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On June 24, the Reserve Bank of India issued guidelines that specify the eligibility criteria for non-banking financial companies (NBFCs) to declare dividends. The RBI claimed that the new rules are framed with a view to infuse greater transparency and uniformity in practice. In this article, we shall look at the key details of the notification released by the RBI on maximum dividend payout ratio for NBFCs.
The board of directors of these firms are required to ensure that they consider the following while assessing the proposal for dividend announcements:
The Non-Banking Financial Companies and Housing Finance Companies are also required to meet specific benchmarks to qualify for a dividend payment. These benchmarks include the following:
The RBI also announced ceilings for dividend payout ratios. The dividend payout ratio means the ratio between total dividend payable and the net profit for a financial year. The ceilings for dividend payout ratios announced by the RBI are as follows:
|Type of NBFC||Percentage of Maximum Dividend Payout Ratio|
|NBFCs that don’t accept any public funds & not having any customer interface||No Ceiling|
|Core Investment Companies||60%|
|Standalone Primary Dealers||60%|
It is worth mentioning here that the regulator specified that the total dividend payable should include payments on equity shares and those on compulsorily convertible preference shares eligible for inclusion in Tier 1 capital.
Non-Banking Financial Companies that fail to meet the minimum financial benchmarks mentioned above can be eligible to declare a dividend, subject to a cap of 10% on the dividend payout ratio if they comply with the conditions specified below:
The RBI stated that in case of standalone primary dealers which have the capital adequacy ratio of 15% (regulatory minimum) or above during each of the quarters of the previous year, but less than 20% in any of those quarters, the dividend payout ratio cannot exceed 33.3%.
The RBI set the maximum dividend payout ratio as part of its guidelines on distribution of dividend by Non-Banking Finance Companies. As per RBI, the guidelines is aimed at infusing greater transparency and uniformity in the payout practice and shall be effective for declaration of dividend from the financial year ending 31st March 2022.
These guidelines were proposed first by the Reserve Bank of India in the form of a draft circular in the month of December last year and came after the RBI governor Shaktikanta Das on 4th December stated that the growing significance of NBFCs and their inter-linkages with various segments in the financial system. The RBI governor had said that it made it imperative to enhance the resilience of the sector.
He had said that it had been decided to put in place transparent criteria as per a matrix of parameters for declaration of dividends by different categories of Non-Banking Financial Companies.
The tightening in dividend payout rules comes within a few weeks of the RBI’s norms on auditor appointments. NBFCs are against the move of auditor appointment, but the Reserve Bank has remained adamant. For better understanding, you may refer to the RBI notification on maximum dividend payout ratio for NBFCs attached with this article.NBFCS2A8A6D0DFCD346B7BA78285EE25759A6
Read our article:A Complete Overview of Buying and Selling of NBFCs