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Can dividend declarations be a zero-sum game?
March, 22nd 2007
March has been seeing a double march of dividend announcements from corporates. To know if the calculations that lie behind the dividend decisions will pan out to the advantage of companies, Business Line contacted Mr P.K. Vijayaraghavan, Associate Director at PricewaterhouseCoopers Private Ltd, Chennai.

He advises on corporate tax, expatriate tax, withholding tax and regulatory matters on inbound and outbound investments, and has experience spanning well over a decade covering a wide spectrum of industries and services.

"The spate of announcements of interim dividend by companies including some of public sector banks in reaction to the recent budget proposal to raise the rate of DDT (Dividend Distribution Tax) by about 3 per cent, 2.97 per cent to be precise, effective April 1, is not something inexplicable," he says. "It is indeed a commendable decision towards attempting to minimise the tax cost on declaration of final dividend after book closure that will take place after March 31."

Cost of funds

Will the rush in paying interim dividend pay out before the end of the month pay dividend? "Though no one can have any qualm on the widely prevalent practice, a closer analysis might reveal the bargain would not really pay dividends when the cost of funds utilised for the pay out is factored into the final calculation," opines Mr Vijayaraghavan.

If the opportunity cost of funds utilised for such pay out during the period between the interim and final dividend pay out dates is imputed in the calculation, it might wipe out the saving in tax cost let alone square it up, he explains. "The longer the time interval, the more severe the losses on this account would be in the present scenario of shooting interest rates and drying liquidity, providing attractive opportunities for deploying surplus funds." Liquidity crunch is visible in the wild spikes that call rates have been experiencing, of late.

Mr Vijayaraghavan suggests that it would be in fitness of things to stop over and think twice before making a final move, since treasury and tax management have to work in tandem to optimise costs to ensure maximisation of wealth for the shareholders.

"At the end of the day, it might be a zero-sum game with no real benefit accruing out of the exercise unless it is driven by other considerations. A deferred decision may not be worse than regretting a hasty one," he reasons.

D. Murali

 
 
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