Fund houses have practically washed their hands of the practice of dividend stripping, with none of them admitting to any wrongdoing in their reply to market regulator Securities and Exchange Board of India (Sebi). On Wednesday, the regulator had asked fund houses to confirm in writing by Thursday if they were resorting to such a malpractice or not.
"Fund houses have said they are not indulging in such practice as of now. Nobody has gone into the past since the regulator's email does not specifically ask for past violations but only the current status," said a fund official.
A few fund houses have been guilty of dividend stripping in the past few months, said sector officials. From October to December, about Rs 6,000 crore has been collected in dividend stripping schemes, they said.
Experts believe that asking fund houses to admit in writing about the practice would essentially be a wasteful exercise unless Sebi looks into the allegations and appoints auditors to inspect the schemes/fund houses that have resorted to dividend stripping.
"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.
Dividend stripping refers to the practice of using dividends declared by a scheme to lower one's tax liability. Investors essentially pocket the dividend and show reduction in the net asset value (NAV) as capital loss to be adjusted against capital gains from any other investment.
As per current norms, investors can claim the notional loss caused by the 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 has warned a few fund houses on paying out high dividend yield and indulging in dividend stripping but AMCs have not taken the warning seriously," said the first official quoted above.
Dividend stripping has gained momentum after industry body Association of Mutual Funds in India asked fund houses to stop offering the bonus option as part of their schemes in May last year. Back then, Amfi had asked fund houses to stop the bonus plan option and stop taking money into such plans from immediate effect. This had virtually stopped the practice, resulting in some players shifting their attention to dividend stripping.
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