A slew of listed companies have declared more than Rs4,600 crore of interim dividends in the first two weeks of March since finance minister P. Chidambaram raised the dividend distribution tax from 12.5% to 15% in the 28 February Budget.
Since the Budget is yet to be passed by Parliament and the hike in tax is designed to take effect only from the new financial year in April 2007, many companies are rushing to pay dividends on the basis of projected profits for the financial year ending 31 March 2007. Normally, companies declare dividends after the financial year is over and accounts are audited. This is because dividends are paid out of profits left over after all other claimants have been paid their dues and therefore depend on the amount of net profit earned in the year.
The large sum of dividends declared also signals that listed companies are confident of high profitability in the current fiscal. However, the rush to pay dividends now may also mean that there may be little or no final dividends paid when the accounts are audited. In other words, the interim dividends paid are in lieu of the final dividends for most of the firms.
India’s largest private sector company Reliance Industries, also among the most financially savvy corporates, has announced a Rs1,533.4 crore dividend that is around 33% of the total dividends declared. The second-highest dividend declared so far is by GAIL (India) at Rs211.41 crore. It is followed by RIL-controlled IPCL at Rs181.2 crore.
Thus the top three dividend payees so far hail from the oil and gas sector, a reflection of the high petroleum prices still prevailing worldwide.
Analysts expect the wave of companies declaring dividends to surge further in the second half of the month with Suzlon Energy, which has made a bid for German Repower, declaring a 50% interim dividend payable on the face value of shares. Over 200 firms so far have announced that they will hold board meetings this month to consider payment of interim dividends to their shareholders. Some of them are even paying second interim dividends.
An increase in the dividend distribution tax would force firms to cut the dividend paid to absorb the increase in tax payable by the firm. Dividends are tax-free in the hands of shareholders. For instance, if a firm was paying Rs100 as dividend, investors would get Rs87.5 now but post-1 April, this figure will fall to Rs85.