Postal Stamps in East India Company

The East India Company took constructive steps to improve the existing systems in India when in 1688, they opened a post office in Bombay followed by similar ones in Calcutta and Madras. Lord Clive further expanded the services in 1766 and in 1774 Warren Hastings made the services available o the general public. The fee charge was two annas per 100 miles.

The postmarks applied on these letters are very rare and are named 'Indian Bishop Marks' after Colonel Henry Bishop, the Postmaster General of the United Kingdom who introduced this practice in Britain.

After 1793, when Cornwallis introduced the Regulation of the Permanent Settlement, the financial responsibility for maintaining the official posts rested with the zamindars. Alongside these, private dawk mail systems sprang up for the commercial conveyance of messages using hired runners. Also, the East India Company created its own infrastructure for the expansion and administration of military and commercial power. The runners were paid according to the distance they travelled and the weight of their letters.

The Post Office Act XVII of 1837 provided that the Governor-General of India in Council had the exclusive right of conveying letters by post for hire within the territories of the East India Company. The mails were available to certain officials without charge, which became a controversial privilege as the years passed. On this basis the Indian Post Office was established on October 1, 1837.

The urgent European mails were carried overland via Egypt at the isthmus of Suez. This route, pioneered by Thomas Waghorn, linked the Red Sea with the Mediterranean, and thence by steamer via Marseilles, Brindisi or Trieste to European destinations. The Suez Canal did not open until much later (17 November, 1869). The time in transit for letters using the Overland Mail route was dramatically reduced. Waghorn's route reduced the journey from 16,000 miles via the Cape of Good Hope to 6,000 miles; and reduced the time in transit from three months to between 35 and 45 days.

The Scinde District Dawk

1852 red sealing wafer Scinde Dawk

The use of the Scinde Dawk adhesive stamps to signify the prepayment of postage began on 1 July 1852 in the Scinde/Sindh district, as part of a comprehensive reform of the district's postal system. A year earlier Sir Bartle Frere had replaced the postal runners with a network of horses and camels, improving communications in the Indus river valley to serve the military and commercial needs of the British East India Company.

The new stamps were embossed individually onto paper or a wax wafer. The shape was circular, with "SCINDE DISTRICT DAWK" around the rim and the British East India Company's Merchant's Mark as the central emblem. The paper was either white or greyish white. The blue stamp was printed onto the paper by the die during the embossing, while the wax version was embossed on a red sealing wax wafer on paper; but all had the same value of 1/2 anna. They were used until October 1854, and then officially suppressed. These are quite scarce today, with valuations from US$700 to $10,000 for postally used examples. The unused red stamp was previously valued at £65,000.00 by Stanley Gibbons (basis 2006); however, it now appears that no unused examples have survived.

The Reforms of 1854 and the First Issues 4 annas, 1854

The first stamps valid for postage throughout India were placed on sale in October, 1854 with four values: 1/2 anna, 1 anna, 2 annas, and 4 annas. Featuring a youthful profile of Queen Victoria aet. 15 years, all four values were designed and printed in Calcutta. All were lithographed except for the 2 annas green, which was produced by typography from copper clichés or from electrotyped plates. These were issued without perforations or gum. The 4 annas value (illustrated) was one of the world's first bicolored stamps, preceded only by the Basel Dove, a beautiful local issue.

These stamps were issued following a Commission of Inquiry which had carefully studied the postal systems of Europe and America. In the opinion of Geoffrey Clarke, the reformed system was to be maintained "for the benefit of the people of India and not for the purpose of swelling the revenue." The Commissioners voted to abolish the earlier practice of conveying official letters free of postage ("franking"). The new system was recommended by the Governor-General, Lord Dalhousie and adopted by the East India Company's Court of Directors. It introduced "low and uniform" rates for sending mail efficiently throughout the country within the jurisdiction of the East India Company. The basic rate was 1/2 anna on letters not more than 1/4 tola in weight. The stamps were needed to show the postage was prepaid, a basic principle of the new system, like the fundamental changes of the British system advocated by Rowland Hill and the Scinde reforms of Bartle Frere. These reforms transformed mail services within India.

