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EXECUTIVE SUMMARY

2010 was a year of a lot of new launches in India, some of which generated a lot of

interest. From 3D televisions and HD set-top boxes, to tablet PCs with Smartphone

features, the new launches created a lot of enthusiasm among both manufacturers and

consumers. With many companies now trying to bring out low-priced models for new

technologies to attract the masses, the consumer electronics market in India is getting

ready to expand in a big way.

Legislation encouraging growth

The Government of India steadily reduced the excise duty on consumer products in the

2008-2010 period to help the industry fight post-recession blues. In addition, in the 2011

budget the government did not increase the excise duty, despite economic recovery. The

corporate tax was also reduced in order to help the industry grow further. All in all, theGovernment of India is trying to come up with growth-orientated policies that will help

the Indian consumer products industry to grow in a big way.

Changing lifestyle impacting consumer electronics

The changing lifestyle of people in India is having a significant impact on the consumer

electronics market in India. Categories like digital TVs, converters, decoders and

receivers, computers and peripherals, in-car entertainment devices and mobile phones are

witnessing robust growth as they are status symbols. However, categories like video

players and home audio and cinema are witnessing slow or declining growth rates as

people are spending less and less time at home.

Chained retailers and exclusive outlets growing faster

With increased mobility of people across India in terms of work, the independent

electronics specialists no longer enjoy the trust that they used to benefit from in the past

because of years of service. The young generation is more comfortable shopping at

exclusive company outlets or chained electronics specialists where such consumers can

choose from the latest models, see demos and choose the model and brand as per their

need without being pushed by a salesman. The independent retailers are losing out as

people suspect them of indulging in fraudulent practices like changing parts and

components.

Multi-functional products will rule the market in the future

Consumers are now looking for multiple features in a single device. They now want their

mobile phones to allow complete internet connectivity, their cameras to have wi-fi

connectivity so that they can instantly share their photos with friends and families, their

PCs to have mobile phone functionality and their TVs to have internet connectivity. All

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this is leading to a lot of technological advancements in consumer electronics and the

market is expanding with many multi-functional products entering the market and many

more expected to enter the market in the forecast period.

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INTRODUCTION

The Finance Manager has to

decide the dividend policy very carefully.

A wrong dividend policy may put the

company into financial troubles and thecapital structure of the company may get

unbalanced.

The growth of the company may

get hampered if sufficient resources are

not available to implement growth

programs.

The Finance Manager has to formulate the dividend policy in such a way, which

coincides with the ultimate object of the finance function of maximizing the wealth of

shareholders and value of the firm.

IMPORTANCE OF DIVIDEND POLICY

Profits earned by a company may be handled by it basically in two ways:

1. To distribute the profits among the shareholders by way of dividend.

2. To retain the profits in the business to be used in future.

There are no strict rules and guidelines available to decide as to what portion of

the profits should be distributed by way of dividend and what portion should be retained

in the business. As such, to decide the dividend policy may be one of the most trickiest

and delicate decisions which the management of the company may be required to take.

If the management decides to retain a large portion of the profits in the business,

funds required for future expansion and modernization needs of the company may be

available to it on long-term basis, without any obligations to repay the same. The

expansion or modernization programs may improve the earning capacity of the company

in future, which may carry forward the growth of the company.

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The company may be able to absorb the shocks of business fluctuations and

adverse situations boldly. A strong and stable company may earn the confidence of the

investors and creditors and funds may be available to it at reasonable rates conveniently.

As a result, the share prices and the value of the company will increase. Thus,

though the shareholders are required to fore go the dividends in the short run, they get

benefit in the long run.

On the other hand, if the management decides to distribute a large portion of

profits by way of dividend, the company may be able to earn the confidence of the

shareholders and may be able to attract the prospective investors to invest in the securities

of the company.

Shareholders are necessarily interested in getting larger dividends immediately

due to the time value of money and due to uncertainty regarding the future. Shareholders

are thus attracted to the companies paying high dividends, due to which prices of the

shares and value of the company increases.

Thus it can be seen, that both high retentions and high dividends may be desirable,

but there is necessarily a reciprocal relationship between the retentions and dividends.

The skill of the Finance Manager lies in striking the balance between these two extremes.

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INDUSTRIAL PROFILE

Indias Consumer Market

Indias consumer market is riding the crest of the countrys economic

boom. Driven by a young population with access to disposable incomes and

easy finance options, the consumer market has been throwing up staggering

figures.

India officially classifies its population in five groups, based on annual

household income. These groups are: Lower Income; three subgroups of

Middle Income; and Higher Income. However, the rupee income

classifications by themselves do not present a realistic picture of market

potential for a foreign business enterprise, because of significant differences

in purchase power parities of various currencies. In fact, the Indian rupee has

a very high purchase power parity compared to its international exchange

value. For instance, while the exchange rate of one US dollar is 48.50

Rupees, the domestic purchasing power of a US dollar in the US is closer to

the purchasing power of Rs 6 in India, for equivalent needs and services. As

a result, India ranks fifth in the world, on purchase power parity terms,despite being having low per capita national income (US$ 340 per capita).

Consumer Classes

Even discounting the purchase power parity factor, income

classifications do not serve as an effective indicator of ownership and

consumption trends in the economy. Accordingly, the National Council for

Applied Economic Research (NCAER), Indias premier economic research

institution, has released an alternative classification system based on

consumption indicators, which is more relevant for ascertaining consumption

patterns of various classes of goods. There are five classes of consumer

households, ranging from the destitute to the highly affluent, which differ

considerably in their consumption behavior and ownership patterns across

various categories of goods. These classes exist in urban as well as rural

households both, and consumption trends may differ significantly between

similar income households in urban and rural areas.

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Structure of the Indian Consumer Market

Consumer Classes (Annual income

Rs

2001 2007 2010 Change

The rich (Rs.215, 000 and more)ii 1.2 2 6.2 416%

The Consuming Class (Rs. 45-

215,000)

32.5 54.6 90.9 179%

The Climbers (Rs. 22-45, 000) 54.1 71.6 74.1 37%

The Aspirants (Rs.16-22, 000) 44 28.1 15.3 -65%

The Destitute (below Rs. 16,000) 33.2 3.4 12.8 -61%

Total 164.8 180.7 199.2 21%

The target market segments considered for aspiration and lifestyle

goods are the 35 million homes representing the consuming classes and the

rich, or some 150 million people. It was the roughly 80 million households

that comprise the upper aspiring to lower consuming that so excited the

global market when they decided to enter the Indian market in the early

1990s.

It was not until 1992, when the Indian market first began to open up post

liberalization, that the MNCs started taking a closer look at the purchasing

power of the countrys middle class. Inevitably, the first thing they saw was

the massive volume of this potential market, rather than its cultural

idiosyncrasies.

Overview of Indias Consumer Durables Market

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The Indian consumer durables segment can be segregated into consumer

electronics (TVs, VCD players and audio systems etc.) and consumer

appliances (also known as white goods) like refrigerators, washing

machines, air conditioners (A/Cs), microwave ovens, vacuum cleaners and

dishwashers. Most of the segments in this sector are characterized by intense

competition, emergence of new companies (especially MNCs) and

introduction of state-of-the-art models, price discounts and exchange

schemes. MNCs continue to dominate the Indian consumer durable segment,

which is apparent from the fact that these companies command more than 65

per cent market share in the colour television (CTV) segment. In consonance

with the global trend, over the years, demand for consumer durables has

increased with rising income levels, double-income families, changing

lifestyles, availability of credit, increasing consumer awareness and

introduction of new models. Products like air conditioners are no longer

perceived as luxury products.

