The Reserve Bank of India (RBI) on Wednesday released draft suggestions for distribution of dividend by non-banking economic corporations (NBFCs). The draft sets thresholds in terms of capital adequacy and non performing assets (NPAs) for NBFCs to be eligible to distribute dividends. However, the draft also tends to make exceptions for distinct circumstances and sets the dividend payout ratio for every of them. The suggestions will be applicable for dividend to be declared FY21 onwards.
In order to be in a position to declare dividend, deposit taking NBFCs (NBFC-D) and systemically critical non-deposit taking NBFCs (NBFC-ND-SI) must have a capital to danger-weighted assets ratio (CRAR) of at least 15% for the final 3 years, which includes the accounting year for which it proposes to declare dividend. Non-systemically critical non-deposit taking NBFCs (NBFC-ND) must have a leverage ratio of significantly less than 7 for the final 3 years, which includes the accounting year for which it proposes to declare dividend.
Core investment corporations (CICs) must have an adjusted net worth (ANW) of at least 30% of its aggregate danger weighted assets on balance sheet and danger adjusted worth of off -balance sheet things for the final 3 years, which includes the accounting year for which it proposes to declare dividend.
The net NPA ratio must be significantly less than 6% in every of the final 3 years, which includes the accounting year for which the corporation proposes to declare dividend. The corporation have to also comply with provisions of Section 45 IC of the RBI Act, 1934 and with prevailing regulations and suggestions issued by the RBI. The proposed dividend must be payable only out of the existing year’s profit and the RBI must not have placed any explicit restrictions on the NBFC on declaration of dividend.
However, if the CRAR, leverage or ANW norms are not met in the earlier two years, the applicable NBFCs and CICs would be eligible to spend dividend as per terms set out in two annexes to the draft suggestions. To be in a position to do so, they must have accomplished the minimum regulatory CRAR, leverage and ANW norms and their net NPA have to be significantly less than 4% in the accounting year for which they propose to declare dividend.
In case the profit for the relevant period involves any extraordinary earnings or earnings, the payout ratio shall be computed just after excluding such things. The economic statements pertaining to the year for which the NBFC is declaring dividend must be no cost of any qualifications by the auditors which have an adverse bearing on the profit throughout that year. In case of any qualification to that impact, the net profit must be suitably adjusted when computing the dividend spend-out ratio. In case, topic to meeting the minimum regulatory requirement, an NBFC has a distinct CRAR and a CIC has distinct ANW in the final 3 years, dividend payout will be determined primarily based on the lowest CRAR or ANW. The dividend payout ratio shall be calculated as a percentage of dividend payable in a year to net profit throughout the year.
The terms for exemption will not be applicable to NBFC-NDs and Type I NBFCs. Type I NBFCs are NBFC-NDs which neither accept public funds nor intend to accept public funds in the future and neither have client interface nor intend to have client interface in the future. “While NBFC-ND may declare dividend subject to a ceiling of 50% on the dividend pay-out ratio, as per the Board approved policy, Type I NBFC shall not be subject to any ceiling on the dividend pay-out,” the draft mentioned.
A copy of these suggestions have to be placed just before the board of the NBFC at its subsequent meeting. While deciding on the policy for declaring dividends, the board must take into account the interests of all stakeholders, the supervisory findings of the RBI with regard to divergence in identification of NPAs and shortfall in provisioning, the auditors’ qualifications pertaining to the statement of accounts, and the NBFC’s extended-term development plans.
For standalone main dealers (SPDs) possessing CRAR at 20% or above throughout all the 4 quarters of the accounting year in which dividend is proposed, the dividend spend-out ratio shall not exceed 60%. “The Reserve Bank will not entertain any request for ad-hoc dispensation on declaration of dividend from SPDs,” the draft mentioned.