The De La Rue design for the Recess Printed issues:

An 1856 color imprimatur The East India Company already had attempted a 1/2 anna vermilion stamp in April, 1854, known as the "9 1/2 arches essay". This could not be produced in quantity because it required an expensive vermilion pigment not readily available from England, and the substituted Indian pigment destroyed the printing stones.

A new design for stamps, with Queen Victoria in an oval vignette inside a rectangular frame, was inscribed "EAST INDIA POSTAGE". These stamps were recess printed by De La Rue in England (who produced all the subsequent issues of British India until 1925). The first of these became available in 1855. They continued in use well after the British government took over the administration of India in 1858, following the 1857 Rebellion against the East India Company's rule. From 1865 the Indian stamps were printed on paper watermarked with an elephant's head.

The Reforms of 1866 and the Provisionals

The volume of mail moved by the postal system increased relentlessly, doubling between 1854 and 1866, then doubling again by 1871. The Post Office Act XIV introduced reforms by May 1, 1866 to correct some of the more apparent postal system deficiencies and abuses. Postal service efficiencies also were introduced. In 1863 new lower rates were set for "steamer" mail to Europe at 6 annas 8 pies for a 1/2 ounce letter. Lower rates were introduced for inland mail, as well.

New regulations removed the special postal privileges which had been enjoyed by officials of the East India Company. Stamps for official use were prepared and carefully accounted for to combat the abuse of privileges by officials. In 1854 Spain had printed special stamps for official communications, but in 1866 India was the first country to adopt the simple expedient of overprinting 'Service' on postage stamps and 'Service Postage' on revenue stamps. This innovation became widely adopted by other countries in later years.

Shortages developed, so these stamps also had to be improvised. Some of the "Service Postage" overprinted rarities of this year resulted from the sudden changes in postal regulations. New designs for the 4 annas and "6 annas 8 pies" stamps were issued in 1866. Nevertheless, there was a shortage of stamps to meet the new rates. Provisional six annas stamps were improvised by cutting the tops and bottoms from a current Foreign Bill revenue stamp, and overprinting "POSTAGE".

Another four new designs appeared, one at a time, between 1874 and 1876.

A complete new set of stamps was issued in 1882 for the Empire of India that had been proclaimed five years earlier, in 1877. The designs consisted of the usual Victoria profile, in a variety of frames, inscribed "INDIA POSTAGE". The watermark also changed to a star shape. These stamps were heavily used and are still quite common today.

Twentieth century

EdwardVII
One rupee (1902

GeorgeV
1 anna 3 pies (1932)

High values -- 2, 3 and 5 rupees -- were introduced in 1895. Other existing designs were reprinted in new colors in 1900.

In 1902 a new series depicting King Edward VII generally reused the frames of the Victoria stamps, with some color changes, and included values up to 25 rupees. The higher values were often used for the payment of telegraph and parcel fees. Generally, such usage will lower a collector's estimation of a stamp's value; except those from remote or "used abroad" offices.

The 1911 stamps of King George V were more florid in their design. It is reported that George V, a philatelist, personally approved these designs. In 1919 a 1 1/2 anna stamp was introduced, inscribed "ONE AND HALF ANNA", but in 1921 this changed to "ONE AND A HALF ANNAS". In 1926 the watermark changed to a pattern of multiple stars.

The first issue produced in India marks the 'Inauguration of New Delhi' in 1931. This 1 rupee stamp shows the Secretariat and Dominion Columns.

The first pictorial stamps appeared in 1931. The set of six, showing the fortress of Purana Qila, Delhi and government edifices, was issued to mark the government's move from Calcutta to New Delhi. Another pictorial set, also showing buildings, commemorated George V's Silver Jubilee in 1935.