The biggest attraction for MNCs is the growing Indian middle class. This

market is characterised with low penetration levels. MNCs hold an edge overtheir Indian counterparts in terms of superior technology combined with a

steady flow of capital, while domestic companies compete on the basis of

their well-acknowledged brands, an extensive distribution network and an

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insight in local market conditions. One of the critical factors those influences

durable demand is the government spending on infrastructure, especially the

rural electrification programme. Given the government's inclination to cut

back spending, rural electrification programmes have always lagged behind

schedule. This has not favoured durable companies till now. Any

incremental Corporate Catalyst India A report on Indian Consumer Durables

Industry spending in infrastructure and electrification programmes could

spur growth of the industry. The digital revolution is shaking up the

consumer durables industry. With the advent of MP3 music files, personal

video recorders, game machines, digital cameras, appliances with embedded

devices, and a host of other media and services, it is no longer clear who

controls which part of home entertainment. This has set off a battle for

dominance, and the shake up is spanning the entire technology spectrum.

Microsoft Corp. is spending billions on entertainment initiatives such as its

Xbox video game console. Compaq and HP sell MP3 music players that plug

into home-stereo systems. Apple Computer is positioning its new iMac as a

digital-entertainment device.

Sony is building Vaio computers that focus on integrating multimedia

applications. Philips sells stereos that hook into a high-speed Internet

connection to play music from the Web. More startups are trying to carve

out profitable niches in digital music, video, and home networking. The

industry is witnessing a number of strategic alliances, to develop a range of

capabilities - electronic hardware, software and entertainment Content. As

more consumers grow comfortable with technology, companies need to

build simpler devices that offer more entertainment and convenience. These

new machines need to work together readily, and should be as easy to set up

and use as a telephone or a television. Consumerization of technology could

be a major phenomenon over the next 5 to 10 years. This could hasten

industry consolidation, as healthy companies gain market share by buying

out weaker ones at attractive prices. Apart from steady income gains,

consumer financing has become a major driver in the consumer durables

industry. In the case of more expensive consumer goods, such as

refrigerators, washing machines, colour televisions and personal computers,

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retailers are joining forces with banks and finance companies to market their

goods more aggressively. Among department stores, other factors that will

support rising sales include a strong emphasis on retail technology, loyalty

schemes, private labels and the subletting of floor space in larger stores to

smaller retailers selling a variety of products and services, such as music and

coffee.

Growth Scenario

Rising disposable income and declining prices of durables have resulted in

increased volumes. An increase in disposable income is aided by an increase

n the number of both double-income and nuclear families.

The market for consumer durables (including entertainment electronics,

communitarian and IT products) is estimated at Rs 32 billion (US $7.1

billion). The market is expected to grow at 10 to 12 per cent annually and is

expected to reach Rs 60 billion (US$13.3 billion) by 2008. The urban

consumer durables market is growing at an annual rate of seven to 10 per

cent, the rural durables market is growing at 25 per cent annually. Some

high-growth categories within this segment include mobile phones, TVs andmusic systems.

Television sets Personal computers Refrigerators Video recorders Consumer

durables are expected to grow at 10-15 per cent in 2007-08, driven by the

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growth in CTVs and air conditioners. Value growth of durables is expected

to behigher than historical levels as price declines for most of the products

are notexpected to be very significant. Though price declines will continue,

it will cease tobe the primary demand driver. Instead the continuing strength

of incomedemographics will support volume growth.

In economics, a durable good or a hard good is a good that does not quickly

wear out, or more specifically, one that yields utility over time rather than

being completely consumed in one use. Item like bricks orjewellery could

be considered perfectly durable goods, because they should theoretically

never wear out. Highly durable goods such as refrigerators, cars, ormobile

phones usually continue to be useful for three or more years of use, so

durable goods are typically characterized by long periods between

successive purchases.

Examples of consumer durable goods include cars, household goods (home

appliances, consumer electronics, furniture, etc.), sports equipment, and toys.

Consumer durables are the products whose life expectancy is at least 3 years.

These products are hard goods that cannot be used up at once. The consumerdurables sector can be segmented into consumer electronics, such as,

VCD/DVD, home theatre, music players, colour televisions (CTVs), etc. and

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white goods, such as, dish washers, air conditioners, water heaters, washing

machines, refrigerators, etc.

Non-durable goods or soft goods (consumables) are the opposite of durable

goods. They may be defined either as goods that are immediately consumed

in one use or ones that have a lifespan of less than 3 years.

Examples of nondurable goods include fast-moving consumer goods such

as cosmetics and cleaning products, food, fuel, office supplies, packaging

and containers, paper and paper products, personal products, rubber, plastics,

textiles, clothing and footwear.

While durable goods can usually be rented as well as bought, nondurable

goods can generally not be rented. While buying Durable goods comes under

the category of Investment demand of Goods, buying Non-Durables comes

under the category of Consumption demand of Goods.

Before the liberalization of the Indian economy, only a few companies like

Kelvinator, Godrej, Allyn, and Voltas were the major players in the

consumer durables market, accounting for no less than 90% of the market.

Then, after the liberalization, foreign players like LG, Sony, Samsung,

Whirlpool, Daewoo, Aiwa came into the picture. Today, these players

control the major share of the consumer durables market.

Consumer durables market is expected to grow at 10-15% in 2007-2008. It is

growing very fast because of rise in living standards, easy access to

consumer finance, and wide range of choice, as many foreign players are

entering in the market.

On the flip side, the presence of a large number of players in the consumer

durables market sometimes results in excess supply.

Durable goods are those which dont wear out quickly, yielding utility over

time rather than at once. Examples of consumer durable goods include

electronic equipment, home furnishings and fixtures, photographic

equipment, leisure equipment and kitchen appliances. They can be further

classified as either white goods, such as refrigerators, washing machines and

air conditioners or brown goods such as blenders, cooking ranges and

http://en.wikipedia.org/wiki/Consumableshttp://en.wikipedia.org/w/index.php?title=Fast-moving_consumer_goods&action=edit&redlink=1http://en.wikipedia.org/wiki/Cosmeticshttp://en.wikipedia.org/wiki/Cosmeticshttp://en.wikipedia.org/w/index.php?title=Fast-moving_consumer_goods&action=edit&redlink=1http://en.wikipedia.org/wiki/Consumables

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microwaves or consumer electronics such as televisions and DVD players.

Such big-ticket items typically continue to be serviceable for three years at

least and are characterized by long inter-purchase times.

Classification of Consumer Durables Sector

1. Consumer Electronics includes VCD/DVD, home theatre, music players,

color televisions (CTVs), cameras, camcorders, portable audio, Hi-Fi, etc.

2. White Goods include dishwashers, air conditioners, water heaters,

washing machines, refrigerators, vacuum cleaners, kitchen appliances, non-

kitchen appliances, microwaves, built-in appliances, tumble dryer, personal

care products, etc.

3. Moulded Luggage includes plastics.

4. Clocks and Watches

5. Mobile Phones

Performance

In the past 10 years, the global market has witnessed a surge in demand as

economies such as Brazil, Mexico, India and China have opened up and

begun rapid development, welcoming globalization with lan. The consumer

durables industry has always exhibited impressive growth despite strong

competition and constant price cutting, and the first contraction since the

2001 dot-com bust has been due to the global recession. Given the strong

correlation between demand for durables (both new and replacements) and

income, the industry naturally suffered during the 2008-2009 period.

However, projections for current year going forward are very optimistic, as

consumers resume spending, and producers launch new enticing variants to

grab new customers. Leading players include Sony Corporation, Toshiba

Corporation, Whirlpool Corporation and Panasonic Corporation.

