust on R&D and thereby
improve the competitiveness of the industry.
3. Spread awareness about hedging mechanisms available in exchanges like MCX and
NCDX and develop appropriate regulatory mechanism to avoid any manipulative
practices.
4. Develop an appropriate Institutional Framework for collection of data and
dissemination of Information.
5. Consider setting up of a multi-disciplinary organization along the lines of the
International Iron & Steel Institute (IISI).
6. Proposal to have a dedicated plan fund of Rs. 25 crores for the 11th Five Year Plan in
the Ministry of Steel towards grant for development of human resources for iron and
steel and for ad campaigns for promotion of steel usage.
7. A Technology Up gradation Fund Scheme (TUFS) for the Small and Medium
Enterprises (SME) sector in steel industry to upgrade the technological profile of the
plants in the SME sector.
Role of Government:
In the pre reform era, the ministry of steel played the role of key regulator and was involved in
decision making related to pricing, allocation and distribution. With dismantling of the strict
regulatory regime, the role of Government in all sectors has changed to that of a facilitator. So is

32
true of the steel industry. In the post-de-regulation period, the role of the Ministry of Steel is now
considered that of a facilitator. This is how the government itself sees its role.13 The box below
excerpts the annual report of the Ministry overseeing the steel sector.
Given the oligopolistic features of the steel industry, the role of Government in promoting
competitive forces in the industry is of some importance. Government intervention may be called
for, especially to protect larger consumer interests. But whether it is done via policy or through
some regulatory/judicial mechanism is the question of interest. However, the government
continues to intervene in ad-hoc ways through its administrative ministry on and off. For instance
government's diktat to the steel producers to hold prices down in the face of rising domestic and
global demand for steel is a clear example of government's undue intrusion in the market.

Excerpts from Annual Report 2010-2011 Ministry of Steel, Government of India.

Role of the Ministry
1. Providing linkage for raw materials, rail movement clearance etc. for new plants and
expansion of existing ones.
2. Facilitating movement of raw materials other than coal through finalization of wagon
requirements and ensure an un-interrupted supply of raw materials to the producers.
3. Interaction with All India Financial Institutions to expedite clearance of projects.
4. Regular interactions with entrepreneurs proposing to set up new ventures, to review the
progress of implementation and assess problems faced.
5. Identification of infrastructural and related facilities required by steel industry.
6. Promoting, developing and propagating the proper and effective use of steel and increasing
intensity of steel usage particularly in the construction sector in rural and semi urban areas,
through the setting up of “Institute for Steel Development and Growth (INSDAG)” in
Kolkata.
7. Encouraging research & development activities in the steel sector. There is an institutional
mechanism through which financial assistance is provided from Steel Development Fund
for this purpose. Efforts are being made to further augment R&D activities in the country.
8. Interacting with State Governments to provide power at reduced/ concessional tariffs
especially to mini steel plants all over the country. Similarly, the freight rates adopted by
the Railways have been rationalized after inter action with the Railway Board and freight
cost on raw material transportation for steel producers is reduced.

33
 9. Rationalizing the classification of coking coal in consultation with the Coal Ministry so as
to reduce the impact of royalty payable on this basic raw material. Import duties on several
raw materials, such as, scrap, ships for breaking, coke, non-coking coal etc. used by the
steel industry has been reduced steadily over the past 4-5 years.

OUTCOME BUDGET FOR 2013-14 OF MAJOR SCHEMES :

The concept of Outcome Budget was introduced in 2005-06 by the Government with the objective
of improving the quality of development programmes by making their conceptualization, design
and implementation „outcome‟ oriented. It is based on the premise that „outlays do not necessarily
mean outcomes‟. The intention of outcome budgeting is to track not only the intermediate physical
„outputs‟ that are more readily measurable, but also the „outcomes‟ which are the end objectives
of State intervention. This requires strong project/ programme formulation, appraisal capabilities,
as well as effective delivery systems. The development outcomes need to be defined in measurable
terms, with benchmarking of unit cost of delivery, making the entire exercise moniterable. This
also requires better utilization of physical assets and manpower, and steps to improve project
management and programme implementation, including effective monitoring. Appropriate
systems also need to be put in place to ensure timely flow of funds, which should be utilized for
the intended purposes with the desired outcomes; and properly accounted for through suitable
reporting, audit and evaluation mechanisms. Outcome Budget is, therefore, an effort to put in place
a mechanism to measure the development outcomes of all major programmes.
In the 11th Plan (2007-12), a new scheme for “promotion of Research & Development in Iron and
Steel sector” was included with a budgetary provision of Rs. 118.00 crore for promotion of
research & development in the domestic iron and steel sector. Under the scheme, a total of eight
(8) R& D project proposals have been approved for implementation since 2009-10. Total
cumulative amount of Rs. 51.51 crore has been released under the scheme upto December, 2012.
In the first year of 12th Five Year Plan (2012-17) i.e. 2012-13, two new schemes i.e. Scheme for
promotion of beneficiation & agglomeration of low grade iron ore & ore fines and Scheme for
improving energy efficiency of secondary steel sector were included with token provisions of Rs.
1.00 crore each for pursuing research activities in Iron & Steel sector. However, Schemes have
been dropped due to the lower overall allocation to Ministry of Steel for the 12th Plan by the
Planning Commission.

34
In the Annual Plan (2013-14), which is the second year of 12th Five Year Plan (2012-17) Rs. 12.00
crore has been earmarked for existing projects. One new component under the existing R&D
scheme i.e. Development of Technology for Cold Rolled Grain Oriented (CRGO) Steel Sheets and
other value added innovative steel products has been included with budgetary provision of Rs.
32.00 crore and new projects under the existing scheme on Development of innovative iron/steel
making Process Technology has been included with budgetary provision of Rs. 2.00 crore.
The PSUs under the administrative control of the Ministry formulate and implement various
schemes/ programmes related to their respective area of operations. The schemes of the PSUs are
components of their respective Annual or long term plans. Since each PSU has several schemes,
most of which are related to the normal day to day functioning as well as MOU linked operations
of the company, it would be difficult to cover all schemes of the PSUs in the Outcome Budget. A
decision was, therefore, taken that only projects with sanctioned/estimated cost of more than
Rs.50.00 crore will be covered as given in the following table.

