The Reserve Bank on Thursday issued guidelines on distribution of dividends by non-banking financial companies (NBFCs) in order to infuse greater transparency and uniformity in the practice.
The guidelines shall be effective for declaration of dividend from the profits of the financial year ending March 31, 2022 and onwards. These will be applicable to NFBCs regulated by the RBI.
As per the minimum prudential requirements prescribed for declaration of dividend, the net NPA ratio of the NBFC concerned shall be less than 6 per cent in each of the last three years, including as at the close of the financial year for which the dividend is proposed to be declared.
Also, 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.
The guidelines also prescribe ceilings on dividend payout ratios for NBFCs.
For an NBFC which is a core investment company, the maximum dividend payout ratio could be 60 per cent and 50 per cent for other NBFCs. However, there is no ceiling specified for NBFCs that do not accept public funds and do not have any customer interface.
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.
The proposed dividend shall include both dividend on equity shares and compulsorily convertible preference shares eligible for inclusion in Tier 1 capital, RBI said.
In case the net profit for the relevant period includes any exceptional and/or extraordinary profits/ income or the financial statements are qualified by the statutory auditor that indicates an overstatement of net profit, the same shall be reduced from net profits while determining the dividend payout ratio.
NFBCs will also have to report details of dividend declared during the financial year to the RBI.
The Board of Directors of the NBFC, while considering the proposals for dividend, will take into account supervisory findings of the RBI (National Housing Bank (NHB) for HFCs) on divergence in classification and provisioning for Non-Performing Assets (NPAs).
The board will also have to take long-term growth plans of the NBFC.
Among others, the guidelines will be applicable on housing finance companies (HFCs), core investment companies, government NBFCs, mortgage guarantee companies, standalone primary dealers, NBFC - peer to peer lending platform and NBFC - account aggregator.