Developing countries such as India and China have largely been shielded

from the backlash of the recession, as consumers continued to buy basic

appliances. In fact, China has been ranked the second-biggest market in the

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world for consumer electronics. Despite the recession, their strong domestic

economy and growing high-income population have buoyed demand leading

to aggressive market growth.

There is growing interest for new age products such as LCD-TVs and DVD

players. Meanwhile, the penetration of the basic, largest dollar items such asovens, washing machines and refrigerators is also increasing. India too, has

witnessed a similar phenomenon, with the urban consumer durables market

growing at almost 10 %p.a., and the rural durables market growing at 25%

p.a. Some high-growth categories within this segment include mobile

phones, TVs and music systems.

The Indian consumer durables industry has witnessed a considerable changein the past couple of years. Changing lifestyle, higher disposable income

coupled with greater affordability and a surge in advertising has been

instrumental in bringing about a sea change in the consumer behavior

pattern. Apart from steady income gains, consumer financing and hire-

purchase schemes have become a major driver in the consumer durables

industry.

In the case of more expensive consumer goods, such as refrigerators,

washing machines, color televisions and personal computers, retailers are

joining forces with banks and finance companies to market their goods more

aggressively. In addition, change in policy, such as the WTO FTA in 2005

resulted in zero customs duty on imports of all telecom equipment, thereby

improving the pricing and affordability of imported goods.

SECTOR OUTLOOK

There has been strong competition between the major MNCs like Samsung,

LG, and Sony.

LG Electronics India Ltd. has announced its extension plan in 2006. Thecompany is going to invest $250 million in India by 2011 and is planning to

establish a manufacturing facility in Pune.

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TCL Corporation is also planning to establish a $22 million manufacturing

facility in India.

The Indian companies like Videocon Industries and Onida are also

planning to expand. Videocon has acquired Electrolux brand in India. Also,

with the acquisition of Thomson Displays by Videocon in Poland, China,

and Mexico, the company is marking its international presence

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COMPANY PROFILE

LG Electronics India Pvt Ltd Established in 1997, LG Electronics India Pvt.

Ltd., is a wholly owned subsidiary of LG Electronics, South Korea . In India for a decade

now, it is the market leader in comsumer durables ,and recognised as a leading

technology innovator in the information technology and mobile communications business

. It is the acknowledged trendsetter for the consumer durable industry in India with the

fastest ever nationwide reach, latest global technology and product innovation. One of

the most formidable brands, LGEIL has an impressive portfolio of Home Appliances,

Consumer Durables, Digital Display products, GSM mobile phones and IT products.

VISION & BUSINESS GOALS

LG Electronics continues to pursue its 21st century vision of becoming a

worldwide leader in digitalensuring customer satisfaction through innovative products

and superior service while aiming to rank among the worlds top three electronics,

information, and telecommunications firms by 2010.

LG Electronics pursues its 21st century vision of becoming a true global digital

leader, making its customers worldwide delighted through its innovative digital products

and services. Going forward LG India will synergize all activities in keeping with the

global vision of becoming a global top 3 player in all business areas by following the

Blue Ocean Strategy. The Blue Ocean strategy is based on the understanding that only

flexible companies that adapt to lifecycle and industry changes will enjoy continued

growth. The success of the Blue Ocean Strategy will focus on creating high growth &

profit by focusing on five key areas at LG: Products, Business Model, Work, and Systems

& People.

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MAJOR SEGMENTS OF LG ELECTRONICS

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COMPANY ANALYSIS

According to the Individual - Audited financial statement for the Year of 2011,

total net operating revenues increased with 8.57%, from INR 10,959.9 tens of millions to

INR 11,899.7 tens of millions. Operating result decreased from INR 606.6 tens of

millions to INR 576.7 tens of millions which means -4.93% change. The results of the

period decreased -14.31% reaching INR 297.7 tens of millions at the end of the period

against INR 347.4 tens of millions last year. Return on equity (Net income/Total equity)

went from 20.66% to 15.04%, the Return On Asset (Net income / Total Asset) went from

20.66% to 15.04% and the Net Profit Margin (Net Income/Net Sales) went from 3.17% to

2.50% when compared to the same period of last year. The Debt to Equity Ratio (Total

Liabilities/Equity) was 100.00% compared to 100.00% of last year. Finally, the Current

Ratio (Current Assets/Current Liabilities) went from 2.07 to 1.82 when compared to the

previous year.

BRAND IDENTITY

LG is the brand that is Delightfully Smart. "Life's Good" slogan, and futuristic

logo are a great representation of what we stand for.

Global, Tomorrow, Energy, Humanity and Technology are the pillars that this

corporation is founded on; with the capital letters L and G positioned inside a circle to

center our ideals above all else, humanity. The symbol mark stands for our resolve to

establish a lasting relationship with, and to achieve the highest satisfaction for our

customers.

The letters "L" and "G" in a circle symbolize the world, future, youth, humanity,

and technology. Our philosophy is based on Humanity. Also, it represents LG's efforts

to keep close relationships with our customers around the world. The symbol mark

consists of two elements: the LG logo in LG Grey and the stylized image of a human

face in the unique LG Red color. Red, the main color, represents our friendliness, and

also gives a strong impression of LG's commitment to deliver the best. Therefore, the

shape or the color of this symbol mark must never be changed.

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Our logo is the fundamental visual expression used to identify LG. It expresses

the quality and sophistication that is the hallmark of our products. It is simple, modern

and distinctive. Consistent and proper usage of the logo is absolutely essential. The logo

is symbolic of our steadfast reputation for excellence; therefore, any variation of the

logo diminishes the visual identity of LG Electronics and its products.

We have two versions of our logo: Corporate Logo and 3D Logo. The updated

3D Logo retains the heritage and equity of the Corporate Logo, while aligning with our

new positioning. It was redrawn to strengthen the visual impact of our symbol mark and

help communicate our attributes.

CORPORATE LOGO

Applicable Items :

- Stationery

(Business Card, Letterhead, Envelope)

- Office templates (Fax, Memo)

- Awards

- ID badges

- Corporate signs

3D LOGO

Applicable Items :

- Advertising

(Print, Online, TV and Outdoor)

- Websites and microsites

- Promotional literature

(Leaflet, Brochures, etc)

- Packaging

- Retail signs and POPs

- Shopping bags

- Service vehicle

DESIGN

Fast growth is the result of strategies designed to expand earnings quickly, while

improving the growth rate in terms of monetary value rather than quantity.

http://www.lg.com/in/download/about-lg/LG_2D_LOGO.ziphttp://www.lg.com/in/download/about-lg/LG_2D_LOGO.ziphttp://www.lg.com/in/download/about-lg/LG_3D_LOGO.ziphttp://www.lg.com/in/download/about-lg/LG_2D_LOGO.ziphttp://www.lg.com/in/download/about-lg/LG_3D_LOGO.ziphttp://www.lg.com/in/download/about-lg/LG_2D_LOGO.zip

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ONE EYE

Market leadership refers to the ability to achieve the "LG brand is No. 1" goal, thanks to

its formidable market presence worldwide.

UPPER RIGHT HAND SPACE

Market leadership refers to the ability to achieve the "LG brand is No. 1" goal, thanks toits formidable market presence worldwide.

COLORS

Market leadership refers to the ability to achieve the "LG brand is No. 1" goal, thanks to

its formidable market presence worldwide.

HISTORY

The history of LG Electronics has always been surrounded by the company's

desire to create a happier, better life. LG Electronics was established in 1958 and has

since led the way into the advanced digital era thanks to the technological expertise

acquired by manufacturing many home appliances such as radios and TVs. LG

Electronics has unveiled many new products, applied new technologies in the form of

mobile devices and digital TVs in the 21st century and continues to reinforce its status

as a global company.

