Dividend distribution tax proposal comes into effect from April 1

It is the first and most tempting thing to do, but may not be quite possible, says the Chief Financial Officer of a mid-sized company, when asked if companies were likely to rush in and announce interim dividends before April 1, following the increase in the dividend distribution tax (DDT).

This Budget had increased the DDT by 2.5 per cent from 12.5 to 15 per cent and some analysts were of the opinion that there would be a spate of companies rushing in to announce interim dividends by March 31, when it comes into effect. By announcing a dividend in the current financial year, companies would not attract the additional tax burden.

But a company official points out that the last time such a scramble had taken place was when DDT was introduced some years ago. The proposal was to come into effect in June and that gave companies time to announce interim dividends. The Union Finance Ministry had to finally step in to stem the scramble, he recounts.

But once bitten, twice shy and this year the Ministry has not given companies the liberty of time, as the DDT proposal comes into effect from April 1.

Mr N. Santhanam, Group-President (Legal) and Chief Financial Officer, Nicholas Piramal India Ltd, quite agrees. If a listed company had to declare an interim dividend, it requires three weeks to inform the stock exchanges.

And that makes it difficult. Companies with F&O scrips, need 30 days notice and for them it becomes physically impossible to declare an interim dividend by April, he said.

Also, it is an incremental increase of about 3 per cent and companies are unlikely to scurry in for interim dividends, Mr Santhanam said. It would be bad corporate governance, he added.

A stock market analyst echoes this assessment, in that companies may not rush in for an interim dividend before March 31. The large dividend payers are the public sector units and the large oil PSUs, for instance, have announced their interim dividends.

Companies in the FMCG (fast-moving consumer goods) and pharma sector, for example, with a December year-ending, may still look at the prospect of giving a dividend, he said.

Though some companies may go in for an interim dividend, responding to the Budget's announcement, it is unlikely that the big listed companies will rush in to do the same by the end of the month, he said.