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SEBI told to ensure cos' compliance on interim

Shaji Vikraman
Hema Ramakrishnan

NEW DELHI, March 5

THE plans of scores of companies to pay interim dividends before March 31 is set to come unstuck as the Finance Ministry has advised the Securities and Exchange Board of India (SEBI) to ensure that the listing agreement is strictly complied with.

The advice from the Finance Ministry to SEBI was issued on Tuesday, just four days after the Union Budget, which proposed a shift in the incidence of taxation on dividends from the company to the shareholders. The Finance Ministry's move has been prompted by the stampede by companies to declare interim dividends to beat the March 31 deadline, after which the incidence of taxation on dividends will shift from the companies to the recipient or the shareholders.

The Union Budget for 2002-03 proposed the change in the incidence of taxation, provoking a show of alacrity by corporates.

The requirement of a notice period of 30 days forms part of the listing agreement under the Securities Contracts (Regulation) Act, 1956, which companies enter into with the stock exchanges where their scrips are listed. The Government wants to ensure that the listing agreement is not violated by companies in what is perceived to be an attempt at tax avoidance.

"We have advised SEBI to tell stock exchanges to go strictly by the rule book and not to grant such an exemption as it could possibly tantamount to tax avoidance,'' said a senior Government official.

Following the Government's move, the capital market regulator is expected to advise the stock exchanges not to condone the shorter notice given by companies for the board meetings and for fixing the record date.

The stock exchanges are well within their rights to refuse to grant an exemption to companies on this count.

From April 1 this year, the burden of taxation of dividends will fall on the recipient. Promoters holding large stakes in companies will also be liable to pay tax at the margin from that day.

The advice was given to SEBI by the Department of Economic Affairs (DEA) based on the views expressed by the Revenue Department. The Revenue Deparment, which has been closely monitoring the post-Budget stampede by companies to declare interim dividends, has said that it appeared that companies were taking recourse to this route to take advantage of the present state of withholding tax.

What this means is that if companies are able to complete the payment of dividend prior to March 31, 2002, shareholders will not be liable to pay tax at their end.

While today's developments will impact upon listed companies thanks to the SCRA, it is unclear how it will affect scores of unlisted companies which have declared interim dividends after the Budget.

Unlisted companies outnumber the listed companies on the bourses. The onus therefore will be on the Department of Company Affairs (DCA) in this case, officials reckon.

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