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Dividend Stripping on backburner

A volatile equity market has soured the plans of AMCs, which planned to earn a quick buck with dividend stripping this month. Dividend stripping will be plugged from April 1, 2001, when the budgetary proposals for the new fiscal come into effect.

A volatile equity market has soured the plans of asset management companies, which planned to earn a quick buck with dividend stripping this month. Dividend stripping will be plugged from April 1, 2001, when the budgetary proposals for the new fiscal come into effect. The current fiscal saw rampant dividend stripping with AMCs breaking short-term investments into a tax-free dividend and redemption amount, thus facilitating a notional loss. The "loss" is then offset against capital gains. The government was the biggest loser here and lost crores of tax revenue.

From April 1 however, any investor, who invests in a fund within three-months of declaration of record-date for a dividend and exits within three-months after the record date, cannot adjust the "loss" to the extent of dividend declared against capital gains. Thus, the investor will have to pay the applicable tax-rate on his profit from the sale of an asset. In case the loss is more than the dividend declared, then such excess only will be allowed as a short-term capital loss. Still, if an investor wants to strip dividend, he will have to expose his investments to the vagaries of the market for a long tenure.

"The equity markets are very volatile and big ticket investors are now scared to invest. Even though they will be exposed only to a day's risk, the market has been losing anywhere between 4-6% in a day. Thus, they do not want to risk their investments,'' says a market intermediary. A rough estimate reveal that as many as seven mutual funds had planned to declare a dividend in their balanced and equity funds to attract dividend strippers.

Before the current bout of volatility hit the markets, high networth investors were paying only nominal entry and exit loads to mutual funds for incurring a "notional" loss on their investment. Here too, AMCs retain only a small portion of load earnings and return the rest to investor and intermediary as an incentive. Thus, there was hardly any outflow for the investor compared to tax rates of as high as 38% while the AMCs earned sizeable income owing to sizeable inflows.