Declaration of Dividend by NBFC

Narendra Kumar

25 Sep, 2020

For the declaration of dividend by NBFC, it is mandatory to transfer 20% of PAT to a reserve fund.

What is Dividend by NBFC?

The dividend is the payment entitled to receive by the shareholders, usually in the form of distribution of its profits. The profits earned by the Company can either be retained in business or used for acquisitions, expansion or diversification, or it can be distributed to the shareholders. The Company has the discretion to retain a part of its profits and distribute the balance to its shareholders as a dividend.

What are the applicable Regulations?

• Companies Act provisions related to the Declaration and Payment of Dividend
• Reserve Fund requirements as directed by RBI for NBFC^[1].

Class of shares and Category of Dividends

The company can declare the dividend to both class of shares that is Equity or preference.

The dividend is classified into three categories namely Interim dividend, Final dividend, Preference share Dividend.

The Board has the absolute power to declare interim dividend during the financial year, as and when they consider it fit. Normally, the Board endeavors to declare an interim dividend after finalization of quarterly financial accounts. The Board may declare an interim dividend based on profits of the Company, one or more times in a financial year as and when considered appropriate.

After the annual accounts are prepared, the Board may recommend the final dividend to the shareholders for their approval in the General Meeting of the Company. In the event the Board declares more than one interim dividend in a financial year, the Board may recommend to the shareholder to treat the last interim dividend as a final Dividend.

What is the Source for payment of Dividend?

The dividend by NBFC can be paid out of Followings:

• Profit of the current year after providing for the depreciation.
• Profit of the previous financial year or years after providing for depreciation for previous years.
• Out of the money provided by Central or State Government for payment of a dividend in pursuance of the guarantee given by that, if any.

Creation of Reserve Fund as stipulated by RBI

• Every non-banking financial company shall create a reserve fund.
• NBFCs shall transfer a sum not less than 20 percent of its net profit every year in such reserve fund.
• The same shall be disclosed in the profit and loss account and before any dividend is declared.
• NBFC irrespective of the fact whether it accepts deposits or not shall create a reserve fund. Further, no appropriation can be made from the fund for purpose without the prior written approval of RBI.

The utilization of Retained Earnings in NBFC

The Retained earnings strengthen the Company’s net owned funds. It will further help in maintaining Capital Adequacy Ratio (CAR) for Non-Banking Financial Companies (NBFCs) in the growth phase.

The Board from time to time will decide utilization of the retained earnings depending on various factors including organic/inorganic growth strategies of the Company, market competition, creating long-term shareholder value, etc.

The Board shall ensure the judicious balancing of these factors in the interest of the Company and its stakeholders.

The process to Declare Dividend in NBFC

• If the Articles of Association of the Company does not bear any contrary provisions to pay the dividend then the company can distribute a dividend in a proportion of the Paid-up Share Capital of the Company.
• The company shall conduct a board meeting to decide the amount of dividend which they want to recommend in General Meeting and approve the draft notice of General Meeting.
• The notice of the general meeting shall contain resolution for Dividend.
• The Company shall hold the General Meeting:
  1. Declaration of Dividend is Ordinary Business.
  2. Ordinary Resolution for the declaration of a dividend will be passed in the General Meeting.
• After approval by shareholders, the dividend shall be paid within 30 days.
• Points to be kept in mind while declaring the dividend in NBFC:
  1. Dividend declared by shareholders can’t exceed the dividend recommended by the Board.
  2. Dividend declared in General Meeting by the member can be less than the dividend recommended by the Board.
  3. Dividend paid in General Meeting is Final Dividend.
  4. Declaration of dividend and amount to be transferred to reserve is the responsibility of the Board.
  5. The dividend on equity shares can be distributed only after dividend on preference shares is declared.
  6. The separate account shall be created with schedule bank to deposit dividend amount within 5 days from the date of declaration of such dividend.
  7. The unpaid dividend shall be transferred to a special account within 7 days from the date of expiry of 30 days of the date of dividend declaration.
  8. Interest is levied on late payment of dividend.
  9. Transfer of Investor protection Fund after completion of Seven-year.
  10. The penalty for non-payment of the dividend.
• Where a dividend is approved by the shareholders at the annual general meeting, it becomes a debt against the company and it is deemed to be receivable by the members in the year of the declaration of the dividend and not at the time when the dividend was recommended by the Board.

Circumstances under which dividend need not be paid by NBFC

• Where it cannot be paid because of the operation of any law
• Where a shareholder direction regarding payment of dividend could not be complied with.
• Where the company has lawfully adjusted the dividend against any sum due from the shareholders
• Where the dividend could not be paid not due to any default on the part of the company.

On the conclusive fact of declaration and payment of dividend given under section 123 of Companies Act, 2013^[2] more or less applicable to Non-Banking Financial institution unless the regulatory organization gives specific direction on it. On literal go through of Section 123 read with rules thereunder, the dividend can be declared at Board Meeting finalized at Annual General Meeting of Company became the liability of Company to be paid on due time.