1958

Founded as GoldStar

1960's

Produces Korea's first radios, TVs, refrigerators, washing

machines, and air conditioners

1995

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Renamed LG Electronics Acquires US-based Zenith

1997

World's first CDMA digital mobile handsets supplied to

Ameritech and GTE in U.S. Achieves UL certification in

U.S. Develops world's first IC set for DTV

1998 Develops world's first 60-inch plasma TV

1999

Establishes LG Philips LCD, a joint venture with Philips

2000

Launches world's first Internet refrigerator Exports

synchronous IMT-2000 to Marconi Wireless of Italy

Significant exports to Verizon Wireless in U.S.

2001

GSM mobile handset Exports to Russia, Italy, and Indonesia

Establishes market leadership in Australian CDMA market

Launches world's first Internet washing machine, airconditioner, and microwave oven

2002

Under LG Holding Company system, separates into LG

Electronics and LG Corporation Full-scale export of GPRS

color mobile phones to Europe Establishes CDMA handset

production line and R&D center in China

2003

Enters Northern European and Middle East GSM handset

market Achieves monthly export volume above 2.5 million

units (July) Top global CDMA producer

2004

EVSB, the next-generation DTV transmission technology,

chosen to be the U.S./Canada Industry standard by the US

ATSC Commercializes world's first 55" all-in-one LCD TV

Commercializes world's first 71" plasma TV Develops

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world's first Satellite- and Terrestrial-DMB handsets

2005

Becomes fourth-largest supplier of the mobile handsets

market worldwide Develops world's first 3G UMTS DMB

handset, 3G-based DVB-Hand Media FLO DMB Phone

with time-shift function and DMB notebook computer

Establishes LG-Nortel, a network solution joint venture with

Nortel

2006

LG Chocolate, the first model in LG's Black Label series of

premium handsets, sells 7.5 million units worldwide

Develops the first single-scan 60" HD PDP module and 100-

inch LCD TV Establishes strategic partnership with UL

Acquires the world's first IPv6 Gold Ready logo

2007

Launches the industry's first dual-format, high-definition

disc player and drive Launches 120Hz Full HD LCD TV

Demonstrated the world-first MIMO 4G-Enabled

technologies with 3G LTE Won contract for GSMA's 3G

campaign

2008

Introduces new global brand identity: "Stylish design and

smart technology, in products that fit our consumer's lives."

Posted No.1 spot in US frontloading washers in 5

consecutive quarters Unveiled the world's first Bluetooth

headset combined mobile phone Unveiled the world's first

Blu-ray network storage Developed the world's first LTE

mobile modem chip Recorded over 100 million units of LG

air conditioners in accumulated sales

2009

Became second-largest LCD TV provider worldwide

Became third-largest supplier of mobile handsets market

worldwide Became Global Partner and Technology Partnerof Formula One

2010

Unveiled the worlds first and fastest dual-core smartphone,

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LG OPTIMUS 2X Unveiled the worlds first full LED 3D

TV

STRATEGIC ALLIANCES

LG Electronics is making technology advances and identifying business

opportunities through various partnerships relationships with some of the world's

leading companies.

LG Electronics is striving to become number one in the world by collaborating

in various business and technology fields and by strategic alliances with world famous

companies. "Strategic alliance between corporations," in which companies with

different infrastructures cooperate in the fast-developing 21st century business field, is

of key significance in terms of strengthening the existing and creating a new industry.

LG Electronics will do its best to create new products and services with an open mind,

while developing new technologies and business fields through various partnerships

with some of the world's most successful companies.

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SWOT ANALYSIS OF LG ELECTRONICS

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INTRODUCTION TO TOPIC

A business

organisation always aims

at earning profits. The

utilisation of profits

earned is a significant

financial decision. The

main issue here is

whether the profits

should be used by the

owner(s) or retained and

reinvested in thebusiness itself. This

decision does not

involve any problem is

so far as the sole

proprietary business is

concerned. In case of a partnership the agreement often provides for the basis of

distribution of profits among partners. The decision-making is somewhat complex in the

case of joint stock companies.

Since company is an artificial person, the decision regarding utilisation ofprofits

rests with a group of people, namely the board of directors. As in any other types of

organisation, the disposal of net earnings of a company involves either their retention in

the business or their distribution to the owners (i.e., shareholders) in the form of dividend,

or both. Yet the decision regarding distribution of disposable earnings to the shareholders

is a significant one. The decision may mean a higher income, lower income or no

income at all to the shareholders. Besides affecting the mood of the present shareholders,

dividend may also influence the mood, behaviour and responses of prospective

investors, stock exchanges and financial institutions because of its relationship with

the worth of the company, which in turn affects the

market value of its shares. The decision regarding

dividend is taken by the Board of Directors and is

then recommended to the shareholders for their

formal approval in the annual general meeting of the

company. Disposal of profits in the form of

dividends can become a controversial-issue because

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of conflicting interests of various parties like the directors, employees, shareholders,

debenture holders, lending institutions, etc. Even among the shareholders there may be

conflicts as they may belong to different income groups. While some may be interested

in regular income, others may be interested in capital appreciation and capital gains.

Hence, formulation of dividend policy is a complex decision. It needs careful

consideration of various factors. One thing, however, standsout. Instead of an ad hoc

approach, it is more desirable to follow a reasonably long-term policy regarding

dividends.

CONCEPT OF DIVIDEND

Dividends are

payments made by

a corporation to its

shareholder members. It

is the portion of

corporate profits paid

out to stockholders.

When a corporation

earns a profit or surplus, that money can be put to two uses: it can either be re-invested in

the business (called retained earnings), or it can be distributed to shareholders. There are

two ways to distribute cash to shareholders: share repurchases or dividends. Many

corporations retain a portion of their earnings and pay the remainder as a dividend.

A dividend is allocated as a fixed amount per share. Therefore, a shareholder

receives a dividend in proportion to their shareholding. For the joint stock company,

paying dividends is not an expense; rather, it is the division of after tax profits among

shareholders. Retained earnings (profits that have not been distributed as dividends) are

shown in the shareholder equity section in the company's balance sheet - the same as its

issued share capital. Public usually pay dividends on a fixed schedule, but may declare a

dividend at any time, sometimes called a special dividend to distinguish it from the fixed

schedule dividends.

Cooperatives, on the other hand, allocate dividends according to members'

activity, so their dividends are often considered to be a pre-tax expense.

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Dividends are usually paid in the form of cash, store credits (common among

retail consumers' cooperatives) and shares in the company (either newly created shares or

existing shares bought in the market.) Further, many public companies offerdividend

reinvestment plans, which automatically use the cash dividend to purchase additional

shares for the shareholder.

DIVIDEND DEFINITION

A dividend is a payment made by a company to its shareholders. A company can

retain its profit for the purpose of re-investment in the business operations (known as

retained earnings), or it can distribute the profit among its shareholders in the form of

dividends.

A dividend is not regarded as expenditure; rather, it is considered a distribution of

assets among shareholders. The majority of companies keep a component of their profits

as retained earnings and distribute the rest as dividend.

FORMS OF PAYMENT

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Cash dividends (most common) are those paid out in currency, usually

via electronic funds transferor a printed papercheck. Such dividends are a form of

investment income and are usually taxable to the recipient in the year they are paid. This

is the most common method of sharing corporate profits with the shareholders of the

company. For each share owned, a declared amount of money is distributed. Thus, if a

person owns 100 shares and the cash dividend is USD $0.50 per share, the holder of the

stock will be paid USD $50.

Stock or scrip dividends are those paid out in the form of additional stock shares

of the issuing corporation, or another corporation (such as its subsidiary corporation).