LIBERALISATION OF THE INDIAN STEEL SECTOR:

The Indian steel sector was the first core sector to be completely freed from the licensing regime
and pricing and distribution controls. This was done primarily because of the inherent strengths
and capabilities demonstrated by the Indian iron and steel industry. The economic reforms and the
consequent liberalization of the iron and steel sector which started in the early 1990s resulted in
substantial growth in the steel industry and green field steel plants were set up in the private sector.
India ranked as the fourth largest producer of crude steel in the world after China, Japan and the
USA during 2011 and is also expected to maintain this position, based on January-November, 2012
data as released by the World Steel Association.
India was also the third largest consumer of finished steel in the world, after China and USA in
2011 and is expected to maintain the rank based on the consumption figures for 2012 projected by
the World Steel Association.
The country has also been the largest sponge iron producer in the world since 2003. The domestic
steel industry represents over Rs. 90,000 crore of capital (and expanding further) and directly
provides employment to over 5 lakh people. The production for sale of total finished steel (alloy -
Non-alloy) during April-December 2012 (prov.) was 56.57 million tonnes, up by 3.3% over same
period of last year (source: JPC Flash Report, December 2012).

35
The important policy measures which have been taken over the years for the growth and
development of the Indian iron and steel sector are as under:-
(i) Pricing and distribution of steel were deregulated from January, 1992. At the same time, it
was ensured that priority continued to be accorded for meeting the requirements of small-
scale industries, exporters of engineering goods and North Eastern region, besides strategic
sectors such as Defence and Railways.
(ii) The import regime for iron and steel has undergone major liberalization moving gradually
from a controlled import by way of import licensing, foreign exchange release, canalization
and high import tariffs to total freeing of iron and steel imports from licensing, canalization
and lowering of import duty levels. Export of iron and steel items has also been freely
allowed.
(iii) Currently, the import duty on steel items is 7.5 per cent for flat steel (alloy and non-alloy)
and at 5 per cent for all other items. The import duty on raw materials like melting scrap,
coking coal, met coke is NIL and between 2 to 5 percent for other raw materials such as
Zinc, Iron Ore and Ferro Alloys. There is no export duty on any steel item. However,
Government has imposed ad-valorem export duty of 30 per cent on all forms of iron ore
(except pellets, on which there is no duty) in order to conserve the mineral for long term
requirement of the domestic steel industry.
(iv) Excise duty for steel is currently at 12 per cent.
(v) To ensure sufficient domestic availability and curb the rising price of hot-rolled coils in the
domestic market, its imports have been freed by the government.
(vi) The National Steel Policy 2005 is being updated to provide a roadmap for Indian Steel
Industry’s long term growth prospects in view of fast-changing nature of operations,
structure and dynamics.
(vii) Earlier, the Government had notified 16 steel products under the “Steel & Steel Products
(Quality Control) Order” issued under the Bureau of Indian Standard Act 1986. Further, in
September 2012, the Government has issued the amended Steel & Steel Products (Quality
Control) Second Order, according to which no manufacturer can manufacture, import, store
for sale or distribute steel and steel products which do not conform to the standards and
which do not bear the standard mark (BIS or ISI Mark).

36
 (viii) In order to obtain a full picture of the pattern of rural steel consumption in the country, an
all India survey was commissioned by the Ministry of Steel. The survey work was
coordinated by Joint Plant Committee, Kolkata and the field work was carried out by IMRB
International, a leading market research organization. The study report was examined by a
high-level Committee appointed by the Ministry of Steel for devising roadmap for
implementation of the recommendations of the study, which have submitted its report to
Ministry of Steel.
As per the decisions of this Committee, a Monitoring Committee has been constituted by
the Ministry of Steel under the Chairmanship of Joint Secretary to Government of India and
comprising of representatives from public sector steel plants i.e. SAIL, RINL, Ministry of Steel,
JPC and INSDAG. The Terms of Reference of the Monitoring Committee include:
(a) To monitor the implementation of the various action areas approved in the Action
Plan
(b) To periodically review the results of the various action areas, post implementation
(c) To build up a database on rural stock points of various steel producers and any other
parameter considered important
(d) To suggest areas for further improvement
(e) Any other related area considered important over course of time.

37
 CHAPTER-2
INTRODUCTION TO
TOPIC

38
 INTRODUCTION

A dividend is a distribution of a portion of a company's earnings to a class of its shareholders.

Dividends can be in the form of cash, stock, and less commonly, property. Most stable companies
offer dividends to shareholders. Often the stock prices of these financially secure companies do
not move much, and dividends are offered as a way to entice, reward and retain investors.

Investing in dividend-paying stocks can be an effective method of building long-term wealth. This
guide with introduce dividend terminology and explore the basics of dividends - from how
dividends work, to researching, reinvestment and taxes.

When a company earns profits from operations, management can do one of two things with those
profits. It can choose to retain them - essentially reinvesting them into the company with the hope
of creating more profits and thus further stock appreciation. The alternative is to distribute a portion
of the profits to shareholders in the form of dividends. Management can also opt to repurchase
some of its own shares - a move that would also benefit shareholders.

A company must keep growing at an above-average pace to justify reinvesting in itself rather than
paying a dividend. Generally speaking, when a company's growth slows, its stock won't climb as
much, and dividends will be necessary to keep shareholders around. This growth slowdown
happens to virtually all companies after they attain a large market capitalization. A company will
simply reach a size at which it no longer has the potential to grow at annual rates of 30-40% like
a small cap, regardless of how much money is plowed back into it. At a certain point, the law of
large numbers makes a mega-cap company and growth rates that outperform the market an
impossible combination. In this section, we'll take a deeper look at the different types of dividends
and the mechanics of dividend payments; how companies establish dividend policy and the
different types of dividend policies; the reasons why companies and investors might prefer higher,
lower or no dividend payments; and share repurchases, stock splits and stock dividends as an
alternative to cash dividends.

