B Ltd. has an issued capital of 5 Crore equity shares of ₹10 each. The company has free reserves of ₹300 Crore. The stock price quoted in stock market is ₹300. The promotor holds 70% of the equity capital in the company.

CS Professional · Capital Commodity and Money Market · PYQS · December 2021
B Ltd. has an issued capital of 5 Crore equity shares of ₹10 each. The company has free reserves of ₹300 Crore. The stock price quoted in stock market is ₹300. The promotor holds 70% of the equity capital in the company. B Ltd. has decided to distribute part of its surplus cash to its shareholders. The company short-listed two options: (i) Declare a dividend of 160 percent. (ii) Buy-back 2,00,000 equity shares @ ₹400 per share by way of Tender Route. Comment on the following aspects: (a) Out of above two options which are more beneficial to the promotor for the purpose of taxation.

Answer & Explanation:

The Promoter holds 70% of 5 crore equity shares of ₹10 each i.e. 3,50,00,000 equity shares (3.5 crore). Dividend receivable 16 per share on 3.5 crore share = ₹56 crore Proportionate Buy-back amount 70% of 2,00,000 equity share = ₹56 crore Although amount is same but the dividend is taxable in the hands of Promoter while there is no tax on buy back of Shares. As such buy-back is more beneficial to the Promoter.

Topics: Corporate Finance

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