* Seeks payout by Mar 31 from partly owned HZL - sources
* HZL prefers some payout through share buyback - sources
* Buyback prospects uncertain due to legal hurdles
* Govt may press issue at HZL Feb board meeting - sources
By Neha Dasgupta
NEW DELHI, Jan 17 (Reuters) - India is seeking a dividend ofup to $2.2 billion from partly state-owned Hindustan Zinc Ltd(HZL), three people with knowledge of the matter said,as New Delhi targets a boom in the base metal to help shore upcrumbling public finances.
The government, which owns 29.5 percent of HZL, is pushingfor a dividend of 100-150 billion rupees ($1.47-2.20 billion),to be paid by March 31, officials said, speaking on condition ofanonymity.
Majority-owned by billionaire Anil Agarwal's VedantaResources Plc, HZL is sitting on about 360 billionrupees in surplus cash, they said, and would rather rewardinvestors at least in part with a share buyback. At its latestshare price, HZL's market capitalisation was about 1.2 trillionrupees, more than double its level this time last year.
The push comes as Prime Minister Narendra Modi's shock moveto outlaw high-value bank notes late last year has squeezed thecountry's economy, straining finances at both governmentdepartments and state-run firms. On Monday, India's oil ministersaid the government is seeking higher dividend payouts fromcash-rich oil marketing companies.
"We are looking at their accumulated profit, and we havebeen preparing to fight," a senior government official said.Government representatives may raise the issue at an HZL boardmeeting next month, the official said. That debate could fuelfrustration at Vedanta, which has long wanted to take fullcontrol of the business.
HZL did not respond to a Reuters e-mail seeking comment.
In the previous financial year, buoyed by strong demand forzinc, used in everything from pharmaceuticals to batteries, HZLpaid shareholders a record dividend. The government earned asmuch as 50 billion rupees from that payout, including thedividend distribution tax.
Between July and September, the company's net profit stoodat 19.02 billion rupees, down about 15 percent. Analysts expectHZL to book a profit of about 76 billion rupees in the curentfiscal year.
But people directly involved in talks on the matter saidthat this year HZL is reluctant to pay shareholders a heftydividend as it would attract a 20 percent tax payout. Instead,the company is keen to explore share buybacks.
However, a share buyback, reducing the government's holding,could run up against an order by the country's Supreme Court inJanuary 2016, when the government was instructed not to reduceits stake in HZL without seeking parliamentary approval.
The government has also sought legal opinion on whether itwould be allowed to dilute some of its holding in the company,the sources said. ($1 = 68.0400 Indian rupees)
(Additional reporting by Promit Mukherjee; Editing by KennethMaxwell and Alexandra Hudson)
