Ever since finance minister Arun Jaitley made an announcement in the Union Budget to levy a 10% tax on a dividend income of `10 lakh or more, Dalal Street has been flooded with dividend announcements. While in many cases companies have announced higher dividends compared to last year, in most cases they have advanced the dividend payout to March instead of April to help their investors beat the new tax.
As many as 318 listed companies have announced dividends worth `34,836 crore in March this year, as compared to just `5,669 crore by 27 firms in the same month last year. Usually, companies pay their final dividend after declaring their profits for the entire financial year — mostly in April or May.
As one would expect, the rush to pay high dividends and advancing their record dates was seen mainly in companies that have high promoter holdings. Of these 318 companies, promoters, cumulatively, hold nearly two-thirds of the total outstanding equity.
Sun TV, in which the promoter group holds a 75% stake, for instance, announced an interim dividend `7.5 a share in March, after having paid a dividend of `2 a share in February. Last year, without such a tax on dividend income, the company had announced its final dividend in April.
Similarly, Reliance Industries, which had paid a dividend of `1,463.9 crore for FY15 to its promoters in April, 2015, has paid a similar dividend of `1537.1 crore for FY16, but in the month of March, 2016.
A similar rise and advancing of dividend payouts by a large number of companies was last seen March, 2007, when the then finance minister P Chidambaram had increased the rate of dividend distribution tax (DDT) from 12.5% to 15% in Union Budget 2008. Interestingly, nearly a quarter of the 318 firms which have announced interim dividends this time had also featured on the 2007 list.
Since the government is the majority shareholder in many of the high dividend paying companies, the benefit of the new tax might not be much to the exchequer.