Finance Minister Jaswant Singh's announcement on dividend being tax-free in the hands of shareholders may mean a Rs 440 crore (Rs 4.40 billion) windfall for Hindustan Lever Ltd, India's largest consumer products company.

Hindustan Lever may have to make changes in its Rs 1,928 crore (Rs 19.28 billion) bonus debenture scheme, as the Budget announcement has made the purpose of the special dividend, meant to offset the tax incidence of Rs 2.76 a share, redundant.

The special dividend entailed an outgo of Rs 608 crore (Rs 6.08 billion) for the company. But considering that Hindustan Lever will now have to pay a dividend distribution tax of 12.8 per cent, including the surcharge, or around Rs 170 crore (Rs 1.70 billion), the net benefit to the company will be around Rs 440 crore.

"The Hindustan Lever board will look at ways to rework the terms of the bonus debenture issue," a company executive said.

Hindustan Lever was awaiting approval by the Reserve Bank of India before finalising the record date for the allotment of the debentures, having got an approval from the Bombay high court. The special dividend of Rs 2.76 was scheduled to be paid on the day of allotment.

The company had announced in October 2001 that investors would be allotted bonus debentures that had a face value of Rs 6 for every one equity share held.

Since such an allotment is treated as 'deemed dividend' for tax purposes, the company had also provided for dividend distribution tax at the then applicable rates of 10.2 per cent.

However, after Yashwant Sinha's 2002-03 Budget transferred the incidence of tax to the dividend recipient, Hindustan Lever modified its scheme to include the special dividend to compensate shareholders for any tax outgo on account of the bonus issue.