They are usually issued in proportion to shares owned (for example, for every 100 shares

of stock owned, a 5% stock dividend will yield 5 extra shares). If the payment involves

the issue of new shares, it is similar to astock split in that it increases the total number of

shares while lowering the price of each share without changing the market capitalization,

or total value, of the shares held. (See also Stock dilution.)

Property dividends or dividends in specie(Latin for"in kind") are those paid out

in the form of assets from the issuing corporation or another corporation, such as a

subsidiary corporation. They are relatively rare and most frequently are securities of other

FORMS OFPAYMENT

Cashdividends

Stock or scrip

dividends

Propertydividends

Interimdividends

Otherdividends

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companies owned by the issuer, however they can take other forms, such as products and

services.

Interim dividends are dividend payments made before a company's annual

general meeting (AGM) and final financial statements. This declared dividend usually

accompanies the company's interim financial statements.

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 aprecursor 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.

Other dividends can be used in structured finance. Financial assets with a known

market value can be distributed as dividends; warrants are sometimes distributed in this

way. For large companies with subsidiaries, dividends can take the form of shares in a

subsidiary company. A common technique for "spinning off" a company from its parent

is to distribute shares in the new company to the old company's shareholders. The new

shares can then be traded independently.

DIVIDEND POLICY : INTRODUCTION

The objective of corporate management usually is the maximisation of the market

value of the enterprise i.e., its wealth. The market value of common stock of a company is

influenced by its policy regarding allocation of net earnings into `plough back' and

`payout'. While maximising the market value of shares, the dividend policy should be so

oriented as to satisfy the interests of the existing shareholders as well as to attract the

potential investors. Thus, the aim should be to maximise the present value of future

dividends and the appreciation in the market price of shares.

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Dividend policy is concerned with taking a decision regarding paying cash

dividend in the present or paying an increased dividend at a later stage. The firm could

also pay in the form ofstock dividends which unlike cash dividends do not provide

liquidity to the investors; however, it ensures capital gains to the stockholders. The

expectations of dividends by shareholders helps them determine the share value,

therefore, dividend policy is a significant decision taken by the financial managers of any

company.

BACKGROUND OF CORPORATE DIVIDEND POLICY

The issue of corporate dividends has a long history and, as Frankfurter and Wood

(1997) observed, is bound up with the development of the corporate form itself.

Corporate dividends date back at least to the early sixteenth century in Holland and

Great Britain when the captains of sixteenth century sailing ships started selling

financial claims to investors, which entitled them to share in the proceeds, if any, of the

voyages3. At the end of each voyage, the profits and the capital were distributed to

investors, liquidating and ending the ventures life. By the end of the sixteenth century,

these financial claims began to be traded on open markets in Amsterdam and were

gradually replaced by shares of ownership. It is worth mentioning that even then many

investors would buy shares from more than one captain to diversify the risk associated

with this type of business.

At the end of each voyage, the enterprise liquidation of the venture ensured a

distribution of the profits to owners and helped to reduce the possibilities of fraudulent

practice by captains (Baskin, 1988). However, as the profitability of these ventures was

established and became more regular, the process of liquidation of the assets at the

conclusion of each voyage became increasingly inconvenient and costly. The successes

of the ventures increased their credibility and shareholders became more confident in

their management (captains), and this was accomplished by, among other things, the

payment of generous dividends (Baskin, 1988). As a result, these companies began

trading as going concern entities, and distributing only the profits rather than the entire

invested capital. The emergence of firms as a going concern initiated the fundamentalpractice of firms to decide what proportion of the firms income (rather than assets) to

return to investors and produced the first dividend payment regulations (Frankfurter and

Wood, 1997). Gradually, corporate charters began to restrict the payments of dividends

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to the profits only.

The ownership structure of shipping firms gradually evolved into a joint

stock company form of business. But it was chartered trading firms more generally that

adopted the joint stock form. In 1613, the British East India Company issued its first

joint stock shares with a nominal value. No distinction was made, however, between

capital and profit (Walker, 1931, p.102). In the seventeenth century, the success of this

type of trading company seemed poised to allow the spread of this form of business

organization to include other activities such as mining, banking, clothing, and utilities.

Indeed, in the early 1700s, excitement about the possibilities of expanded trade and the

corporate form saw a speculative bubble form, which collapsed spectacularly when the

South Sea Company went into bankruptcy. The Bubble Act of 1711 effectively slowed,

but did not stop, the development of the corporate form in Britain for almost a century

(Walker, 1931).

In the early stages of corporate history, managers realized the importance of

high and stable dividend payments. In some ways, this was due to the analogy investors

made with the other form of financial security then traded, namely government bonds.

Bonds paid a regular and stable interest payment, and corporate managers found that

investors preferred shares that performed like bonds (i.e. paid a regular and stable

dividend). For example, Bank of North America in 1781 paid dividends after only six

months of operation, and the bank charter entitled the board of directors to distribute

dividends regularly out of profits. Paying consistent dividends remained of paramount

importance to managers during the first half of the 19th century (Frankfurter and

Wood, 1997, p.24)

In addition to the importance placed by investors on dividend stability, another

issue of modern corporate dividend policy to emerge early in the nineteenth century

was that dividends came to be seen as an important form of information. The scarcity

and unreliability of financial data often resulted in investors making their assessments

of corporations through their dividend payments rather than reported earnings. In

short, investors were often faced with inaccurate information about the

performance of a firm, and used dividend policy as a way of gauging what

managements views about future performance might be. Consequently, an increase in

divided payments tended to be reflected in rising stock prices. As corporations becameaware of this phenomenon, it raised the possibility that managers of companies could

use dividends to signal strong earnings prospects and/or to support a companys share

price because investors may read dividend announcements as a proxy for earnings

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growth.

To summarise, the development of dividend payments to shareholders has been

tied up with the development of the corporate form itself. Corporate managers realized

early the importance of dividend payments in satisfying shareholders expectations.

They often smoothed dividends over time believing that dividend reductions might have

unfavourable effects on share price and therefore, used dividends as a device to signal

information to the market. Moreover, dividend policy is believed to have an impact on

share price. Since the 1950s, the effect of dividend policy on firm value and other

issues of corporate dividend policy have been subjected to a great debate among finance

scholars. The next section considers these developments from both a theoretical and an

empirical point of view.

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Types of Dividend Policies

The following are various types of dividend policies (1) Policy of No Immediate

Dividend (2) Stable Dividend Policy. (3) Regular Dividend plus Extra Dividend Policy.

(4) Irregular Dividend Policy. (5) Regular Stock Dividend Policy. (6) Regular Dividend

plus Stock Dividend Policy. (7) Liberal Dividend Policy.

We discuss these policies in detail:

(1) Policy of No Immediate Dividend: Generally, management follows a policy of

paying no immediate dividend in the beginning of its life, as it requires funds for growth

and expansion. In case, when the outside funds are costlier or when the access to capital

market is difficult for the company and shareholders are ready to wait for dividend for

some time, this policy is justified, provided the company is growing fast and it requires a

good deal of amount for expansion. But such a policy is not justified for a long time, as

the shareholders are deprived of the dividend and the retained earnings built up which

will attract attention of laborers, consumers etc. It would be better if the period of

dividend is followed by issue of bonus shares, so that later on rate of dividend is

maintained at a reasonable level.

