RBI prescribes guidelines for dividend pay-out by NBFCs
28 Jun 2021
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Reserve Bank of India (RBI) has prescribed certain guidelines on distribution of dividend by non-banking finance companies (NBFCs) in order to infuse greater transparency and uniformity in the practice of dividend distribution.
RBI said these guidelines will be applicable to all NBFCs regulated by RBI, including systemically important non-deposit taking companies and deposit taking companies; and non-systemically important non-deposit taking companies.
These guidelines will be effective for declaration of dividend from the profits of the financial year ending 31 March 2022 and onwards, RBI said.
The board of directors of an NBFC shall, while considering the proposal for dividend, take into account the supervisory findings of the Reserve Bank (National Housing Bank (NHB) for HFCs) on divergence in classification and provisioning for non-performing assets (NPAs), qualifications in the auditors’ report to the financial statements and long term growth plans of the NBFC.
The board should ensure that the total dividend proposed for the financial year does not exceed the ceilings specified in these guidelines.
To be eligible for dividend pay-out NBFCs should meet minimum prudential requirements.
NBFCs (other than standalone primary dealers) should have met the applicable regulatory capital requirement for each of the last three financial years, including the financial year for which the dividend is proposed.
Standalone primary dealers (SPDs) should have maintained a minimum CRAR of 20 per cent for the financial year (all the four quarters) for which dividend is proposed.
The net NPA ratio should be less than 6 per cent in each of the last three years, including as at the close of the financial year for which dividend is proposed to be declared.
NBFCs should comply with the provisions of Section 45 IC of the Reserve Bank of India Act, 1934 while HFCs should comply with the provisions of Section 29 C of The National Housing Bank Act, 1987.
NBFCs should be compliant with the prevailing regulations/ guidelines issued by the Reserve Bank. Also, the Reserve Bank or the NHB (for HFCs) shall not have placed any explicit restrictions on declaration of dividend.
NBFCs eligible to declare dividend may pay dividend, subject to the following:
(a) The Dividend Payout Ratio is the ratio between the amount of the dividend payable in a year and the net profit as per the audited financial statements for the financial year for which the dividend is proposed.
(b) Proposed dividend should include both dividend on equity shares and compulsorily convertible preference shares eligible for inclusion in Tier 1 Capital.
(c) In case the net profit for the relevant period includes any exceptional and/or extra-ordinary profits/ income or the financial statements are qualified (including ’emphasis of matter’) by the statutory auditor that indicates an overstatement of net profit, the same should be reduced from net profits while determining the dividend payout ratio.
Ceilings on dividend payout ratio
There is no ceiling on the maximum dividend payout ratio (percentage) for NBFCs that do not accept public funds and do not have any customer interface while it has been fixed at 60 per cent for Core Investment Companies and Standalone Primary Dealers and at 50 per cent for other NBFCs.
RBI said it will not entertain any request for ad-hoc dispensation on declaration of dividend.
An NBFC (other than SPD), which does not meet the applicable prudential requirement prescribed for each of the last three financial years, may be eligible to declare dividend, subject to a cap of 10 per cent on the dividend payout ratio, provided the NBFC meets the applicable capital adequacy requirement in the financial year for which it proposes to pay dividend and has net NPA of less than 4 per cent as at the close of the financial year.
As per extant regulations, in case of SPDs which have a CRAR at or above the regulatory minimum of 15 per cent during each of the quarters of the previous year, but lower than 20 per cent in any of those quarters, the dividend payout ratio shall not exceed 33.3 per cent.
NBFC-D, NBFC-ND-SI, HFC and CIC declaring dividend should report details of dividend declared during the financial year as per the prescribed format. The report shall be furnished within a fortnight after declaration of dividend to the Regional Office of the Department of Supervision of the Reserve Bank/ Department of Supervision of NHB, under whose jurisdiction it is registered.