A dividend is generally considered to be a cash payment issued to the holders of company stock.
However, there are several types of dividends, some of which do not involve the payment of cash
to shareholders.

The types of dividends are:

39
  Cash dividend. The cash dividend is by far the most common of the dividend types used.
On the date of declaration, the board of directors resolves to pay a certain dividend amount
in cash to those investors holding the company's stock on a specific date. The date of record
is the date on which dividends are assigned to the holders of the company's stock. On the
date of payment, the company issues dividend payments.
 Stock dividend. A stock dividend is the issuance by a company of its common stock to its
common shareholders without any consideration. If the company issues less than 25
percent of the total number of previously outstanding shares, you treat the transaction as a
stock dividend. If the transaction is for a greater proportion of the previously outstanding
shares, then treat the transaction as a stock split. To record a stock dividend, transfer from
retained earnings to the capital stock and additional paid-in capital accounts an amount
equal to the fair value of the additional shares issued. The fair value of the additional shares
issued is based on their fair market value when the dividend is declared.
 Property dividend. A company may issue a non-monetary dividend to investors, rather
than making a cash or stock payment. Record this distribution at the fair market value of
the assets distributed. Since the fair market value is likely to vary somewhat from the book
value of the assets, the company will likely record the variance as a gain or loss. This
accounting rule can sometimes lead a business to deliberately issue property dividends in
order to alter their taxable and/or reported income.
 Scrip dividend. A company may not have sufficient funds to issue dividends in the near
future, so instead it issues a scrip dividend, which is essentially a promissory note (which
may or may not include interest) to pay shareholders at a later date. This dividend creates
a note payable.
 Liquidating dividend. When the board of directors wishes to return the capital originally
contributed by shareholders as a dividend, it is called a liquidating dividend, and may be a
precursor to shutting down the business. The accounting for a liquidating dividend is
similar to the entries for a cash dividend, except that the funds are considered to come from
the additional paid-in capital account.

Dividend decision refers to the policy that the management formulates in regard to earnings for
distribution as dividends among shareholders. Dividend decision determines the division of
earnings between payments to shareholders and retained earnings.

40
The Dividend Decision, in Corporate finance, is a decision made by the directors of a company
about the amount and timing of any cash payments made to the company’s stockholders. The
Dividend Decision is an important part of the present day corporate world.

The Dividend decision is an important one for the firm as it may influence its capital
structure and stock price. In addition, the Dividend decision may determine the amount of
taxation that stockholders pay.
Factors influencing Dividend Decisions
There are certain issues that are taken into account by the directors while making the dividend
decisions:

Free Cash Flow

Signaling of Information
Clients of Dividends
Free Cash Flow Theory
The free cash flow theory is one of the prime factors of consideration when a dividend decision
is taken. As per this theory the companies provide the shareholders with the money that is left
after investing in all the projects that have a positive net present value.
Signaling of Information
It has been observed that the increase of the worth of stocks in the share market is directly
proportional to the dividend information that is available in the market about the company.
Whenever a company announces that it would provide more dividends to its shareholders, the
price of the shares increases.
Clients of Dividends
While taking dividend decisions the directors have to be aware of the needs of the various types
of shareholders as a particular type of distribution of shares may not be suitable for a certain
group of shareholders.

It has been seen that the companies have been making decent profits and also reduced their
expenditure by providing dividends to only a particular group of shareholders.
For more information about dividend decision please refer to the following links:
Following are the different forms of Dividend :
Scrip Dividend- An unusual type of dividend involving the distribution of promissory notes that

41
calls for some type of payment at a future date.
Bond Dividend- A type of liability dividend paid in the dividend payer’s bonds.
Property Dividend- A stockholder dividend paid in a form other than cash, scrip, or the firm’s
own stock.
Cash Dividend- A dividend paid in cash to a company’s shareholders , normally out of the its
current earnings or accumulated profits
Debenture Dividend
Optional Dividend- Dividend which the shareholder can choose to take as either cash or stock.

 Significance of dividend decision

The firm has to balance between the growth of the company and the distribution to the
shareholders.
It has a critical influence on the value of the firm.
It has to also to strike a balance between the long term financing decision( company
distributing dividend in the absence of any investment opportunity) and the wealth
maximization.
The market price gets affected if dividends paid are less.
Retained earnings helps the firm to concentrate on the growth, expansion and modernization
of the firm.
To sum up, it to a large extent affects the financial structure, flow of funds, corporate
liquidity, stock prices, and growth of the company and investor’s satisfaction.

Factors influencing the dividend decision

 Liquidity of funds
 Stability of earnings
 Financing policy of the firm
 Dividend policy of competitive firms
 Past dividend rates
 Debt obligation
 Ability to borrow
 Growth needs of the company

42
  Profit rates
 Legal requirements
 Policy of control
 Corporate taxation policy
 Tax position of shareholders
 Effect of trade policy
 Attitude of the investor group
 More Information Related to Corporate Finance
 Business Valuation Hybrid Financing
 Capital Budgeting Investment Decision
 Corporate Cash Flow Corporate Leasing
 Corporate Financing Concepts Corporate Finance Management
 Risk Analysis Corporate Finance Accounting
 Corporate Finance Advisory Corporate Finance Consulting
 Corporate Finance Statements Corporate Tax
 Corporate Finance journal Online Corporate Financing

Dividend policy is concerned with financial policies regarding paying cash dividend in the present
or paying an increased dividend at a later stage. Whether to issue dividends, and what amount, is
determined mainly on the basis of the company's unappropriated profit (excess cash) and
influenced by the company's long-term earning power. When cash surplus exists and is not needed
by the firm, then management is expected to pay out some or all of those surplus earnings in the
form of cash dividends or to repurchase the company's stock through a share buyback program.

If there are no NPV positive opportunities, i.e. projects where returns exceed the hurdle rate, and
excess cash surplus is not needed, then – finance theory suggests – management should return
some or all of the excess cash to shareholders as dividends. This is the general case, however there
are exceptions. For example, shareholders of a "growth stock", expect that the company will,
almost by definition, retain most of the excess earnings so as to fund future growth internally. By
withholding current dividend payments to shareholders, managers of growth companies are hoping
that dividend payments will be increased proportionality higher in the future, to offset the
retainment of current earnings and the internal financing of present investment projects.

