Indian govt seeks up to $2.2 bln dividend from Hindustan Zinc - sources

* 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 of up to $2.2 billion from partly state-owned Hindustan Zinc Ltd (BSE: 500188.BO - news) (HZL), three people with knowledge of the matter said, as New Delhi targets a boom in the base metal to help shore up crumbling public finances.

The government, which owns 29.5 percent of HZL, is pushing for a dividend of 100-150 billion rupees ($1.47-2.20 billion), to be paid by March 31, officials said, speaking on condition of anonymity.

Majority-owned by billionaire Anil Agarwal's Vedanta Resources Plc, HZL is sitting on about 360 billion rupees in surplus cash, they said, and would rather reward investors at least in part with a share buyback. At its latest share price, HZL's market capitalisation was about 1.2 trillion rupees, more than double its level this time last year.

The push comes as Prime Minister Narendra Modi's shock move to outlaw high-value bank notes late last year has squeezed the country's economy, straining finances at both government departments and state-run firms. On Monday, India's oil minister said the government is seeking higher dividend payouts from cash-rich oil marketing companies.

"We are looking at their accumulated profit, and we have been preparing to fight," a senior government official said. Government representatives may raise the issue at an HZL board meeting next month, the official said. That debate could fuel frustration at Vedanta, which has long wanted to take full control of the business.

HZL did not respond to a Reuters e-mail seeking comment.

In the previous financial year, buoyed by strong demand for zinc, used in everything from pharmaceuticals to batteries, HZL paid shareholders a record dividend. The government earned as much as 50 billion rupees from that payout, including the dividend distribution tax.

Between July and September, the company's net profit stood at 19.02 billion rupees, down about 15 percent. Analysts expect HZL to book a profit of about 76 billion rupees in the curent fiscal year.

But people directly involved in talks on the matter said that this year HZL is reluctant to pay shareholders a hefty dividend 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 in January 2016, when the government was instructed not to reduce its stake in HZL without seeking parliamentary approval.

The government has also sought legal opinion on whether it would 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 Kenneth Maxwell and Alexandra Hudson)