(2) Regular or Stable Dividend Policy: When a company pays dividend regularly at a

fixed rate, and maintains it for a considerably long time even though the profits may

fluctuate, it is said to follow regular or stable dividend policy. Thus stable dividend policy

means a policy of paying a minimum amount of dividend every year regularly. It raises

the prestige of the company in the eyes of the investors. A firm paying stable dividend

can satisfy its shareholders and can enhance its credit standing in the market. Not only

that the dividend must be regularly paid but the dividend must be stable. It may be fixed

amount per share or a fixed percentage of net profits or it may be total fixed amount of

dividend on all the shares etc. The benefits of stable dividend policy are (i) it helps in

raising long-term finance. When the company tries to raise finance in future, the investors

would examine the dividend record of the company. The investors would not hesitate to

invest in company with stable dividend policy. (2) As it will enhance the prestige of the

company, the price of its shares would remain at a high level. (3) The shareholders

develop confidence in management. (4) It makes long-term planning easier. (The detailed

discussion of this policy follows in the next paragraph.

(3) Regular Dividend plus Extra Dividend Policy. A firm paying regular dividends

would continue with its pay out ratio. But when the earnings exceed the normal level, the

directors would pay extra dividend in addition to the regular dividend. But it would be

named 'Extra dividend', as it should not give an impression that the company has

enhanced rate of regular dividend, This would give an impression to shareholders that the

company has given extra dividend because it has earned extra profits and would not be

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repeated when the business earnings become normal. Because of this policy, the

company's prestige and its share values will not be adversely affected. Only when the

earnings of the company have permanently increased, the extra dividend should be

merged with regular normal dividend and thus rate of normal dividend should be raised.

Besides, the extra dividend should not be abruptly declared, but the shareholders should

have some idea in advance, so that they may sell their shares, if they like. This system is

not found in India.

(4) Irregular Dividend Policy: When the firm does not pay out fixed dividend regularly,

it is irregular dividend policy. It changes from year to year according to changes in

earnings level. This policy is based on the management belief that dividend should be

paid only when the earnings and liquid position of the firm warrant it. This policy is

followed by firms having unstable earnings, particularly engaged in luxury goods.

(5) Regular Stock Dividend Policy: When a firm pays dividend in the form of shares

instead of cash regularly for some years continuously, it is said to follow this policy. We

know stock dividend as bonus shares. When a company is short of cash or is facing

liquidity crunch, because a large part of its earnings are blocked in high level of

receivables or when the company is need of cash for its modernization and expansion

program, it follows this policy. It is not advisable to follow this policy for a long time, as

the number of shares will go on increasing, which would result in fall in earnings per

share. This would adversely affect the credit standing of the firm and its share values willgo down.

(6) Regular Dividend plus Stock Dividend Policy: A firm may pay certain amount of

dividend in cash and some dividend is paid in the form of shares (stock). Thus, the

dividend is split in to two parts. This policy is justified when (1) The company wants to

maintain its policy of regular dividend and yet (2) It wants to retain some part of its

divisible profit with it for expansion. (3) It wants to give benefit of its earnings to

shareholders but has not enough liquidity to give full dividend in cash. All the limitations

of paying regular stock dividends apply to this policy.

(7) Liberal Dividend Policy: It is a policy of distributing a major part of its earnings to

its shareholders as dividend and retains a minimum amount as retained earnings. Thus,

the ratio of dividend distribution is very large as compared to retained earnings. The rate

of dividend or the amount of dividend is not fixed. It varies according to earnings. The

higher is the profit, the higher will be the rate of dividend. In years of poor earnings, the

rate of dividend will be lower. In fact, it is the policy of Irregular Dividend.

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Dividend Policy Goals

There are several factors, which influence the determination of the dividend

policy. As such no two companies may follow exactly similar dividend policies. The

dividend policy has to be tailored to the particular circumstances of the company.However, the following aspects have general applicability:

Dividend policy should be analysed in terms of its effect on the value of the company.

Investment by the company in new profitable opportunities creates value and when a

company foregoes an attractive investment, shareholders incur an opportunity loss.

Dividend, investment and financing decisions are interdependent and there is often a

tradeoff.

Dividend decision should not be treated as a short run residual decision because '

variability of annual earnings may cause even a zero dividend in a particular year. This

m a y have serious repercussions for the company and m a y result in the delisting of

its share for the purpose of dealings on any approved stock exchange.

A workable compromise is to treat dividends as a long-run residual to avoid

undesirable variations in payout. This needs financial planning over a fairly long time

horizon.

Whatever dividend policy is adopted by the company, the general principles

guiding the dividend policy should, as far as possible, be communicated clearly to

investors who m a y then take their decisions in terms of their own preferences and

needs.

Erratic and frequent changes in dividends should be avoided. Reduction in the rate of

dividend is a painful thing for the shareholders to bear. The management will find it hard

to convince the shareholders of the desirability of a lower dividend for the sake of

preserving their future interests.

FACTORS AFFECTING DIVIDEND DECISION

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1. Stability of Earnings. The nature of business has an important bearing on the

dividend policy. Industrial units having stability of earnings may formulate a more

consistent dividend policy than those having an uneven flow of incomes because they can

predict easily their savings and earnings. Usually, enterprises dealing in necessities suffer

less from oscillating earnings than those dealing in luxuries or fancy goods.

2. Age of corporation. Age of the corporation counts much in deciding the dividend

policy. A newly established company may require much of its earnings for expansion and

plant improvement and may adopt a rigid dividend policy while, on the other hand, an

older company can formulate a clear cut and more consistent policy regarding dividend.

3. Liquidity of Funds. Availability of cash and sound financial position is also an

important factor in dividend decisions. A dividend represents a cash outflow, the greater

the funds and the liquidity of the firm the better the ability to pay dividend. The liquidity

of a firm depends very much on the investment and financial decisions of the firm which

in turn determines the rate of expansion and the manner of financing. If cash position is

weak, stock dividend will be distributed and if cash position is good, company can

distribute the cash dividend.

4. Extent of share Distribution.Nature of ownership also affects the dividend decisions.

A closely held company is likely to get the assent of the shareholders for the suspensionof dividend or for following a conservative dividend policy. On the other hand, a

company having a good number of shareholders widely distributed and forming low or

medium income group, would face a great difficulty in securing such assent because they

will emphasise to distribute higher dividend.

5. Needs for Additional Capital. Companies retain a part of their profits for

strengthening their financial position. The income may be conserved for meeting the

increased requirements of working capital or of future expansion. Small companies

usually find difficulties in raising finance for their needs of increased working capital for

expansion programmes. They having no other alternative, use their ploughed back profits.

Thus, such Companies distribute dividend at low rates and retain a big part of profits.

6. Trade Cycles. Business cycles also exercise influence upon dividend Policy. Dividend

policy is adjusted according to the business oscillations. During the boom, prudent

management creates food reserves for contingencies which follow the inflationary period.

Higher rates of dividend can be used as a tool for marketing the securities in an otherwise

depressed market. The financial solvency can be proved and maintained by the companies

in dull years if the adequate reserves have been built up.

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7. Government Policies. The earnings capacity of the enterprise is widely affected by the

change in fiscal, industrial, labour, control and other government policies. Sometimes

government restricts the distribution of dividend beyond a certain percentage in a

particular industry or in all spheres of business activity as was done in emergency. The

dividend policy has to be modified or formulated accordingly in those enterprises.

8. Taxation Policy. High taxation reduces the earnings of he companies and

consequently the rate of dividend is lowered down. Sometimes government levies

dividend-tax of distribution of dividend beyond a certain limit. It also affects the capital

formation. N India, dividends beyond 10 % of paid-up capital are subject to dividend tax

at 7.5 %.

9. Legal Requirements. In deciding on the dividend, the directors take the legal

requirements too into consideration. In order to protect the interests of creditors an

outsiders, the companies Act 1956 prescribes certain guidelines in respect of the

distribution and payment of dividend. Moreover, a company is required to provide for

depreciation on its fixed and tangible assets before declaring dividend on shares. It

proposes that Dividend should not be distributed out of capita, in any case. Likewise,

contractual obligation should also be fulfilled, for example, payment of dividend on

preference shares in priority over ordinary dividend.