43
Management must also choose the form of the dividend distribution, generally as
cash dividends or via a share buyback. Various factors may be taken into consideration: where
shareholders must pay tax on dividends, firms may elect to retain earnings or to perform a stock
buyback, in both cases increasing the value of shares outstanding. Alternatively, some companies
will pay "dividends" from stock rather than in cash; see Corporate action. Financial theory
suggests that the dividend policy should be set based upon the type of company and what
management determines is the best use of those dividend resources for the firm to its shareholders.
As a general rule, shareholders of growth companies would prefer managers to have a share
buyback program, whereas shareholders of value or secondary stocks would prefer the
management of these companies to payout surplus earnings in the form of cash dividends.

There are three main approaches to dividends: residual, stability or a hybrid of the two.

 Residual Dividend Policy

Companies using the residual dividend policy choose to rely on internally generated equity to
finance any new projects. As a result, dividend payments can come out of the residual or
leftover equity only after all project capital requirements are met. These companies usually
attempt to maintain balance in their debt/equity ratios before making any dividend
distributions, deciding on dividends only if there is enough money left over after all operating
and expansion expenses are met.

For example, let's suppose that a company named CBC has recently earned $1,000 and has a
strict policy to maintain a debt/equity ratio of 0.5 (one part debt to every two parts of equity).
Now, suppose this company has a project with a capital requirement of $900. In order to
maintain the debt/equity ratio of 0.5, CBC would have to pay for one-third of this project by
using debt ($300) and two-thirds ($600) by using equity. In other words, the company would
have to borrow $300 and use $600 of its equity to maintain the 0.5 ratio, leaving a residual
amount of $400 ($1,000 - $600) for dividends. On the other hand, if the project had a capital
requirement of $1,500, the debt requirement would be $500 and the equity requirement would
be $1,000, leaving zero ($1,000 - $1,000) for dividends. If any project required an equity
portion that was greater than the company's available levels, the company would issue new
stock.

44
 Typically, this method of dividend payment creates volatility in the dividend payments that
some investors find undesirable.

The residual-dividend model is based on three key pieces: an investment opportunity schedule
(IOS), a target capital structure and a cost of external capital.

1. The first step in the residual dividend model to set a target dividend payout ratio to determine
the optimal capital budget.

2. Then, management must determine the equity amount needed to finance the optimal capital
budget. This should be done primarily through retained earnings.

3. The dividends are then paid out with the leftover, or residual, earnings. Given the use of
residual earnings, the model is known as the "residual-dividend model."

A primary advantage of the dividend-residual model is that with capital-projects budgeting, the
residual-dividend model is useful in setting longer-term dividend policy. A significant
disadvantage is that dividends may be unstable. Earnings from year to year can vary depending on
business situations. As such, it is difficult to maintain stable earnings and thus a stable dividend.
While the residual-dividend model is useful for longer-term planning, many firms do not use the
model in calculating dividends each quarter.

 Dividend Stability Policy

The fluctuation of dividends created by the residual policy significantly contrasts with the certainty
of the dividend stability policy. With the stability policy, quarterly dividends are set at a fraction
of yearly earnings. This policy reduces uncertainty for investors and provides them with income.

 Hybrid Dividend Policy

The final approach is a combination between the residual and stable dividend policy. Using this
approach, companies tend to view the debt/equity ratio as a long-term rather than a short-term
goal. In today's markets, this approach is commonly used by companies that pay dividends. As
these companies will generally experience business cycle fluctuations, they will generally have
one set dividend, which is set as a relatively small portion of yearly income and can be easily

45
maintained. On top of this set dividend, these companies will offer another extra dividend paid
only when income exceeds general levels.

Relevance of dividend policy

Dividends paid by the firms are viewed positively both by the investors and the firms. The firms
which do not pay dividends are rated in oppositely by investors thus affecting the share price. The
people who support relevance of dividends clearly state that regular dividends reduce uncertainty
of the shareholders i.e. the earnings of the firm is discounted at a lower rate, thereby increasing the
market value. However, its exactly opposite in the case of increased uncertainty due to non-
payment of dividends.

46
 CHAPTER – 3
LITERATURE REVIEW

47
 LITERATURE REVIEW

The dividends and dividend policy were the subject of many studies for many years e.g. Lintner
(1956), Gordon (1959), Miller and Modigliani (1961), Mancinelli and Ozkan, (2006), Amidu and
Abor (2006), Zhou and Ruland (2006) etc. Some studies, for example Lintner (1956), Baker et. al.
(1985), Pruitt and Gitman (1991), Benartzi et al.(1997), Baker and Powell (2000), investigated the
possible effect of past dividends on future earnings and/or dividends. Some other researchers
focused on the effect of investment decisions of firms (Fama 1974), industry classification (Baker
1988), capital adequacy (Dickens et al. 2002), and the ownership structure of companies
(Mancinelli and Ozkan, 2006) on dividend policy.

Lintner (1956)

Hypothesizes that earnings can be used as one primary indicator of a firm's capacity to pay
dividends. Since dividends are usually paid from annual profits, profitable firms will logically pay
more dividends. In order to examine whether the profitability of a firminfluences its dividend
policy, earnings per share (EPS) are used as a proxy for profitability. A positive relationship
between dividends and profitability is expected.

Brittian (1966)

Argues that cash flow is more important than net earnings in determining a firm's ability to pay
dividends. Cash flow is considered the relevant measure of a company's disposable income. In
order to test the effect of cash flow on a firm's dividend policy, a new variable, operating cash flow
per share (CFPS), is used as a proxy.

Kalay (1982)

Also argues that stockholder can pay out the proceeds of a new issue a senior debt as dividends
(debt financed dividend), thereby increasing the risk of the outstanding bonds. Easterbrook (1984)
states that dividend is beneficial to equity holders because they force managers constantly to obtain
new capital in competitive markets. The prediction of agency theory is parallel with residual theory
of dividend payment that dividend has positive effect on financing decision.

48
Healy and Palepu (1988)

Tried to to analyze the signaling hypothesis, i.e. earnings information conveyed by dividend
initiations and omissions. Benartzi, Michaely, Thaler (1997) analyzes the issue of whether
dividend changes signal the future or the past. For a sample of 7186 dividend announcements made
by NYSE or AMEX firms during the period 1979-91, they find a lagged and contemporaneous
relation between dividend changes and earnings. Their analysis also shows that in the two years
following dividend increases, earnings changes are unrelated to the sign and magnitude of dividend
changes.

Pruitt and Gitman (1991)

Had done a survey 1,000 largest US firms in term of investment, financing, and dividends decisions
in their firms. The result showed that the important determinants of dividends policy are the current
and past profit level, the volatility of earnings and the expected future earnings in term of the
growth in earnings.

DeAngelo, DeAngelo and Skinner (1992)

Analyses the relationship between dividends and losses and the information conveyed by dividend
changes about the earnings performance. They examine the dividend behaviour of 167 NYSE
firms with at least one annual loss during 1980-95 and those of 440 firms with no losses during
the same period, where all the firms had a consistent track record of ten or more years of positive
earnings and dividends. They find that 50.9% of 167 firms with at least one loss during 1980-95
reduced dividends, compared to 1% of 440 firms without losses. Their findings support signaling
hypothesis in that dividend changes improve the ability to predict future earnings performance.

Mahapatra and Sahu (1993)

Find cash flow as a major determinant of dividend followed by net earnings. Narasimhan and Asha
(1997) observe that the uniform tax rate of 10 percent on dividend as proposed by the Indian union
budget 1997-98, alters the demand of investors in favor of high payouts. Mohanty (1999) finds
that firms, which issued bonus shares, have either maintained the pre-bonus level or only decreased
it marginally there by increasing the payout to shareholders. Narasimhan and Vijayalakshmi

49
(2002) analyze the influence of ownership structure on dividend payout and find no influence of
insider ownership on dividend behavior of firms.

I.M. Pandey and Ramesh Bhat, (1994)

Study the managers perceptions of dividend decision for a sample of 425 Indian companies for the
period 1986-87 to 1990-91. For this purpose, they undertake a survey of managers perceptions of
dividend decision and find that managers perceive current earnings as the most significant factor.
They analyzed the dividend payout behaviour of Indian firms and found that the Indian firms have
lower target ratios and higher adjustment factors. They also observed that monetary policies have
a significant influence on the dividend payout behaviour of Indian firms which cause about a 5-6
per cent reduction in the payout ratios.

Glen et al. (1995)

Study the dividend policy of firms in emerging markets. They find that firms in these markets have
a target dividend payout rate, but less concerned with volatility in dividends over time. They also
find that shareholders and governments exert a great deal of influence on dividend policy and
observe that dividends have little signaling content in these markets.

Mishra and Narender (1996)

Analyze the dividend policies of 39 state-owned enterprises (SoE) in India for the period 1984-85
to 1993-94. Their findings revealed that earnings per share(EPS) is a major factor in determining
the dividend payout of SoEs.

Pecking order theory (Myers, 1996)

Assumes that dividend is sticky. Managers only increase the dividend when they sure maintain the
increasing dividend in the future. Thus, increasing dividend is a good signal (Miller and Rock,
1985), and decreasing dividend is a bad signal. Myers, 1984; Myers and Majluf, 1984 argues that
firms prefer to use internal fund. If external fund is needed, managers will choose debt financing
rather than issue new equity.

Balancing theory (Brigham et al. 1999) attempts to predict the managerial behavior based on
business risk. In less business risk, the theory suggests the firm to use more debt, and use less debt
in high business risk.

50
Bernsterin (1998)

Expresses concern over the decline in payout over a period of time in the US market. He observes
that given the „concocted‟ earnings estimates provided by firms, the low dividend payout induces
reinvestment risk and earnings risk for the investors.

Baker and Powell (1999)

Tested the following question: “Do the views of managers about dividend issues differ among
different industry groups?” They found out in their results that the responses of the three groups
of industries selected (utilities, manufacturing and wholesale/retail trade) differ insignificantly.
They suggested that a firm's industry type has little influence on the views that managers have
about theoretical and empirical issues involving dividend policy.

Fama and French (2001)

Analyze the issue of lower dividends paid by corporate firms over the period 1973-1999 and the
factors responsible for the decline. In particular they analyze whether the lower dividends were the
effect of changing firm characteristics or lower propensity to pay on the part of firms. They observe
that proportion of companies paying dividend has dropped from a peak of 66.5 percent in 1978 to
20.8 percent in 1999. They attribute this decline to the changing characteristics of firms: “The
decline in the incidence of dividend payers is in part due to an increasing tilt of publicly traded
firms toward the characteristics – small size, low earnings, and high growth – of firms that typically
have never paid dividends.

Ramacharran (2001)

Analyzes the variation in dividend yield for 21 emerging markets (including India) for the period
1992-99. His macroeconomic approach using country risk data finds evidence for pecking order
hypothesis – lower dividends are paid when higher growth is expected. The study also finds that
political risk factors have no significant impact on dividend payments of firms in emerging
markets.

Lee and Ryan (2002)

Analyze the dividend signaling-hypothesis and the issue of direction of causality between earnings
and dividends - whether earnings cause dividends or vice versa. For a sample of 133 dividend

51
initiations and 165 dividend omissions, they find that dividend payment is influenced by recent
performance of earnings, and free cash flows. They also find evidence of positive (negative)
earnings growth preceding dividend initiations (omissions).

Manickam & Naleson (2008)

Studied 10 major industries which have been selected on the basic of convince sampling method
for the period of 10 years during 1992-2001. They found in the frequency distribution of dividend
per share that maximum numbers of companies are distributed in the medium category of
chemical, cotton, textiles, electrical, metal and alloy, paper, sugar and synthetic textiles industries.

Lalitha Mani & Priya (2010)

Studied dividend behaviour of five Indian steel companies using the statistical tools such as
ANOVA, Trend Analysis, Coefficient Variation, Mean, and Standard Deviation. The study
revealed that Tata steel has highest earnings per share with high dividend amount declaration.
SAIL which has the impressive growth rate during the study.

Al-Ajmi (2011)

Suggested that current dividends are affected by their pasts and their future prospects. To a lesser
extent dividends were associated with net earnings. Payout ratios (POR) were not found to have a
strong effect on the company's future earnings growth, but had some significant negative
correlation with the company's leverage. Since dividends have an effect on stock prices and
company's future growth. Firms pay out a lower proportion of their cash flows compared to the
proportion of dividends of reported earnings. Firms have more flexible dividend policies since
they are willing to cut or skip dividends when profit declines and pay no dividends when losses
are reported. Lagged dividend payments, profitability, cash flows, and life cycle are determinants
of dividend payments.

52
 CHAPTER – 4
RESEARCH
METHODOLOGY

53
 RESEARCH METHODOLOGY

For this Empirical analysis, Data has been collected from the official website and selected steel
company’s financial reports. The steel Companies which satisfied the following criteria have
been short listed for further research.

 Share holder population should be greater than 5,000

 Availability of data for at least for the period of 5 years
 Declaration of dividend for at least fifteen years to the period of the study.

Companies that meet the above conditions are

 KALYANI STEEL
 TATA STEEL
 SAIL STEEL

STATISTICAL TOOLS USED:

(I) Mean, Standard Deviation, Coefficient of Variations:

To study the variation in the ratio, Standard Deviation, Coefficient of Variations have been
used.

(II) ANOVA

ANOVA test has been used to examine whether the mean value of dividend per share differ
for one company to other.

54
 CHAPTER -5
OBJECTIVES OF STUDY

55
 OBJECTIVES OF THE STUDY

Primary Objectives

 To determine the performance of dividends of select steel companies in India.

Secondary Objectives

 To find out the Dividend trend level of STEEL companies in India.

 To determine the Earnings Per Share (EPS) of the company.
 To estimate the Dividend amount (DPS) allotted to each equity share holder of the
company.
 To find out the dividend policy adopted by the different steel companies in India.
 To estimate the growth rate of each company.

56
Selection of Companies:

Top three steel companies in India in terms of production have been selected and they
are covering more than 60% of market share in steel industry in 2018 i.e. 1. Tata Steel (TS), 2.
SAIL (SA), 3. Kalyani Steel (KS).

Selection of Variables Followings are the variables which are selected for the fulfillment of
desired objectives -

1. Earnings per Share (EPS) is the total earning divided by the number of shares in issue. It
shows how much of the company’s profit, after tax, each shareholders owns.

2. Dividend per share (DPS) is the total dividends paid out over an entire year divided by the
number of outstanding ordinary shares issued. Dividends are a form of profits distribution to
the shareholders.

3. Dividend Payout Ratio (DPR) shows the percentage of earnings paid to shareholders in
dividends and calculated by dividing yearly dividend per share by earning per share.

Definition of variables and Ratios:

Dividend per share (DPS) = Total dividend payment/Number of shares outstanding The
extent of payment of dividend to the shareholders is measured in the form of dividend per
share. The dividend per share gives the amount of cash flows from the company to the owners.

Dividend payout ratio (DPR) = Dividend per share/Earnings per share This ratio
calculates the proportion of earnings distributed as dividend to the shareholders. Hence this
ratio reflects the dividend policy of the company.

Earnings per share (EPS) = (Profits after tax – Preference dividend)/Number of shares
outstanding This ratio determines what the company is earning for each share. For many
investors, earnings are an important indicator of the financial performance of the company.

Current Ratio (CR) = Current Assets – Current Liabilities This ratio tests the short term
solvency of the company. It indicates the availability of current assets in rupees for every rupee
of current liabilities.

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Capital Employed per share (CEPS) = (Net fixed assets + Net working capital)/Number
of shares outstanding Capital employed represents the scale of operations of the business.
The ratio Capital employed per shares indicates amount of funds invested per share.

58
 CHAPTER – 6
ANALYSIS AND
INTERPRETATION OF
DATA

59
 Table-1: .Performance of EPS, DPS, and DPR of Steel Companies

Year KALYANI STEEL TATA STEEL SAIL

YEAR EPS DPS DPR EPS DPS DPR EPS DPS DPR
2001 2.48 0.72 29.03 22.02 5.92 26.88 -0.82 0 0
2002 1.45 0.48 33.1 11.07 4.06 36.68 -3.2 0 0
2003 1.8 0.09 5 33.45 9.05 27.06 -0.76 0 0
2004 4.21 0.02 0.48 53.58 11.28 21.05 6.08 0 0
2005 10.23 2.3 22.48 64.92 14.84 22.86 16.4 3.75 22.87
2006 24.03 3.42 14.23 64.31 14.82 23.04 9.12 2.28 25
2007 18.59 4.68 25.17 68.55 19.02 27.75 11.62 3.58 28.37
2008 18.15 12 2.18 63.85 16 25.06 14.95 2.45 16.38
2009 17.21 11.5 1.98 83.02 16 19.27 18.37 2.6 14.15
2010 16.81 8.57 1.44 68.58 8 11.66 19.62 3.3 16.82
2011 17.61 12.05 2.12 83.53 12 14.37 15.47 2.4 15.51
2012 11.41 10.54 1.2 80.8 12 14.85 12.37 2 16.17
2013 10.86 16.15 1.75 69.02 8 11.6 8.65 2 23.11
2014 13.42 3.00 22.35 66.02 10.00 15.14 6.33 2.00 31.59
2015 19.09 0.00 0 66.30 8.00 12.06 5.07 2.00 39.44
2016 25.99 0.00 0.00 50.46 8.00 15.85 -9.74 0.00 -2.56
2017 35.65 5.00 14.0 35.47 10.00 30.28 -6.86 0.00 0.00
2018 26.48 5.00 18.9 34.63 10.00 29.67 -1.17 0.00 0.00

EPS- Earning Per Share, DPS- Dividend per Share, DPR- Dividend Payout Ratio

Interpretation: Table 1 shows the results indicates EPS mean value of TATA STEEL of Rs.
83.53 which is highest across the three steel companies and followed by Kalyani steel with Rs.
24.03 and least paid by SAIL IS Rs.19.62. Highest mean value of DPS is paid by Tata steel of Rs
19.02 which is followed by kalyani Steel with Rs. 16.15 and s Sail Steel with Rs. 3.75 and The

60
highest variability shown by Tata steel which is in earning per share whereas least variance is
shown by SAIL.

Table-2: Mean Standard deviation and Coefficient Variation of DPS

COMPANIES MEAN S.D C.V

KALYANI STEEL 6.35 5.65 88.98
TATA STEEL 11.61 4.44 38.24
SAIL 1.87 1.41 75.4
Sources : Calculated values
SD-Standard Deviation, C.V- Coefficient Variation

Interpretation:

I. Kalyani steel showed the Mean dividend payment of per equity shareholder Rs.6.35 and
standard deviation of 5.647 and coefficient of variation of
II. Tata steel has paid the mean dividend amount of Rs.11.615, standard deviation of 4.440
and Coefficient of variation of DPS is 38.23.
III. Sail steel Last sample of the study paid mean dividend payment amount of Rs 1.874,
Standard deviation of the company lies in 1.409 and coefficient of variation of the
company for the thirteen of the study showed a value of 75.4.

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Table-3: Performance of EPS, DPS, and DPR of KALYANI STEEL
Source- Secondary data
Year EPS DPS DPR

2001 2.48 0.72 29.03

2002 1.45 0.48 33.1

2003 1.8 0.09 5

2004 4.21 0.02 0.48

2005 10.23 2.3 22.48

2006 24.03 3.42 14.23

2007 18.59 4.68 25.17

2008 18.15 12 2.18

2009 17.21 11.5 1.98

2010 16.81 8.57 1.44

2011 17.61 12.05 2.12

2012 11.41 10.54 1.2

2013 10.86 16.15 1.75

2014 13.42 3 22.35

2015 19.09 0 0

2016 25.99 0 0

2017 35.65 5 14

2018 26.48 5 18.9

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Interpretations: It show earning per share is in 2001 to 2006 it keeps on fluctuating.from 2007 to
2010 it starts decreasing.from2011 it again comes at decreasing level and becomes 19.09 in
2015.from 2015 to 2017 it comes increase level and start decrease from 2017 to 2018.in dividend
per share is in 2001 to 2004 it is on decreasing rate.from 2006 to 2008 it is on increasing rate. It
fluctuates from 2011 to 2014 and finally becomes zero in 2015.and its constant 2017 to 2018.
Dividend payout ratio from 2002 is on decreasing rate.from 2007 to 2010 it is decreasing
continuously. in 2014 it becomes 22.35 and finally in 2015 it becomes zero.and it start increasing
form 2017 to 2018

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Table-4: Performance of EPS, DPS, and DPR of TATA STEEL
Source- Secondary data
Year EPS DPS DPR

2001 22.02 5.92 26.88

2002 11.07 4.06 36.68

2003 33.45 9.05 27.06

2004 53.58 11.28 21.05

2005 64.92 14.84 22.86

2006 64.31 14.82 23.04

2007 68.55 19.02 27.75

2008 63.85 16 25.06

2009 83.02 16 19.27

2010 68.58 8 11.66

2011 83.53 12 14.37

2012 80.8 12 14.85

2013 69.02 8 11.6

2014 66.02 10 15.14

2015 66.30 8 12.06

2016 50.46 8 15.85

2017 35.47 10 30.28

2018 34.63 10 29.67

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Interpretation: the EPS of the company from 2003 to 2009 is on increasing rate.It starts
decreasing from 2011 and becomes 66.30 in 2015 its start dcreasing till 2018. DPS of the
company is fluctuating upto 2006. From 2007 it starts decreasing. In the year 2011 and 2012 it
remains constant and the ratio becomes 8 in 2015 to 2018 it become constant. Dividend payout
ratio decreasing rate from the year 2002 to 2004. From 2005 to 2007 it continues to be in
increasing order. After that it starts fluctuating from 2008 to 2015.in 2016 to 2017 its rise and
after it constant in 2017 to 2018.

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Table 5: Performance of EPS, DPS, and DPR of SAIL
Source- Secondary data

Year EPS DPS DPR

2001 -0.82 0 0

2002 -3.2 0 0

2003 -0.76 0 0

2004 6.08 0 0

2005 16.4 3.75 22.87

2006 9.12 2.28 25

2007 11.62 3.58 28.37

2008 14.95 2.45 16.38

2009 18.37 2.6 14.15

2010 19.62 3.3 16.82

2011 15.47 2.4 15.51

2012 12.37 2 16.17

2013 8.65 2 23.11

2014 6.33 2 31.59

2015 5.07 2 39.44

2016 -9.74 0 -2.56

2017 -6.86 0 0

2018 -1.17 0 0

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Interpretation: Earning per share In 2001 it is -0.82, in 2002 it is -3.2 and in 2003 it is -0.76. It is
on increasing order from 2006 to 2010. From 2011 to 2015 it starts decreasing in 2018 it become
zero.The dividend per share is zero from 2001 to 2004. From 2007 it is in decreasing order up to
2009. It also shows decreasing order from 2010 to 2013. It becomes constant in 2014 and 2015and
it become zero in 2018. The year 2001 to 2004 it is zero. It shows increasing rate from 2005 to
2008. It shows continous and rapid increase from 2013.

