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India Inc not keen to save on dividend tax
March, 12th 2007
Less than 5% of listed cos plan to pay interim

Costly option
Cash flow crucial to decision on interim
Organising free cash may be costly exercise
Bank strike may hinder distribution of dividend

Why have only a handful out of 5,000 plus listed companies opted for interim dividend in March itself, while the majority is not utilising the opportunity to save on tax?

As per quick estimates, less than five per cent of the listed companies have either initiated moves to recommend an interim dividend or have already declared it this month till date.

Among the 30 Sensex companies, only four - Reliance Industries, Hindalco, Grasim Industries and L&T - have blinked.

According to an impact analysis done by KPMG on the Budget proposals, the effective incidence of tax (additional secondary and higher education cess to be levied at one per cent and surcharge) on the dividend distribution at the corporate level has been hiked by about three percentage points from 14.025 per cent to 16.995 per cent.

As the Budget proposals would come into effect from April 1, March had provided an opportunity for tax savings to corporates on the dividend payout.

However, according to a senior official of a Sensex company, apart from the simple arithmetic on the saving there are various factors that may not favour such a hasty call within a timeframe of 31 days.

"The protocols of declaring dividend involve a number of steps from calling of a board meeting till actual distribution.

"Moreover, a corporate financial decision depends on a comparative study of interest cost and the so-called savings on tax."

The Company Secretary of a BSE 200 company said that considering the number of working days available in view of the strike called by some of the bank unions between March 20 and March 30, it may actually be difficult to distribute the dividend before the end of the month.

Mr Ketan Dalal, senior partner of consulting firm RSM, said that the current cash flow and management of shareholders' expectations are also crucial inputs in arriving at such a decision.

Consequent to the high yields being offered (11-11.75 per cent for tenures between 90 days and one year), the last few weeks have seen large accretions of bulk corporate deposits.

In view of this, organising free cash for dividend distribution might prove costlier than the notional tax saved, banking sources said.

The recent acceleration in wholesale deposit accretion was supported by data from the Reserve Bank of India's liquidity adjustment facility auction.

At Friday's auction, the RBI mopped up Rs 26,000 crore for three days.

The migration into bank deposits in recent weeks has been evident from figures released in the weekly statistical supplement of the RBI too.

In the February 16-23 period, the aggregate deposits rose by Rs 38,806 crore. During the period, time deposits alone shot up by over Rs 20,000 crore, almost entirely by way of bulk deposits from corporates, bankers said.

Jayanta Mallick
C. Shivkumar

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