MARCH 11: Finance minister Yashwant Sinha's budget proposal for doubling the dividend tax payable by companies to 20 per cent has triggered a spate of interim dividend declarations by the Indian corporates.Over the last 10 days seven companies have declared interim dividends ranging between 15 per cent and 285 per cent (Rs 1.50 to Rs 28.50 on a share of Rs 10) and over a dozen other companies have announced board meetings over the next fortnight to declare interim dividends.In most cases, the reason for the scramble to announce interim dividend is to avoid the higher tax payment. According to the new provisions in Section 115-O, dividends which are declared, distributed or paid (whichever is earlier) on or after June 1, 2000, will attract a 20 per cent tax. Taking into account a 10 per cent surcharge, companies will have to effectively shell out 22 per cent tax on the dividend outgo. Of the 20-and-odd companies which are holding board meetings this month to consider interim dividend, only two - Asian Paints and Rhone Poulenc - had declared interim dividends last year.Interim dividends are easy to declare since company boards are empowered to do so. Final dividends, however, tend to be a long-drawn affair involving the holding of annual general meetings and approval of the audited balance sheet. Moreover, companies are required to give a 21-day notice to hold the AGM-again a time-consuming affair.According to tax practitioner Jayant M Thakur, companies with lower market prices may go in for a buyback of shares as this would lead to a lower tax outgo. Companies opting for buyback will be required to pay only 10 per cent long-term capital gains on the indexed cost of the shares. The final outflow may be anywhere from zero to five per cent, depending on how the company prices its buyback issue, Thakur pointed out.Sinha's move may force the corporates to change the profit-distribution strategies of corporates. While MNCs are likely to follow the present dividend policy as they pay dividends to their parent companies, Indian companies, on the other hand, may trim the dividend outgo to save cash outflows. "It all depends on how these companies communicate with the investors," said Thakur.Bonus shares may not replace dividends as it would lead to an increase in share capital. "Corporates must raise the level of net profit to maintain the dividend outgo as otherwise the share value of the companies would be affected," an industry analyst said.
