Dividend Declaration by NBFC

Dividend Declaration

Profits earned by the NBFC Company can either be retained in business or it can be used for the purpose acquisitions, expansion or diversification, or it can also be distributed to the shareholders of the company. The dividend is a payment which is received by the shareholders in the form of distribution of its profits. It is the discretion of the company to retain a part of its profits and distribute the balance to its shareholders as a dividend. According to section 45-IC of the Reserve Bank of India Act[1], before Dividend Declaration, it is required for every NBFC to create a reserve fund and transfer a sum not less than 20% of its net profits every year as disclosed in the profit and loss account. For dividend declaration provisions of the companies, the act shall apply and RBI requirements for NBFC.

As per RBI, eligibility criteria for dividend declaration:

  • It is required for every applicable Non-Banking Financial Services NBFC to maintain a minimum capital ratio consisting of Tier I and Tier II capital which shall not be less than 15 percent of the aggregate of its on-balance sheet risk-weighted assets and the risk-adjusted value of its off-balance sheet items.
  • The Tier I capital in respect of applicable NBFCs (other than NBFC-MFI and IDF-NBFC), at any point of time, shall not be less than 10% by March 31, 2017.
  • Statutory transfers of 20% of Profit after Tax under section 45(IC) of the RBI Act before declaring the dividend.
  • The proposed dividend should be paid only out of current year’s profit.
  • If the Company does not meet all of the above criteria, it cannot declare any dividend for that particular year.
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Class of Shares and Category of Dividends

The dividend can be declared to both the class of shares that is Equity or preference.

Dividend are mainly classified into three categories such as

  • Interim dividend,
  • Final dividend,
  • Preference share Dividend.

During the financial year, the board has absolute power to declare an interim dividend as and when they consider it fit. Normally, after finalization of quarterly financial accounts board endeavor to declare an interim dividend. Based on the profits of the Company, the board may declare an interim dividend as and when considered appropriate. Board may recommend a final dividend at the General Meeting of the Company to the shareholders for their approval after preparation of annual accounts.

NBFC Consultant in India

In the case of one financial year board declares more than one interim dividend then the board may recommend to the shareholder to treat the last interim dividend as a final Dividend.

Sources of the Payment of the Dividend

Here are the following sources from which dividend can be paid out:

  • 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 the Central Government[2] or State Government for payment of a dividend in pursuance of a guarantee given by that, if any.

Reserve Fund Creation As Stipulated by RBI

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

Company’s net owned funds are strengthening by retained earnings. In the growth phase, it will further help in maintaining Capital Adequacy Ratio (CAR) for Non-Banking Financial Companies (NBFCs).

Depending on various factors such as organic/inorganic growth strategies of the Company, market competition, creating long-term shareholder value etc, board from time to time will decide utilization of the retained earnings. In the interest of the Company and its stakeholders, the board shall ensure the judicious balancing of these factors.

Consideration of Factors while Declaring Dividend

The decision of dividend declaration is considered a crucial decision as it determines the amount of profit to be distributed among shareholders and the amount of profit to be retained in the business. Board takes a decision with an object to enhance shareholders wealth and market value of the shares. In the case of NBFCs, it is a primary need to maintain sufficient resources and financial flexibility to meet financial and operational requirements.

External Factors

  • State of Economy;
  • Capital Markets;
  • Statutory and Contractual Restrictions;

Internal Factors

Board will consider various internal factors apart from external factors while declaring dividend:

  • Profits earned during the year;
  • Present and future capital requirements of the existing businesses;
  • Capital expenditures and the Company’s debt position;
  • Business Acquisitions opportunities;
  • Expansion/ Modernization of existing businesses;
  • growth opportunities available to the company;
  • Additional investments in subsidiaries/associates of the Company;
  • Fresh investments in external businesses;
  • Cash flow from company operations;
  • Cost of raising funds;
  • Providing for unforeseen events and contingencies with financial implication;
  • Any other factor as deemed fit by the Board.

Dividend Declaration Process

  • The company can distribute the dividend in the proportion of the Paid-up Share Capital of the Company in case Articles of Association of the Company does not bear any contrary provisions to pay a dividend.
  • To decide the amount of dividend which they want to recommend in the General Meeting, the company shall conduct a board meeting and approve a draft notice of General Meeting.
  • The general meeting notice shall contain dividend resolution.
  • The Company shall hold the General Meeting:
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Dividend declaration is Ordinary Business and Ordinary Resolution will be passed in the General Meeting.

  • After obtaining shareholders’ approval dividend shall be paid within 30 days.
  • Dividend declared by shareholders can’t exceed the dividend recommended by the Board but dividend declared in General Meeting by a member can be less than the dividend recommended by the Board.
  • Dividend paid in General Meeting is Final Dividend.
  • Dividend declared an amount to be transferred to reserve is the responsibility of the Board.
  • Only After a declaration of the dividend on preference shares, dividend on equity shares can be distributed.
  • To deposit dividend amount a separate account shall be created with the scheduled bank and dividend amount shall be deposited within 5 days from the date of declaration of such dividend.
  • Within 7 days from the date of expiry of 30 days of the date of declaration of dividend, the unpaid dividend shall be transferred to the special account.
  • Interest is levied on late payment of dividend.
  • After completion of Seven-year, an amount shall be transferred to the investor protection Fund.
  • The penalty will be imposed for non-payment of the dividend.
  • One dividend is approved by the shareholders in 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.

However, the dividend is not required to be paid by NBFCs in case

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

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