Institutional Restrictions Homework Help

Institutional Restrictions

The dividend alternative is also supported by legal restrictions as to the type of ordinary shares in which certain investors can invest. For instance, the life insurance companies are permitted in terms of section 27-A (1) of the Insurance Act, 1938, to invest in only such equity shares on which a dividend of not less than 4 per cent including bonus has, been for 7 years or for at least 7 out of 8 or 9 years immediately preceding. To be eligible for institution investment, the companies should pay dividends. These legal impediment therefore, favour dividends to retention of earnings. A variation of the legal requirement to pay dividends is to be the case of mutual funds. They are required in terms of the stipulations governing the operations, to distribute at least 90 per cent of its net income to investors. The point is that is eligible securities for investment by the mutual funds are assumed to be those that are on dividend paying list.

To conclude the discussion of market imperfections, there are four factors which dilute indifference of investors between dividends and retained earnings, of these, flotation costs see to favour retention of earnings. On the other hand, the desire for current income and, the relationship transaction and inconvenience costs legal restrictions as applicable to the eligible securities institutional investment and we exemption of dividend income imply a preference for payment of dividends. In sum, therefore, market imperfections imply the investors would like the company to retain earnings to finance investment programmers. The dividend policy is not irrelevant.

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