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Aarati Krishnan

BY deciding to tag a special dividend of Rs 2.76 per share along with the proposed bonus debenture issue, HLL appears to have found a neat way to compensate shareholders for the additional tax that they will have to bear as a result of the Budget proposal to tax dividends in the hands of the recipient.

With the bonus debentures being treated as deemed dividend, under the new tax laws, a shareholder in the 30 per cent tax bracket (31.5 per cent with the surcharge) would have to had to shell out a tax of Rs 1.89 upfront, on receipt of each bonus debenture with a face value of Rs 6.

The special dividend of Rs 2.76 per share, declared now, is intended to compensate shareholders for this outgo, apart from covering the tax liability on the special dividend itself (which would work out to Rs 0.87). The special dividend has been worked out to cover the tax liability for those in the highest tax bracket.

Shareholders in the 20 per cent and 10 per cent tax bracket would be in a position to retain a part of the special dividend for themselves, after meeting the tax liability on the bonus debentures.

While shareholders in the 20 per cent tax bracket will retain Rs 0.63 per share after meeting the dividend liability, those in the 10 per cent tax bracket will retain Rs 1.26 per share.

A good augury?

Apart from the decision to declare a special dividend, HLL has also made one important change to the bonus debenture proposal. It has announced that it now plans to redeem the debentures in just one instalment, instead of phasing it out over two, as contemplated earlier. Further, HLL has also advanced the date of redemption, resetting it to 18 months from the date of issue, as against the 24 and 36 months envisaged earlier. In doing so, HLL has denied itself the luxury of staggering the cash outgo arising from debenture redemption over the next two years and has instead braced itself to meet the entire liability in a single year — 2003.

Under the earlier proposal, HLL would have had to pay out around Rs 778 crore in 2003 and around Rs 719 crore in 2004 towards debenture redemption and interest.

Under the altered proposal, it may now have to shell out the entire lumpsum (of debenture redemption plus interest) totalling to Rs 1,440 crore in 2003 itself.

This can mean only one of two things. Either HLL has now become more confident of generating a higher level of cash flows within the next 18 months. Of the cash profits of Rs 2,088 crore generated by HLL in 2001, taxes and dividends alone absorbed Rs 1,500 crore. Clearly, HLL needs to generate much higher cash flows over 2002 and 2003, if it is to meet its tax liability, maintain dividends at Rs 5 per share and also spare enough cash to meet the interest and redemption payments on dividends, totalling Rs 1,440 crore.

Alternatively, the move could also mean that HLL now sees fewer opportunities for using the surplus cash it already carries in its balance sheet. When it first announced the bonus debenture proposal, HLL said that by staggering the redemption of debentures, it had the benefit of "retaining access to the cash for exploiting any business opportunity that may come up within the... timeframe of three years".

Now, by advancing the schedule for debenture redemption, is HLL signalling that it no longer needs the access to substantial cash surpluses over the next two years?

Or that it has given up hope of any big "business opportunities" arising over the next two years? Investors can take their pick, depending on how optimistic they are feeling at the moment.

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