MFs plead 'not guilty' to dividend stripping allegations

Officials says some fund houses are guilty as Rs 6,000 cr was collected in dividend stripping schemes in October-December

None of the country's fund houses admit to be doing any dividend stripping, they've each told the Securities and Exchange Board of India (Sebi).

On Wednesday, the regulator had asked fund houses to confirm by Thursday if they were. The term refers to the practice of using dividends declared by a scheme to lower one's tax liability. Investors, then, essentially pocket the dividend and show a reduction in the net asset value (NAV) as a capital loss, to be adjusted against capital gains from any other investment.

"Nobody has gone into the past, since the regulator’s e-mail does not specifically ask for past violations but only the current status,” said a fund official.  

A few had been guilty of doing this in recent months, said sector officials.  From October to December, about Rs 6,000 crore are estimated to have been collected in dividend stripping schemes, they said.

Experts say what Sebi just did is futile, unless it examines the allegations and appoints auditors to inspect the schemes or fund houses that are held to have done this.

“It is difficult to ascertain if prior information about dividend payout has been leaked to investors but any wrongdoing can be established, based on a spike in inflows prior to the record date, a high dividend yield and outflows immediately after the dividend payout,” said another fund official.

By current norms, investors can claim a notional loss caused by a dividend payment if the units are bought three months before the record date or are held for at least nine months after the dividend is paid.

“In the past, Amfi (association of Mutual Funds in India) has warned a few fund houses but AMCs (asset management companies) have not taken the warning seriously,” said the first official quoted earlier.

The practice is held to have gained momentum after Amfi asked fund houses last May to stop offering a bonus option as part of their schemes, and stop taking money into such plans from immediate effect. This is supposed to have halted the practice.