Alpha Ideas

Source:Manoj Nagpal

An investor was sitting in his Chennai office with a smug smile. He had recently concluded the sale of his stake in an electronics company to a private equity fund for over Rs.500 crore. But his smug smile was due to something else.

Out of the blue, he had received a call from a leading wealth management firm. The suave talking private banker at the other end of the line had succinctly explained to him how smart tax planning through a dividend strip could help him save a bulk of his tax liability. “Invest in a mutual fund scheme that will give a large dividend after three months. The dividend will create a notional book loss, get your money back after three months and your taxes disappear,” the private banker had put in simple terms to him.

To which the Chennai investor with wide eyes queried, “But isn’t a mutual fund for the long term, and how would we ever know which fund will declare a dividend after three months? Isn’t that illegal?” The private banker explained, “For a smart investor like you, we have all this information informally beforehand. That’s our cutting edge. And it’s not just one fund; I have this information for four mutual funds that are doing this in October itself—welcome to the world of mutual fund stripping.”

He finally invested Rs.140 crore in this dividend strip opportunity to create an accounting book loss of Rs.50 crore and save his taxes. (This is a true story and the situation narrated here is exactly as it happened.)

–wrote Manoj Nagpal