The stamps issued in 1937 depicted various forms of mail transports, with King George VI's effigy appearing on the higher values. A new issue in 1941, constrained by the austerity of World War II, consisted of rather plain designs using minimal amounts of ink and paper. As Indian Post Offices annually required some billions of stamps for postage, as a measure of economy the large pictorial stamps were immediately withdrawn and smaller stamps were issued. Even this did not ease the paper situation and it was thought desirable to reduce the size even more.

A victory issue in 1946 was followed in November, 1947 by a first Dominion issue, whose three stamps were the first to depict the Ashoka Pillar and the new flag of India (the third showed an airplane).

Postage stamps were generally issued separately from the revenue stamps. However in 1906, the set of King Edward VII stamps were issued in two values, half anna and one anna with the caption "INDIA POSTAGE & REVENUE". The George V Series (1911 to 1933) added two more values, two annas and four annas to the Postage & Revenue stamps. These dual-purpose issues were an exception and generally the two types were issued separately.

POSTAL HISTORY IN INDIA

Indian Postal History 1947-1997

On the occasion of 50th Anniversary of India’s Independence, when the then CPMG of Ahmadabad requested the Gujarat Philatelists’ Association and its members to build a collection on India’s Freedom Struggle to be shown for full one year from 15th August 1997, it revealed that the Postal Department do not have all Postage stamps which will be shown in the Collection.

If the Department do not have even Postage Stamps, how can we, the collectors think that they will have information on their workings of last 50 years. On enquiry, it was known that they do not have any systematic recordings of their workings. And this truth, forced me to jot down the loose ends of our Modern Postal History from 1947 to1997.

I built a collection of Modern Postal History of India (1947-1997), which was shown in 1997. Since then I wanted to record the achievements, events, various Postal facilities and services, which were introduced and/or withdrawn during the last 50 years.

If we look back, we will find that in last 50 years many postal services were introduced out of which some were revised and few were discontinued.

The facility of minimum two deliveries in a day has become history. Postal service’s labels, clear brass cancellations, time slug in cancellations and delivery postmarks are not found any more.

There are many facts (I came to know during my study) which are either not known to collectors, such as –

Formula Post Card was introduced on 1st April 1950 and was sold across counters at 3 pies for 4 blank formula Post Cards.

Registered Envelope having Green Cross Lines and the legend was actually Issuedin1951.

There were many postal services which are not even known today. Such as Air Parcel Service which was introduced on 30th January 1949 or regular Helicopter Mail Service in between Bagdogra and Gangtok which remained in existence for more than 9 months during 1988.

The Post in ancient and medieval India:

The history of India's postal system begins long before the introduction of postage stamps. The antecedents have been traced to the systems of the Persian Empire instituted by Cyrus the Great and Darius I for communicating important military and political information. The Atharvaveda records a messenger service. Systems for collecting information and revenue data from the provinces are mentioned in Chanakya's Arthashastra (ca. 3rd century BC).

In ancient times the kings, emperors, rulers, zamindars or the feudal lords protected their land through the intelligence services of specially trained police or military agencies and courier services to convey and obtain information through runners, messengers and even through pigeons. The chief of the secret service, known as the postmaster, maintained the lines of communication ... The people used to send letters to [their] distant relatives through their friends or neighbors.

For centuries it was rare for messages to be carried by any means other than a relay of runners on foot. A runner ran from one village or relay post to the next, carrying the letters on a pole with a sharp point. His was a dangerous occupation: the relay of postal runners worked throughout the day and night, vulnerable to attacks by bandits and wild animals. These mail runners were used chiefly by the rulers, for purposes of information and wartime news. They were subsequently used by merchants for trade purpose. It was much later that mail runners came to be in use for the carriage of private mail.

The postal history of India primarily began with the overland routes, stretching from Persia to India. What began as mere foot-tracks that more than often included fords across the mountaneous streams, gradually evolved over the centuries as highways, used by traders and military envoys on foot and horses, for carriage of missives.

