Tuesday, August 3, 2021

RBI issues guidelines for dividend distribution by NBFCs

The Reserve Bank of India (RBI) on Thursday issued guidelines on the distribution of dividend by non-banking financial companies (NBFCs) to infuse greater transparency and uniformity in the practice.

The guidelines will be effective for the declaration of dividend from the profits of the financial year ending March 31, 2022, and onwards.

NPA ratio should be less than 6% for dividend declaration

The guidelines will be applicable to NFBCs regulated by RBI. As per the prescribed minimum prudential requirements for declaration of dividend, the net NPA ratio of the concerned NBFC should be less than 6 per cent in each of the last three years, including the end of the financial year for which the dividend is proposed to be declared.

Also, NBFCs should meet the applicable regulatory capital requirement for each of the last three financial years, including the financial year for which the dividend is proposed. The guidelines prescribe a ceiling on the dividend payout ratio for NBFCs.

Dividend payout ratio for different NBFCs

For an NBFC which is a core investment company, the maximum dividend payout ratio can be 60 per cent. For other NBFCs, the dividend payout ratio can be 50 per cent. However, there is no limit specified for NBFCs that do not accept public funds and do not have a customer interface.

RBI said the proposed dividend would include both dividend on equity shares and compulsorily convertible preference shares eligible for inclusion in Tier 1 capital.

Other income will not include in profit for dividend distribution

In case the net profit for the relevant period includes any extraordinary profit/income or the financial statements are qualified by the statutory auditor which indicates overstatement of net profit, it shall be deducted from the net profit while determining the dividend payout ratio. NBFCs will also have to furnish RBI with the details of dividend declared during the financial year.

Dividend Payout Ratio

The dividend payout ratio is the ratio of the total amount of dividends paid to shareholders relative to a company’s net income. It is the percentage of earnings paid to shareholders in dividends. The amounts not paid to shareholders are kept by the company, to pay off debt or to reinvest in core operations.

The dividend payout ratio indicates how much money a company is returning to shareholders versus how much it is on hand to reinvest in growth, pay off debt, or add to cash reserves (retained earnings).

Non-Banking Finance Companies (NBFCs)

Non-Banking Financial Companies are financial institutions which do not have banking license from RBI but still provide bank-like financial services like loans, credit facility, retirement planning etc.

The NBFCs do not include businesses whose principal businesses are:

  • Agricultural activity
  • Industrial activity
  • Purchase or sale of any goods other than securities
  • Sale/purchase/construction of any immovable property – rendering of any service

Principal Business: The Reserve Bank of India has defined financial activity as a core business to bring clarity to the entities that will be monitored and regulated as NBFCs under the RBI Act. The criteria are called the 50-50 test and are as follows:

The financial assets of the company should be 50% of the total assets.
Income from financial assets should be 50% of the total income. It is governed by the Ministry of Corporate Affairs as well as the Reserve Bank of India. The license to operate is obtained from RBI and it is incorporated as a company under the applicable laws of the country.

NBFCs that do not register with RBI

The following NBFCs are not required to obtain any registration with the Reserve Bank of India in view that they are regulated by other regulators:

  • Core Investment Companies – (Assets are less than 100 crores or public funds have not been taken)
  • Companies engaged in the business of stockbroking
  • Housing Finance Companies
  • Merchant Banking Companies
  • Companies engaged in the business of venture capital
  • Insurance companies holding a certificate of registration issued by IRDA
  • Chit fund companies as defined in clause (b) of section 2 of the Chit Funds Act, 1982
  • Nidhi companies notified under section 620(a) of the Companies Act 1956
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