10. Past dividend Rates. While formulating the Dividend Policy, the directors must keep

in mind the dividend paid in past years. The current rate should be around the average

past rat. If it has been abnormally increased the shares will be subjected to speculation. In

a new concern, the company should consider the dividend policy of the rival organisation.

11. Ability to Borrow. Well established and large firms have better access to the capital

market than the new Companies and may borrow funds from the external sources if there

arises any need. Such Companies may have a better dividend pay-out ratio. Whereas

smaller firms have to depend on their internal sources and therefore they will have to built

up good reserves by reducing the dividend pay out ratio for meeting any obligation

requiring heavy funds.

12. Policy of Control. Policy of control is another determining factor is so far as

dividends are concerned. If the directors want to have control on company, they would

not like to add new shareholders and therefore, declare a dividend at low rate. Because by

adding new shareholders they fear dilution of control and diversion of policies and

programmes of the existing management. So they prefer to meet the needs throughretained earing. If the directors do not bother about the control of affairs they will follow

a liberal dividend policy. Thus control is an influencing factor in framing the dividend

policy.

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13. Repayments of Loan. A company having loan indebtedness are vowed to a high rate

of retention earnings, unless one other arrangements are made for the redemption of debt

on maturity. It will naturally lower down the rate of dividend. Sometimes, the lenders

(mostly institutional lenders) put restrictions on the dividend distribution still such time

their loan is outstanding. Formal loan contracts generally provide a certain standard of

liquidity and solvency to be maintained. Management is bound to hour such restrictions

and to limit the rate of dividend payout.

14. Time for Payment of Dividend. When should the dividend be paid is another

consideration. Payment of dividend means outflow of cash. It is, therefore, desirable to

distribute dividend at a time when is least needed by the company because there are peak

times as well as lean periods of expenditure. Wise management should plan the payment

of dividend in such a manner that there is no cash outflow at a time when the undertaking

is already in need of urgent finances.

15. Regularity and stability in Dividend Payment. Dividends should be paid regularly

because each investor is interested in the regular payment of dividend. The management

should, inspite of regular payment of dividend, consider that the rate of dividend should

be all the most constant. For this purpose sometimes companies maintain dividend

equalization Fund.

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PROCEDURE FOR DECLARATION AND PAYMENT OF DIVIDENDS

Dividend Distribution Tax (DDT)

Declaration of Interim Dividend

Permission of RBI

Unpaid dividend

Payment within 42 days of declaration

Payment from profits of the Company

Resolution at the annual general meeting

Recommendation by the Board

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Step 1 : Recommendation by the Board

Dividend can be declared only on the recommendation of the board of directors ("Board")

of the company. The members cannot on their own declare any dividend. The Board, after

consideration and approval of the financial statements of the company, determines the

rate of dividend to be declared and recommends the same to the shareholders.

Step 2 : Resolution at the annual general meeting

Dividend is declared by a company by a resolution passed at its AGM after sanctioning

the rate of dividend recommended by the Board. The members may declare a lower rate

of dividend than what is recommended by the Board but they have no power to increase

the amount or rate so recommended by the Board.

Step 3 : Payment from profits of the Company

It has to be ensured that dividend is paid out of the profits of the company after providing

for depreciation and if no depreciation is provided, ensure that approval was obtained

from the Central Government before declaring the dividend.

Step 4 : Payment within 42 days of declaration

(a) The amount of dividend including interim dividend shall be deposited in a

separate bank account within 5 days from the date of declaration of such dividend.

(b) Dividend should be paid out of such bank account within 42 days of declaration of

such dividend.

(c) Failure to comply with this requirement subjects the company to penalty under the

Act unless such failure is because of the reason excepted under the Act.

Step 5 : Unpaid dividend

(a) Unpaid Dividend Account

The amount of dividend which remains unpaid or unclaimed after 30 days from the date

of declaration should be transferred to a special dividend account, to be called Unpaid

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Dividend Account' of the company within 7 days from the expiry of the 30 days period

provided for payment of dividend.

The company in default of this provision shall pay, from the date of such default, 12%

interest on the amount not transferred to the said account, which interest shall ensure to

the benefit of the members, in proportion to the amount remaining unpaid to them.

(b) Investor Education and Protection Fund

Any amount in the Unpaid Dividend Account of the company which remains unclaimed

and unpaid for a period of 7 years from the date of transfer of such amount to the Unpaid

Dividend Account should be transferred to the Investor Education and Protection Fund,

within 30 days of the expiry of 7 years from the date of transfer to the Unpaid DividendAccount. But prior to such transfer the company must have given individual intimation to

the concerned members of the amount of dividend remaining unclaimed which is liable to

be transferred to such fund at least 6 months before the due date of such transfer.

Step 6 : Permission of RBI

The permission of RBI is required in case of payment of dividend to non- resident

shareholders.

Step 7 : Declaration of Interim Dividend

(a) Interim dividend can be declared by the Board without requiring the approval of

the members of the company. However interim dividend can be paid only if authorized by

the articles of association of the company.

(b) A mere resolution declaring interim dividend does not create any liability and may

be rescinded at any time before actual payment. (distinction between interim and final

dividend)

Step 8 : Dividend Distribution Tax (DDT)

The DDT is liable to be paid by the company at the rate of 15.0% (plus a surcharge of

10% and education cess at the rate of 3% on dividend distribution tax and surcharge) on

the total amount distributed as a dividend. Thus the effective rate of dividend distribution

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tax is 16.995%.

In addition it is pertinent to note that dividends are not taxable in India in the hands of the

shareholders.

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DIVIDEND POLICY

Dividend policy is concerned with taking a decision regarding paying cash

dividend in the present or paying an increased dividend at a later stage. The firm could

also pay in the form of stock dividends which unlike cash dividends do not provideliquidity to the investors, however, it ensures capital gains to the stockholders. The

expectations of dividends by shareholders helps them determine the share value,

therefore, dividend policy is a significant decision taken by the financial managers of any

company.

Dividendpolicy

Relevance modelof dividend policy

(direct effect on

the value of the

firm)

Walter's

model

Gordon's

Model

Irrelevance

model of

dividend policy

( does not affect

the firm's value)

Traditionaltheorem

Modigliani-

Miller

theorem

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RELEVANCE MODEL 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, ke thereby increasing the market value. However, its exactly

opposite in the case of increased uncertainty due to non-payment of dividends.

Two important models supporting dividend relevance are given by Walter and Gordon.

WALTER'S MODEL

James E. Walter's model shows the relevance of dividend policy and its bearing on the

value of the share.

Assumptions of the Walter model

1. Retained earnings are the only source of financing investments in the firm, there is

no external finance involved.

2. The cost of capital, ke and the rate of return on investment, r are constant i.e. even

if new investments decisions are taken, the risks of the business remains same.

3. The firm's life is endless i.e. there is no closing down.

Basically, the firm's decision to give or not give out dividends depends on whether it has

enough opportunities to invest the retain earnings i.e. a strong relationship between

investment and dividend decisions is considered.

Model description

Dividends paid to the shareholders are re-invested by the shareholder further, to

get higher returns. This is referred to as the opportunity cost of the firm or the cost of

capital, ke for the firm. Another situation where the firms do not pay out dividends, is

when they invest the profits or retained earnings in profitable opportunities to earn returns

on such investments. This rate of return r, for the firm must at least be equal to ke. If thishappens then the returns of the firm is equal to the earnings of the shareholders if the

dividends were paid. Thus, its clear that if r, is more than the cost of capital ke, then the

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returns from investments is more than returns shareholders receive from further

investments.

