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 others have announced board meetings over the next fortnight to declare interim dividends.

In most cases, the reason for the scramble is to avoid the higher tax payment. According to the new provisions in Section 115-O of the Income-Tax Act, 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 the 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 an 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 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 shares. The final outflow may be anywhere from zero to 5 per cent, depending on how the company prices its buyback issue, Thakur pointed out.

Sinha's move may force corporates to change their profit-distribution strategies. While MNCs are likely to follow the present dividend policy as they pay dividends to their parent companies, local companies, on the other hand, may trim their dividend outgo to save cash outflows. "It all depends on how the companies communicate with investors," said Thakur.

Bonus shares may not replace dividends as it would lead to an increase in share capital. "Corporates must raise their level of net profit to maintain the dividend outgo as otherwise the share value of their companies would be affected," an industry analyst said.

INSIGHT :
Companies stand to gain

Studies have indicated that following the hike in dividend tax, the total tax rate for local companies can be higher than foreign companies in India. `Although it will be reflected "below the line", at 22 per cent the dividend tax rate is far too high. In most cases where companies have been declaring interim dividend, the rush could be-cash flows permitting-to avoid the additional 11 per cent imposed in the Finance Bill. The advantage of interim dividend is that it does not require a general meeting to approve it and a board meeting is sufficient. Hence, the rush to meet the May 31 deadline.