The Reserve Bank of India (RBI) has restricted private sector lender Kotak Mahindra Bank from paying out dividend on perpetual non-cumulative preference shares (PNCPS).
PNCPS is a type of financial instrument which pays a fixed dividend to investors as long as the company is in business.
Announcing the statement on developmental and regulatory policies on December 4, the RBI had said that banks cannot make any dividend payouts from the profits pertaining to the financial year 2019-20. This is in order to further strengthen the banks’ balance sheets while at the same time supporting lending to the real economy, the regulator said.
This was after the regulator observed that in the context of the ongoing stress and the heightened uncertainty on account of COVID-19, it is imperative that banks continue to conserve capital to support the economy and absorb losses.
The RBI has now said that the restriction on dividend payments also applies to perpetual non-cumulative preference shares as well.
In August 2018, Kotak Mahindra Bank said in a stock exchange filing that its Board has "approved the allotment of 100,00,00,000 Perpetual Non-Cumulative Preference Shares (PNCPS) to eligible investors at the issue price of Rs 5 per PNCPS, aggregating to Rs 500 crore pursuant to the issue."
Subsequent to this issue, the paid-up capital of the bank has increased from Rs 953.16 crore to Rs 1,453.16 crore and the promoter holding is 19.70 percent of the paid-up capital, it said.
Kotak's holding in the bank prior to the preference share issuance was 29.74 percent.
Also, the RBI plans to restrict even non-banks from paying dividends saying different categories of NBFCs would be allowed to declare dividend as per a matrix of parameters, subject to a set of generic conditions.
Yesterday, in a draft circular, the regulator proposed draft rules for NBFCs to declare dividend. According to the draft, deposit-taking NBFCs and systemically important non-deposit taking NBFCs should have Capital to Risk (Weighted) Assets Ratio (CRAR) of at least 15 percent for the last three years, including the accounting year for which it proposes to declare dividend.
Also, the net non-performing asset (NPA) ratio should be less than 6 percent in each of the last three years, including the accounting year for which it proposes to declare dividend, the RBI said. Non-Systemically Important Non-Deposit taking NBFC should have leverage ratio of less than 7 for the last three years, including the accounting year for which it proposes to declare dividend, the RBI said.
Unlike banks, currently there are no guidelines in place with regard to the distribution of dividend by NBFCs.