Mutual funds plead 'not guilty' in dividend stripping case

Dividend stripping is illicit practice applied for possible tax evasion through investments in mutual funds

Facing scrutiny by the government and the regulator Sebi, fund houses have pleaded 'not guilty' to allegations of indulging in 'dividend stripping' - an illicit practice used for possible tax evasion through investments in mutual funds.
The matter is likely to be discussed later this week at a board meeting of mutual fund industry body and front-line regulator AMFI (Association of Mutual Funds in India).
Dividend stripping typically involves an investor buying a dividend plan of a mutual fund scheme, booking a loss on it and then set it off against capital gains from other sources.
Citing some media reports on this matter, the government recently wrote to the Securities and Exchange Board of India (Sebi), which is mandated to regulate mutual fund space, to look into the matter and take appropriate actions.

Subsequently, Sebi wrote to the fund houses last week, seeking their clarification on whether they were indulging in 'dividend stripping'.
In their respective responses, most of the fund houses have stated that they were not adopting any such techniques.

A few others have been more careful in their responses and have said they were not aware of any such activities but would take strict action and report the same to Sebi if anything of this sort came out during their internal probes.
Privately, senior executives at some fund houses, however, admit that dividend stripping was indeed taking place and such techniques were largely being used for tax arbitrage by investors and mutual fund houses.

The fund houses have now decided to discuss the matter at the industry level on the AMFI platform and some of them want to take a collective stand through the industry body in their communications and meetings with Sebi and with the government.
As per reports, about Rs 25,500 crore was collected in dividend stripping schemes between April 2014 and October 2015, creating an accounting book loss of over Rs 8,400 crore.
Sebi Chairman U K Sinha said last week that rules were in place to check such practices but strict action will be taken against those violating them.
"Our rules are very clear and if they are followed it is impossible for them to do any stripping. But if somebody has violated it, they will face the consequences," Sinha told PTI on the sidelines of an event in Mumbai.

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, AMFI had asked fund houses to check the practice of 'bonus stripping', which had come under scanner for possible misuse of bonus plans of MF schemes to evade taxes.