The Arab influence of the Caliphate came about with the conquest of Sind by Muhammad bin Qasim in 712 A.D. Thereupon, the Diwan-i-Barid or Department of Posts established official communication across the far-flung empire. The swiftness of the horse messengers finds mention in many of the chronicles of that period.

The first Sultan of Delhi, Qutb-ud-din Aybak (Persian: قطب الدین ایبک) was Sultan for only four years, 1206 - 1210, but he founded the Mamluk Dynasty and created a messenger post system. This was expanded into the dak chowkis, a horse and foot runner service, by Alauddin Khilji in 1296. Sher Shah Suri (1541-1545) replaced runners with horses for conveyance of messages along the northern high road, today known as the Grand Trunk Road, which he constructed between Bengal and Sindh over an ancient trade route at the base of the Himalayas, the Uttarapatha. He also built 1700 'serais' where two horses were always kept for the despatch of the Royal Mail Akbar introduced camels in addition to the horses and runners

In the South of India, in 1672 Raja Chuk Deo of Mysore began an efficient postal service which was further improved upon by Haider Ali

Postal history of Indian states

One Anna Queen Victoria head (error variety of 1897) of Chamba, a convention state.

Main article: Stamps and postal history of Indian states

British India had hundreds of Princely States, some 652 in all, but most of them did not issue postage stamps. The stamp-issuing States were of two kinds: the Convention States and the Feudatory States. The postage stamps and postal histories of these States provide great challenges and many rewards to the patient philatelist. Many rarities are to be found here. Although handbooks are available, much remains to be discovered.

A 1914 red-brown 2 anna of Orchha, a feudatory state

The Convention States are those which had postal conventions (or agreements) with the Post Office of India to provide postal services within their territories. The adhesive stamps and postal stationery of British India were overprinted for use within each Convention State. The first Convention State was Patiala, in 1884, followed by others in 1885. The stamps of the Convention States all became invalid on 01 Jan 1951 when they were replaced with stamps of the Republic of India valid from 01 Jan 1950.

The Feudatory States maintained their own postal services within their territories and issued stamps with their own designs. Many of the stamps were imperforate and without gum, as issued. Many varieties of type, paper, inks and dies are not listed in the standard catalogs. The stamps of each Feudatory State were valid only within that State, so letters sent outside that State needed additional British India postage.

National Philatelic Museum

But I hit upon a much simpler plan. I gathered together all the children in my locality and asked them to volunteer two or three hours' labour of a morning when they had no school. This they willingly agreed to do. I promised to bless them and give them, as a reward, used postage stamps which I had collected.

Mahatma Gandhi, Rajkot 1896.

The National Philatelic Museum of India was inaugurated on 6 July 1968 in New Delhi. It had its beginning at a meeting of the Philatelic Advisory Committee on 18 September 1962. Besides the large collection of India Postage stamps designed, printed and issued, it has a large collection of Indian states, both confederate and feudatory, early essays, proofs and colour trials, a collection of Indian stamps "used abroad" and as well as early Indian postcards, postal stationery and thematic collections.

The museum has been extensively renovated in 2009 and now includes more exhibits, a philatelic bureau and other postal objects such as beautiful Victorian post boxes.

POSTAL HISTORY

Since time immemorial the Kings have maintained channels of Communications for their exclusive use, for receiving and sending the news of political and economic importance. The earliest references to transmission to messages are found in the sacred lore in the ancient scriptures of India. The earliest of these is in the ‘Atharva Veda’, one of the four Vedas – the supreme and the first scripture. Later Ramayana and Mahabharata, two of the greatest epic, mention of the transmission of messages.

A large establishment for the transmission of messages is recorded for Mauryan Emperor Chandragupta in 322 BC. Ibn Batuta, the Moroccan traveler to India in 1310 AD had detailed the mail system of Sulatn Mohammed bin Tughlaq. Massive reorganization of this system took place under Sher Shah Suri. It was developed and maintained under the Mogul and later rulers.