Walter's model says that if rke then the

investment opportunities reap better returns for the firm and thus, the firm should invest

the retained earnings. The relationship between r and k are extremely important to

determine the dividend policy. It decides whether the firm should have zero payout or

100% payout.

In a nutshell :

If r>ke, the firm should have zero payout and make investments.

If r

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Criticism

Although the model provides a simple framework to explain the relationship

between the market value of the share and the dividend policy, it has some unrealistic

assumptions.

1. The assumption of no external financing apart from retained earnings, for the firm

make further investments is not really followed in the real world.

2. The constant r and ke are seldom found in real life, because as and when a firm

invests more the business risks change.

GORDON'S MODEL

Myron J. Gordon has also supported dividend relevance and believes in regular

dividends affecting the share price of the firm.

Assumptions of the Gordon model

Gordon's assumptions are similar to the ones given by Walter. However, there are two

additional assumptions proposed by him :

1. The product of retention ratio b and the rate of return r gives us the growth rate of

the firm g.

2. The cost of capital ke, is not only constant but greater than the growth rate i.e.

ke>g.

Model description

Investor's are risk averse and believe that incomes from dividends are certain rather than

incomes from future capital gains, therefore they predict future capital gains to be risky

propositions. They discount the future capital gains at a higher rate than the firm's

earnings thereby, evaluating a higher value of the share. In short, when retention rate

increases, they require a higher discounting rate. Gordon has given a model similar to

Walter's where he has given a mathematical formula to determine price of the share.

Mathematical representation

The market price of the share is calculated as follows:

http://en.wikipedia.org/wiki/Myron_J._Gordonhttp://en.wikipedia.org/wiki/Myron_J._Gordon

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where,

P = Market price of the share

E = Earnings per share

b = Retention ratio (1 - payout ratio)

r = Rate of return on the firm's investments

ke = Cost of equity

br = Growth rate of the firm (g)

Therefore the model shows a relationship between the payout ratio, rate of return, cost of

capital and the market price of the share.

IRRELEVANCE MODEL OF DIVIDEND POLICY

TRADITIONAL APPROACH

Many finance and economics specialists believe that cash dividend

policy is unimportant because it is not relevant and does not affect the owners wealth.

The source of this belief is a study conducted by Miller and Modigliani (1961). This

study concludes that dividend policy has no effect on a companys value, and therefore

managers will not be able to maximize owners wealth through a dividend policy.

The irrelevance proposition concept for dividend policy on the owners

wealth stems from the fundamental idea that companies which distribute continuous high

cash dividends to shareholders therefore secure a higher share price (Lumby and Jones,

1999). As a result, investors capital gains are very limited in such a company as they

receive the same returns as other investors holding another companys shares with low

dividends while its prices become high because of the retained earnings. These investors

obtain high capital gains which compensates the limited cash dividends. In both cases, the

shareholders wealth is the profits obtained by cash dividend plus capital gains realizedfrom rising share prices. In case there are no taxes or where taxes on capital gains are

equal to dividends taxes, the investor will not be affected, whether or not the company

has paid cash dividends or kept the profit in retained earnings and the investor has

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obtained capital gains when selling his/her shares as a result of the rise in the price of the

companys shares through undistributed profits and with no change in the other effective

factors.

According to the irrelevance proposition, dividend policy affects only the level of

external financing required to finance future projects with a positive net present value.

This means that each dollar distributed to shareholders represents a capital loss of a

dollar. According to this hypothesis, the only constraint on the companys market

value is the companys investment policy, not which dividend policy the company

follows. This is because the investment policy is responsible for future profits (Miller

and Modigliani, 1961). Accordingly, the companys decision on the distribution of

cash or non-profit distribution would not affect the market value of the company and

therefore would not affect the owners wealth. This hypothesis recommends that

managers should give greater importance to the investment policy and let the dividend

policy follow the investment policy; which is known the Residual Dividend Policy.

The advocates of the irrelevance proposition hypothesis (Black and Scholes, 1974,

Miller and Scholes, 1978, Merton and Myron, 1982, Merton, 1986, Peter, 1996) adopt

the idea that an investor can build his/her own cash dividend policy regardless of

the companys dividend policy. This is known as the Homemade Dividend (Miller and

Modigliani, 1961) where investors can obtain income through selling part of his/her

shares equal to the value of cash profits that could have been distributed by the

company if the company does not have cash dividends and the investor himself

wishes to receive cash dividends to meet his consumer needs. The investor may wish also

to reinvest cash dividends distributed by the company if he/she shows no desire for cash

dividends. By following this method, the investor will not be affected by the companys

dividend policy, and therefore would not be compelled to abandon the stocks of

companies following a dividend policy which is not consistent with his/her wishes.

One of the criticisms of the irrelevance proposition hypothesis is that it cannot be

practically acceptable. The theory of building a dividend policy for each investor based

on an efficient market, with no transaction costs for buying and selling, is not practical

(Dempsey and Laber, 1992). In addition, the investor will pay taxes on cash dividends or

capital gains, making the adoption of a specific dividend policy for each investor a costly

process. In addition, investment in companies whose cash dividend policy is consistent

with investors needs is less expensive than building a special dividend policy.

Irrelevance proposition hypothesis is built on the basis that the investor is rational when

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taking his/her decisions. However, psychological tests prove that human beings are not

one hundred per cent rational with regard to decision-making. Shefrin and Statman (1984)

in their study argue that investors have an unreasonable preference regarding profit

dividends; this is not consistent with irrelevance proposition hypothesis. Irrelevance

proposition hypothesis is also criticised for assuming equality between cash dividends

and capital gains. The two are not equal as a cash dividend is cash in the hand without

any uncertainty risk, while a capital gain is cash in the future with considerable risk. So,

how can they be equal?

The irrelevance proposition hypothesis has been built on a set of assumptions that

have already been indicated. It is understood here that any change in these

assumptions would naturally lead to a change in the basic hypothesis and therefore

to a change in the results. Accordingly, and in practical terms, financial markets in

general do not agree with these assumptions

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MODIGLIANI AND MILLER

APPROACH:

Franco Modigliani was awarded Nobel prize in 1985 and Merton Miller in 1990

(along with Markowitz and Sharpe). M&M have theorised on the irrelevance of the

capital structure, and a corollary, irrelevance of the dividend payout ratio to the value of

the firm. Like several financial theories, M&M hypothesis is based on the argument of

efficient capital markets. In addition, we believe that a firm has two options:

(a) It retains earnings and finances its new investment plans with such retained

earnings; (b) It distributes dividends, and finances its new investment plans by

issuing new shares.

The intuitive background of the M&M approach is extremely simple, and in fact,

almost self- explanatory. It is based on the following propositions:

Why would a company retain earnings? Only tenable reason is that the

company has investment opportunities. If the company does not retain earnings,

where does it finance those investment opportunities from? We may assume a

.

Value of the firm (i.e wealth of shareholders)

Depends on Firm's earnings.

Depends on

Firm's investment policy and not on

dividend policy.

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debt issuance, but then as M&M otherwise propounded irrelevance of the capital

structure, they see a parity between debt and equity, and hence, it does not make

a difference whether the new investments are funded by equity or debt. So, let

us assume that the new growth plans are funded by equity.

Shareholders price the equity shares of the company to take into account the

earnings and the retentions of the company. If the company distributes dividends,

the shareholders take into account that fact in pricing of the shares; if the

company does not distribute dividends, that is also reflected in the pricing of the

shares.

If dividends are distributed, the financing needs of the company will be funded by

issuing new shares. The issue price of these shares will compensate for the fact

that the dividends have been distributed. That is to say, the market price of the

share will remain unaffected by whether the dividends have been distributed or

not.

Let us take a one year time horizon to understand the indifference argument of M&M. We

use the following new notations: