MFs found dividend stripping will face action: Sebi chief

Seeking clarification from mutual funds on allegations of 'dividend stripping', capital markets regulator Sebi chairman U K Sinha said action will be taken against those violating rules.
The government has sought a report from the Securities and Exchange Board of India on possible adoption of dividend stripping plan by mutual funds for possible tax evasion and it has sought clarification from mutual funds on the issue, he said.
"Our rules are very clear and if they are followed it is impossible for them to do any stripping," Sinha told PTI.
"But if somebody has violated it, they will face the consequences," he added.

Dividend stripping typically involves an investor buying a dividend plan of a mutual fund scheme, booking a loss on it and setting it off against capital gains from other sources.
The fund houses which had received communication from Sebi yesterday seeking clarification on the issue are expected to respond today on whether they have indulged in dividend stripping or not.

The Sebi communication to mutual funds has cited a media report which stated that during April 2014 and October 2015, about Rs 25,500 crore was collected in dividend stripping schemes, creating an accounting book loss of over Rs 8,400 crore.

Under the current norms, an investor can claim notional loss caused by a dividend payment if the units are purchased three months before the record date or are held for at least nine months after the dividend is paid.
In May, industry body Association of Mutual Funds in India (Amfi) had asked fund houses to check the practise of 'bonus stripping', which had come under scanner for possible misuse of the bonus plans of mutual fund schemes for avoiding taxes.