The traders, whom the rulers allowed the use of royal mail at times, felt the need for regular message service as the first priority of royal mail could be for the rulers only. Big traders have known to operate postal services from 14^th century AD that also accepted mail from others for a fee. During 17^th century AD several postal systems under the patronage of various rulers and traders were in vogue. The East India Company first used these services for exchange of mail between their trading centers in India.

The Company decided to setup their own postal service ‘Company Dawk’ in view of the increasing trade activity and their requirement of intelligence of military nature. In 1688 the first post office of the Company Post was established at Bombay/Madras. Lord Robert Clive, the Governor of Bengal in his second term, ordered for ‘better regulations of the dawks’ in 1766. Warren Hastings, the first Governor General of Bengal with supervisory powers over Bombay and Madras, reorganized the system and opened the service to public in 1774. A Postmaster General was appointed and metal tickets or tokens were issued to pay for the postal charges.

The presidencies of Bombay and Madras followed suit.

In 1835 a Committee was set up for unification of customs and postal system of all the presidencies. The result was the first Indian Post Office Act of 1837. It not only provided for uniform rates and routes but for the uniform designs and other specifications of the postmarks for each category of post office.

A Commission was setup in 1850 and submitted its report in 1851 that resulted in the post office act of 1854. It took three years primarily due to one of the recommendations of the Commission for introduction of adhesive postage stamps as the Company insisted on producing the stamps in India and Indian authorities wanted it printed in England. Under the provisions of this act the monopoly of carrying mail in entire area of British possessions in India were granted to Indian Post office and office of the Director General of Post Offices of India was established. Mr. H P A B Riddle, till then the Postmaster General of North West Presidency, was appointed the first Director General in May 1854. The adhesive stamps were introduced on October 1, 1854 on all India basis. Meanwhile in 1852 adhesive postage stamps were issued for use within the province of Sind, now in Pakistan. These were the first adhesive postage stamps in Asia.

POSTAL BANKING SCHEMES

POSTAL BANKING SCHEMES

Savings Bank

Monthly Income Scheme (MIS)

Recurring Deposit

Time Deposits

Senior Citizen Savings Scheme (SCSS)

Public Provident Fund

Kisan Vikas Patras

National Savings Certificates (NSC)

Savings Schemes Chart

Savings Account

Any individual can open an account.

Cheque facility available.

Type of Account	Maximum Limit
Single Account	Rs. 1 lakh
Joint Account	Rs. 2 lakh

Group Account, Institutional Account, other Accounts like Security Deposit account & Official Capacity account are not permissible

Rate of interest 3.5% per annum

Income Scheme (MIS)

Safe & sure way to get a regular monthly income.

Specially suited for retired employees/ Senior Citizens or any one with high sum for investment.

Rate of interest 8%.

Maturity Period - Six Years.

5% Bonus on Maturity.

Post maturity Interest at the rate applicable from time to time (at present 3.5%)

Auto credit facility to SB Account.

Type of Account	Minimum limit	Maximum limit
Single	Rs. 1500/-	Rs. 4.5 lakhs
Joint	Rs. 1500/-	Rs. 9 lakhs

Deposit in Monthly Income Scheme and invest interest in Recurring Deposit to get 10.5% (approx) interest.

Above scheme operates automatically, if you open a saving bank account and give a request for automatic transfer of Monthly Income Scheme interest to Recurring Deposit through Saving Bank account.

Recurring Deposit

Any individual (a single adult or two adults jointly) can open an account.

Advance Deposits earn rebate.

Four defaults are allowed.

Defaults can be paid within two months.

Part withdrawal facility available.

Premature closure allowed after three years.

Pay Roll Savings Scheme is also available for employees of various Establishments.

Type of Account	Minimum Deposit	Maximum Deposit
Individual Account	Rs. 10/- and in multiples of Rs. 5/- thereafter	No limit.

Post Office Savings Schemes

Any individual (a single adult or two adults jointly) can open an account.

Group Accounts, Institutional Accounts and Misc. account not permissible.

Trust, Regimental Fund or Welfare Fund not permissible to invest.

