The RBI on Tuesday proposed setting limits on the dividends that banks can pay to their shareholders
The Reserve Bank of India (RBI) on Tuesday proposed capping the dividend payouts by banks to their shareholders. Under the proposal, no bank will be allowed to distribute more than 75 percent of its net profit as dividends. The Reserve Bank defines “dividend” as the amount payable on equity shares and includes interim dividends. However, it excludes dividends paid on perpetual non-cumulative preference shares. The proposed rules will apply to all Indian banks, while the limit will be 80 percent for regional rural banks and local area banks.
The Reserve Bank of India (RBI) stated in this draft that before declaring dividends, the bank’s board of directors must consider the long-term growth plan and capital position. Furthermore, the bank’s net profit must be positive during the period for which it is proposing to pay dividends. The RBI clarified in its proposal that these rules will also apply to foreign banks operating branches in India, meaning that foreign banks will also not be allowed to distribute more than 75 percent of their net profit as dividends to their shareholders. These banks can only remit profits to their headquarters for periods in which they have generated a positive net profit.
The RBI has also stated that it reserves the right to restrict dividend distribution or profit repatriation if a bank fails to comply with laws, rules, or guidelines. The Reserve Bank has sought suggestions from the public and banks on this draft proposal until February 5th. It is worth noting that several banks listed on the Indian stock market will begin releasing their third-quarter results for the current financial year in the coming days and will simultaneously announce dividends for their shareholders.
