India Inc is on a payout spree, before the new 10 per cent tax on dividend income kicks in on April 1. Since the tax was announced on Monday, Budget Day, some 50 companies listed on the BSE have declared that they are considering paying an interim dividend before the month ends.
Some have even set record dates for later in March, in a rush to beat the April 1 deadline.
Finance Minister Arun Jaitley has proposed in Budget 2016-17 that if the dividend income earned by a resident individual, HUF or firm exceeds ₹10 lakh, it will be taxed at the rate of 10 per cent in the hands of the recipient. That comes on top of the Dividend Distribution Tax (DDT) already in force –– which is effectively 20.36 per cent (including surcharge and cess). But it is the company that is charged the DDT; the dividend was exempt in the hands of the shareholder.
Suven Life Sciences, Allcargo Logistics, Godrej Industries, Zydus Wellness, Divi’s Laboratories and Navneet Education are among those that have already announced plans to offer dividends this month.
A BusinessLine analysis revealed that investors are also clamouring to buy these dividend stocks, with about 16 of the total sample of 50 scrips seeing a sudden price surge in the range of 8-33 per cent. In the same period, the broader market moved up between five and eight per cent. Suven Life Sciences was the biggest gainer at 33 per cent.
Significantly, of the 20 stocks that gained the most, 15 have promoter shareholding of over 50 per cent.
For instance, promoters held 59.57 per cent of Suven Life Sciences as on December 31.
The pace of dividend declaration this week is unusual because March is generally a lean month for such announcements. For instance, only 27 companies declared dividends all through March 2015.
Not the first time
This, however, is not the first time a Union Budget is triggering a flurry of dividend payments. Prithvi Haldea, Chairman, Prime Database, recalls that after the 2007-08 Budget, when then Finance Minister P Chidambaram raised the Dividend Distribution Tax rate from 12.5 per cent to 15 per cent, as many as 187 companies paid out dividends. Compare this with 22 companies in March 2006 and 14 in March 2008.
“Companies will use this month to pay out dividends for next year in advance and save the additional tax for large shareholders,” Haldea said. “They are just taking advantage of the tax rate difference between March and April.”
Shares of companies with high dividend yields, including biggies such as National Aluminium Company, NMDC and Infosys, also gained up to 13 per cent, outperforming the broader markets. High dividend-paying companies like Tata Consultancy Services, ITC, Hindustan Unilever and Wipro too gained up to 15 per cent, though this could be part of the broader rally seen post-Budget.
The Centrum report expects many more companies to pay out dividends this month. Beginning April, it says companies would adopt the share buyback option to use free cash reserves rather than pay high dividends.