1 Year, 2 Year, 3 Year and 5 Year TD can be opened.

2, 3 & 5 Year TD Accounts can be closed after one year at a discount.

Rate of interest – 6.25%, 6.50% 7.25%, 7.5% compounded Quarterly for 1,2,3 & 5 years TD account respectively.

The investment under this scheme quality for the benefit of section 80C of the Income Tax Act, 1961 from 01.04.2007.

Type of Account	Minimum Deposit	Maximum Deposit
1,2,3 & 5 Year TD	Rs.200/- and in multiples of Rs. 200/- thereafter	No limit.

Post Office Savings Bank - The safest investment

"Save today-Smile tomorrow "

"Pay Day is your Savings Day”

A new avenue of investment and return for Senior Citizen

The account may be opened by an individual,

Who has attained age of 60 years or above on the date of opening of the account.

Who has attained the age 55 years or more but less than 60 years and has retired under a Voluntary Retirement Scheme or a Special Voluntary Retirement Scheme on the date of opening of the account within three months from the date of retirement.

No age limit for the retired personnel of Defense services provided they fulfill other specified conditions.

The account may be opened in individual capacity or jointly with spouse.

Non-resident Indians (NRIs) and Hindu Undivided Family (HUF) are not eligible to open an account.

The individual may open one or more account in the multiple of Rs.1000/-, subject to a maximum limit of Rs.15 lakh. Further, more than one account cannot be opened in the same post office during a calendar month.

No withdrawal shall be permitted before the expiry of a period of five years from the date of opening of the account. The depositor may extend the account for a further period of 3 years

Premature closure of account is permitted

After one year but before 2 years on deduction of 1 ½ % of the deposit.

After 2 years but before date of maturity on deduction of 1% of the deposit.

In case of death of the depositor before maturity, the account shall be closed and deposit refunded without any deduction along with interest.

Interest @ 9% per annum from the date of deposit on quarterly basis. Interest can be automatically credited to savings account provided both the accounts stand in the same post office.

Interest rounded off to the nearest multiple of rupee one.

Post Maturity Interest at the rate applicable to the deposits under.

Post Office Savings Accounts from time to time is admissible for the period beyond maturity.

Nomination facility is available in the Scheme.

The investment under this scheme qualify for the benefit of Section 80C of the Income Tax Act, 1961 from 1.4.2007.

Monthly Income Scheme (MIS) and Senior Citizen Saving Scheme (SCSS) are the best for Senior Citizens who desire monthly/quarterly interest. Invest in MIS / SCSS and transfer interest into RD account through SB account through written request and earn a combined interest of 10.5 % (approx.). This is the safest investment option for the Senior Citizens.

15 Years Public Provident Fund

Ideal investment option for both salaried as well as self employed classes.

Non-Resident Indians (NRIs) not eligible.

Investment up to Rs. 70,000 per annum qualified for IT

Rebate under section 80 C of IT Act.

Loan facility available from 3^rd financial year upto 5^th financial year.

Withdrawal permitted from 6^th financial year.

Free from court attachment.

An individual cannot invest on behalf of HUF (Hindu Undivided Family) or Association of persons

Investment doubles in 8 years 7 months.

Encashment at any time after expiry of 2 ½ Years from the date of issue of certificate at any Post Office

NRIs & HUF not eligible

Nomination facility is available.

Post maturity interest is also admissible at the rate applicable from time to time (at present 3.5%)

Type of Account	Minimum limit	Maximum limit
Public Provident Fund (Individual account on his behalf or on behalf of minor of whom he is the guardian)	Rs. 500/- in a financial year	Rs. 70,000/- in a financial year

National Savings Certificates (NSC)

Scheme specially designed for Government employees, Businessmen and other salaried classes who are IT assesses.

No maximum limit for investment.

No tax deduction at source.

Certificates can be kept as collateral security to get loan from banks.

Investment up to Rs. 1,00,000/- per annum qualifies for IT Rebate under section 80C of IT Act. Trust and HUF cannot invest.

