Who gets impacted by RBI’s new draft rules on dividend payments?

The Reserve Bank of India’s new rules put out in a draft circular on December 10, could restrict at least two non-banking finance companies (NBFCs) -- Mahindra and Mahindra Financial Services (MMFS) and LIC Housing Finance -- from distributing dividends, according to analysts.

“MMFS and LIC Housing Finance face restriction in the dividend distribution. Based on historic data, only two NBFCs are not eligible for dividend distribution for the current year under the new rules,” said Jignesh Shial, Research Analyst at Emkay Global Financial Services in a note.

LIC Housing Finance, which has been struggling with lower capital adequacy for the last couple of years, fails to attain the first benchmark of minimum 15 per cent capital adequacy. However, as per an exception provided by the RBI, the company could pay dividends if it raises capital during the current year.

“Similarly, Mahindra Finance fails to comply with net NPA norms (~4.7 percent as on September 2020 against required ~4 percent), however, stronger recoveries during H2FY21 can allow the company to utilise this exception,” Shial said.

For NBFCs under its coverage, the dividend payout ratio has remained at an average of 15-17 percent, which is well within the RBI’s prescribed norms. Individually, all NBFCs under our coverage have kept their dividend payout ratios lower than the RBI’s prescribed norms, Emkay analyst said.

According to the draft circular released by the central bank, deposit taking NBFCs and Systemically Important Non-Deposit taking NBFCs should have CRAR of at least 15 percent for last 3 years, including the accounting year for which it proposes to declare a dividend.

Also, the net 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 a dividend, the RBI said. However, if the capital adequacy, leverage norms are not met in the previous two years, the applicable NBFCs could be eligible to pay dividend provided they have achieved minimum regulatory CRAR and their net NPA is less than 4 percent in the accounting year for which they propose to declare a dividend, the RBI said.

Non-Systemically Important Non-Deposit taking NBFC should have a leverage ratio of less than 7 for the last 3 years, including the accounting year for which it proposes to declare a dividend, the RBI said.

Further, Core Investment Company (CIC) should have adjusted net worth of at least 30 percent of its aggregate risk-weighted assets on the balance sheet and risk-adjusted value of off-balance sheet items for last three years, including the accounting year for which it proposes to declare a dividend, the RBI said.

According to the RBI, in case the profit includes any extra-ordinary profits or income, the pay-out ratio shall be computed after excluding such extra-ordinary items. Also, the financial statements pertaining to the year for which the NBFC is declaring dividend should be free of any qualifications by the auditors, which have an adverse bearing on the profit during that year, the RBI said.

“In case of any qualification to that effect, the net profit should be suitably adjusted while computing the dividend payout ratio,” the draft circular said.

The RBI further stated that the proposed dividend should be payable only out of the current year's profit. Also, the Reserve Bank should not have placed any explicit restrictions on the NBFC on the declaration of dividend, the RBI said.

Comments on the draft circular are invited from NBFCs, industry participants and other interested parties by December 24, 2020, the RBI said.