DDT removal step in right direction: Tyagi

The Securities and Exchange Board of India (Sebi) has welcomed the move by the government to shift the dividend taxation liability from companies to investors.

“Removal of dividend distribution tax (DDT) was something the market has been asking for. DDT was not logical. It was perhaps introduced to facilitate imposing tax at the unit stage. Ideally, it should be paid by the recipient as per their tax slab,” said Ajay Tyagi, chairman of Sebi, on the sidelines of an event organised by the National Stock Exchange (NSE) to launch the request for quote (RFQ) platform for debt securities.

The Budget announcement got a mixed response from the market. While removal of DDT will result in tax savings of 20 per cent for companies, promoters and other wealthy shareholders may be taxed as high as 43 per cent on the dividends they receive.

Analysts believe firm will now resort to buybacks instead of paying dividends.

Globally, dividends are taxed differently across geographies. While the US and Germany impose withholding tax on dividends, other markets like UK and Singapore don’t.

Meanwhile, Tyagi said Sebi has asked Franklin Templeton Mutual Fund to explain its decision to assign zero value to Vodafone Idea debentures even before any action was initiated by rating agencies.

“If the asset isn’t below investment grade, there is no stipulation as such. We have asked the fund house for an explanation,” he said when asked about the issue.

The action differed from peers UTI MF, Nippon MF, and Birla MF, which went for writedowns as per the valuation metrics provided by rating agencies. Tyagi wasn’t specific when asked if Sebi asked other fund houses for an explanation.

On the proposed share sale of LIC, Tyagi said the insurer will have to follow the same process as any other firm. He refused to comment further saying “no formulation has come to us yet”.

Tyagi also said Sebi is reviewing the classification framework meant for mid-cap and small-cap mutual funds.

On the launch of NSE’S new platform, he said, “The RFQ platform would definitely help in pre-trade transparency, bringing in core confidence among participants by providing exit route in the secondary market and bond market in a transparent manner.”