PPF – A good way of saving for your old age.

Buy National Savings Certificates (NSC) & Kisan Vikas Patras (KVP) every month for six years –Reinvest on maturity and relax - On retirement it will fetch you monthly pension as the NSC/KVP matures.

Postal Life Insurance

Postal Life Insurance was started in 1884 as a welfare measure for the employees of Posts & Telegraphs Department under Government of India dispatch No. 299 dated 18-10-1882 to the Secretary of State. Due to popularity of its schemes, various departments of Central and State Governments were extended its benefits.

Now Postal Life Insurance is open for employees of all Central and State Government Departments, Nationalized Banks, Public Sector Undertakings, Financial Institutions, Local Bodies like Municipalities and Zila Parisads, Educational Institutions aided by the Government etc.

Rural Postal Life Insurance

On 24th March, 1995, the benefits of Postal Life Insurance were extended to rural populace of the country under the banner of Rural Postal Life Insurance

Postal Life Insurance Schemes

SANTHOSH ( ENDOWMENT ASSURANCE)

SURAKSHA (WHOLE LIFE ASSURANCE )

SUVIDHA ( CONVERTIBLE WHOLE LIFE ASSURANCE )

SUMANGAL ( ANTICIPATED ENDOWMENT ASSURANCE )

YUGAL SURAKSHA ( JOINT LIFE ENDOWMENT ASSURANCE)

CHILDREN POLICY

Rural Postal Life Insurance Schemes

GRAM SANTOSH ( ENDOWMENT ASSURANCE )

GRAM SUVIDHA ( CONVERTIBLE WHOLE LIFE ASSURANCE )

GRAM SUMANGAL ( ANTICIPATED ENDOWMENT ASSURANCE )

GRAM PRIYA ( 10 YEARS RPLI )

OVER VIEW OF DIVIDEND POLICY

The purpose of the present chapter is refer to present a critical analysis of some important theories representing these two schools of thought with a view to illustrating the relationship between dividend policy and the valuation of a firm. Therefore keeping the above in view, subsequent pages are used to show the theory (IES) relating to the theories, which support the relevance hypothesis.

Irrelevance of Dividends

Modigliani and Miller (mm) Hypothesis

Relevance of Dividends

Walter’s Model

Gordon’s Model

Irrelevance of Dividends

The Dividend are irrelevant, or are a passive residual, is based on the assumption that the investors are indifferent between dividends and capital gains.

Modigliani and Miller (mm) Hypothesis

The most comprehensive argument in support of the irrelevance of dividends is provided by the mm hypothesis. Modigliani and miller maintain the dividend policy has no effect on the share price of the firm and is, therefore, of no consequence.

Where

PO = Prevailing market price of a share

Ke = Cost of equity capital

D, = Dividend to be received at the end of period 1

P, = Market price of a share at the end of period 1

Relevance of dividends

In sharp contrast to the mm position, there are some theories that consider dividend decisions to be an active variable in determining the value of a firm the dividend decision is, therefore, relevant.

Walter’s Model

The investment policy of a firm cannot be separated from its dividend policy and both are, according to walter, inter linked.

Walter has evolved a mathematical formula to arrive at the appropriate dividend decision. His formula is based on a share valuation model which states.

Where

P = Price of equity shares

D = Initial dividend

Ke = Cost of equity capital

G = Expected growth rate of earnings

Where

R = Expected rate of return on firm’s investments

B = Retention rate (E-d) /E

Thus, RB measures growth rate in dividends.

Gordon’s Model

According to Gordon, the market value of a share is equal to the present value of future streams of dividends. A Simplified version of Gordon’s model can be symbolically expressed as

Where

P = Price of a share

E = Earning per share

B = Retention ratio or percentage of earnings retained.

1-b = D/p ratio, i.e., percentage of earning distributed as dividends

Ke = Capitalization rate/cost of capital

Br = g = Growth rate = rate of return on investment of an

all-equity firm.