TABLE-6 ANOVA TABLE

SOURCE DEGREE OF SUM OF MEAN SUM F-RATIO
FREEDOM SQUARE OF SQUARE

BETWEEN 4 977.04 244.26 22.67

COMPANY

WITHIN 12 192.35 16.029 1.487

COMPAINES

RESIDUAL 48 517.12 10.773

TOTAL 64 1686.514

Sources : Calculated values

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In order to find out whether the mean values of DPS of the companies differ from

each other, Hypothesis of the study was formulated likeof Exclusive Management Research
August 2011-Vol 1 Issue

Hypothesis

Ho = There is no significant difference among the mean values of dividend per share among the
companies

H1 = There is significant difference among the mean values of dividend per share among the
companies

Table-7 has shown that, there is significant difference among the mean values of DPS among the
companies. The calculated F value has been greater than the table value at 5 % Level of
significance. Hence Null hypothesis was rejected. It can be clear that the companies belonging to
the steel company have adopted different Dividend declaration policy among themselves.

68
CHAPTER – 7

FINDINGS

69
 FINDINGS

 There been large fluctuations in EPS, DPS, and DPR of Kalyani Steel Ltd. in the thirteen
year of study, the EPS of the company shown a increasing and decreasing pattern for the
years up to 2009.

 DPS of the company was initially declared as 1.13 after that it maintains a stable dividend
policy of Rs.2 for the successive years.

 Tata steel Ltd has been shown that increasing trend in their earning par share of the
company. The EPS of the company was steeply increasing pattern Peaked in the year of
2003 to 2007 with the amount of 68.55.Similar DPS of the company was also shown
increasing pattern except in the year 2003 to 2007.

 Sail steel in the value of EPS, DPS and DPR. EPS of the company was get gradually
increased till in the year 2008 to2010, in the year 2011 its earnings were declined into
15.47. Where in case of DPS of company showed a gradual increasing pattern in their
dividend amount.

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 CHAPTER-8
SUGGESTIONS

71
 SUGGESSTIONS
Dividend policy is set largely at the discretion of the management. One of the major important
factor management has to consider is shareholders’ interest. By observing responses of the
shareholders regarding the dividend policy and shareholders’ beliefs regarding dividend policy
and making comparative analysis of dividend policies of selected companies, following
suggestions can be made:
 Every year declaration of dividends is necessary. As shareholders’ are the owners of the
company and risk is directly associated with the ownership. As shareholders bear the risk,
so they expect a fair return in form of dividend. So it is suggested to the companies to
provided fair dividends to the shareholders for better investment options and goodwill of
the company.
 Since reduction in dividend may create a negative impression in the mind of shareholders
which will affect the credit position of the company so it is suggested to the companies
that dividend raised should not be reduced.
 Management of each company sets its unique dividend policy which depends on a few
“determinants” or factors affecting dividend policy because Dividend policy of a company
should depend on various internal firms specific factors hence companies should design
internal policies in such a way that best interest of both the shareholders and the company
are satisfied.
 Dividend policy should be decided keeping in mind the growth needs of the firm. A high
dividend payout reduces firm’s access to retained earnings, the cheapest source of capital.
For that reason management may prefer lower dividend payout ratios, especially in growth
firms as the retained funds would be required for expansion purposes.
 It has been found that majority of old age people prefers to invest their income only in
those companies which provides fair dividends. However to them, it is suggested that
rather than making investment in only dividend paying firms, they should also focus on
capital appreciating firms which in turn would result in increasing their overall capital.
 Contrary to above point, it has been found that majority of youngsters prefers to invest
their income only in those companies which provides capital appreciation. However to
them, it is suggested that rather than making investment in only capital appreciating firms,
they should also focus on dividend paying firms which in turn would help them to receive
consistent gain
 Specific corrective actions are suggested to those companies whose dividend payout
signals drastic fluctuations

72
 CHAPTER-9
CONCLUSION

73
 CONCLUSION
The result of the survey has provided some interesting insight regarding dividend policy and
dividend payout behaviour. The companies selected are observed to have continuous dividend
payment records and general trend shows that the dividends have either remained constant or
increased however instances of decline in dividends have been very rare. Moreover, knowing the
significance of least related variable on dividend payout of selected companies, it is observed that
though in many instances results do support theoretical expectations about dividend policy, there
are number of cases where the results are inconsistent with theoretical aspects. The study reveals
that in most of the companies least related variable do not have influence on dividend payout and
in some of the companies least related variable do have influence on dividend payout. It also
reveals that each firms though belonging to the same industry and facing same business
environment has its own and unique dividend policy which is due to company-specific needs and
factors. As per theory, profitability and dividend payout should have positive relation. The study
reveals that dividend payout does not go hand in hand with profitability in many companies. It
reflects that in most of the companies, profitability has weak influence on dividend payout and in
some of the companies; profitability has strong influence on dividend payout. Moreover
considering the opinion of shareholders the study reflects that Age-group is positively and
significantly influenced the investment purpose of shareholders. It can be said that with the
increased age, shareholders invested in companies because of receiving continuous dividend, since
they consider dividend as their regular source of income. Dividend policy has been the subject of
considerable research by financial economists but despite extensive research, the dividend
controversies still remains unresolved. In a survey of literature on dividend policy, Allen and
Michaely44 concluded that “much more empirical and theoretical research on the subject of
dividends is required before a consensus can be reached. “Fisher Black45 had said, “The harder
we look at the dividend picture, the more it seems like a puzzle, with pieces that just don’t fit
together. “The same situation is observed in this study too; hence a fair, clear and complete picture
of the dividend decision is still not made.

74
 CHAPTER-10
BIBLIOGRAPHY

75
 REFERENCES

Lintner, John. (1956). Distribution of incomes of Corporatins among Dividends, Retaining

Earnings and Taxes., American Economic Review, May, 97-113. 12. Miller, M.H. and Modigliani,
F., Dividend Policy, Growth and Valuation of Shares, Journal of Business, October, pp. 411-33,
1961.

Bhat.R & Pandey, I.M.(1994). Dividend Decision: A Study of Managers Perceptions, Decisions,.

Mishra and Narender, Dividend Policy of SOEs in India, FINANCE INDIA, September, pp. 633–
645, 1996.

Baker,H.K.(1999). Dividend Policy issues in regulated

and Unregulated firms: a Managerial Perspective, Managerial Finance, 25(6),

Lalitha Mani, S., & S.Priya., (2010) Trend and Progress in Corporate Dividend of Selected Steel
Companies in India. Indian Journal of Finance, 4(12),

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