The Reserve Bank of India (RBI) has issued guidelines on distribution of dividends by non-banking financial companies (NBFCs), a move that is aimed at infusing greater transparency and uniformity in practice.

The norms to pay dividend to shareholders shall come into effect from the financial year ending 31 March 2022. They will be applicable to NBFCs regulated by the RBI.

The RBI on Thursday said the conditions will have to meet minimum capital adequacy ratios, net non-performing asset (NPA) ratios and some other criteria to be eligible to pay dividend.

The net NPA ratio of the NBFC, for instance, should be less than 6% in each of the last three years, including as at the close of the financial year for which the dividend is proposed.

Also, NBFCs (other than Standalone Primary Dealers) should have met the applicable regulatory capital requirement for each of the last three financial years, including the financial year for which the dividend is proposed.

On capping the dividend payout ratios for NBFCs, the RBI said the maximum could be 60% for core investment companies and standalone primary dealers. Other NBFCs can pay up to 50% of the income. However, there is no upper limit prescribed for NBFCs that do not accept public funds and do not have any customer interface.

The dividend payout ratio is the ratio between the amount of the dividend payable in a year and the net profit as per the audited financial statements.

The proposed dividend shall include both dividend on equity shares and compulsorily convertible preference shares eligible for inclusion in Tier 1 capital, RBI said.

In case the net profit for the relevant period includes any exceptional and/or extraordinary profits/income or the financial statements are qualified by the statutory auditor that indicates an overstatement of net profit, the same shall be reduced from net profits while determining the dividend payout ratio.

NFBCs will also have to report details of dividend declared during the financial year to the RBI.

The board of directors of the NBFC, RBI said, while considering the proposals for dividend, shall take into account supervisory findings of the regulator on divergence in classification and provisioning for NPAs. The board will also have to take into account the long-term growth plans of the NBFC.

NBFCs declaring dividend shall report details within a fortnight after declaration of dividend. It must be reported to the regional office of the Department of Supervision of the RBI or the Department of Supervision of National Housing Bank (NHB), under whose jurisdiction it is registered.

The guidelines will be applicable on housing finance companies (HFCs), core investment companies, government NBFCs, mortgage guarantee companies, standalone primary dealers, NBFC — peer to peer lending platform, and NBFC — account aggregator.