Methods of dividend policy

Dividend per share (DPS)

Is the dividend paid to the equity shareholders on a per share basis. In other words, DPS is the net distributed profit belonging to the ordinary shareholders divided by the number of ordinary shares outstanding, that is.

Dividend Pay-out (D/P) Ratio

Is also known as pay out ratio it measures the relationship between the earning belonging to the ordinary shareholders and the dividend paid to them. In other words, the D/P ration shows what percentage share of the net profits after taxes and preference dividend is paid out a dividend to the equity-holders, it can be calculated by dividing the total dividend paid to the owner the DPS by the EPS, thus.

Earning and dividend yield

Is closer related to the EPS and DPS. While the EPS and DPS are based on the book value per share the yield is expressed in terms of the market value per ordinary share.

Similarly the dividend yield is computed by dividing the cash dividend per share by the market value per share that is.

Earning Yield =

Dividend yield =

The earning yield is also called the earning – price ratio.

Alternative practical Dividend policy

Possible alternative dividend policies are almost infinite, A firm’s management unit carefully select one to encompass consideration of both it internal needs and there of its share holders.

These basic types that will be discussed are:

Stable dividends

Target pay out ratio and the

Regular and extra dividends

Stable dividends

Investors may place a premium on the share of a company which pays stable dividends and only increases its dividend payment when it believes that increase can be maintained.

Target pay out ratio

Target pay out ratio (or range) deviating from his target as appropriate to achieve relatively stable dividends or stable and occasionally increasing ones. Companies seek to maintain a target dividend pay out ratio over the long ran bat only with a lag.

Regular and extra dividend

The regular dividend is set at a level that management believes can be maintained regard less of fluctuation in earnings and capital investment requirement.

Determinants of dividends policy

Investment Opportunities:

Basis: Other thing remaining equal, a firm with more investment opportunities will pay a lower fraction of its earrings as dividends than a stable firm.

Proxy for investment opportunities:

A growth rate in firm’s assets, capital investment.

Testable proposition

A firm with higher growth rates in assets or earnings.

Stability in earnings

Basis: A firm were stable earnings will pay out a higher fraction of its earnings as dividends.

Proxy for variability in earnings:

Variance in EPS.

Testable proposition:

A firm with higher variance in EPS will have a lower dividend pay out ratio.

Alternative sources of capital

Basic: A firm which can issue new stock or sounds at low cost.

Proxy For Cost Of Issue:

Size of the firm

Testable Proposition:

A smaller firm will almost invariably have a higher issuance cost than a larger firm in issuing new stock and debt.

Constraints

Basis Firms which have borrowed large amounts of debt usually have several constraints on their dividend policy.

Proxy for leverage Debt ratio

Testable proposition

A firm with a high debt ratio changes in its dividend policy.

Singnalling incentives

Basis Firm which are undervalued may use dividend increases as signals to the market

Proxy for under valuation

Price/value ratios

Testable proposition

As the ratio of price to value decreases dividend increases will become more frequent

Stock holder characteristics

Basis: Firms, which have acquired a reputation as high dividend yield firms also acquire stockholders who desire high dividends.

Testable proposition

The past history of a company’s dividend policy is usually be a good indication of what it will do in the future.

Tax considerations

Dividend can be taxed two ways

Taxing the dividend the share holders receive or.

Taxing the company dividend distribution tax here, a percentage of the total dividend is taken by the government as tax.

Here, for instance, if bonus share is not taxed but dividend is taxed then, it is much better to go for bonus shares issues as tax liability either on the company or on the share holder or both will be less then.

It has to be noted that taxing policy of the government with regard to dividend is not permanent in nature and varies year to year.

Again, in case of euphoria in the market if the government thinks there is too much investment it may have high dividend taxation.

Dividend tax represents less than 2% of the total tax collected. But it is important tool for the government to give direction to the capital market. So it changes the dividend taxation policy per the dictates of the circumstances prevailing in the stock market.