Mutual funds under Sebi scanner on dividend stripping

Mutual fund houses adopting 'dividend stripping' plan have come under the scanner of capital markets regulator Sebi for possible tax evasion.
The dividend stripping typically involves an investor buying a dividend plan of a mutual fund scheme, book a loss on it and then set it off against capital gains from other sources.
In a communication to the fund houses yesterday, the Securities and Exchange Board of India (Sebi) has asked them to respond by today if they were adopting such technique or not, senior official of an Assets Management Company said.
"The dividend stripping is largely being used for tax arbitrage by investors and mutual fund houses," he added.

The Sebi communication has cited a newspaper article 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 practice of 'bonus stripping', which had come under scanner for possible misuse of the bonus plans of mutual fund schemes for avoiding paying taxes.

Issuance of bonus units does not violate any regulation, but it is certainly against the spirit of regulation, which may come under scrutiny by regulatory authority sooner or later.