Declaration of Dividend by NBFCs

A dividend is a distribution of a portion of a company’s profits to its shareholders. Non-banking financial companies (NBFCs) are also allowed to declare dividends, subject to certain conditions.

Conditions for Declaring Dividend by NBFCs

NBFCs can declare dividends only if they meet the following conditions:

  • They must have been in existence for at least three years.
  • They must have made profits in the current financial year.
  • They must have a minimum capital adequacy ratio (CAR) of 15%.
  • They must have a net non-performing assets (NPA) ratio of less than 4%.

Procedure for Declaring Dividend by NBFCs

To declare a dividend, an NBFC must follow the following steps:

  1. The board of directors of the NBFC must pass a resolution recommending the declaration of a dividend.
  2. The resolution must be approved by the shareholders of the NBFC at an annual general meeting (AGM).
  3. Once the resolution is approved, the NBFC can declare the dividend to its shareholders.

Dividend Payout Ratio

The dividend payout ratio is the percentage of a company’s profits that is distributed as dividends to its shareholders. NBFCs are allowed to distribute a maximum of 50% of their profits as dividends.

Tax on Dividends

Dividends received by shareholders are taxed as income. The tax rate on dividends depends on the income tax slab of the shareholder.

Conclusion

NBFCs can declare dividends only if they meet certain conditions. The procedure for declaring a dividend is similar to that of other companies. NBFCs are allowed to distribute a maximum of 50% of their profits as dividends. Dividends received by shareholders are taxed as income.

MCQs

  1. Which of the following is not a condition for declaring a dividend by NBFCs?
    • (a) The NBFC must have been in existence for at least three years.
    • (b) The NBFC must have made profits in the current financial year.
    • (c) The NBFC must have a minimum CAR of 15%.
    • (d) The NBFC must have a net NPA ratio of less than 4%.
  2. Which of the following is a step in the procedure for declaring a dividend by NBFCs?
    • (a) The board of directors of the NBFC must pass a resolution recommending the declaration of a dividend.
    • (b) The resolution must be approved by the shareholders of the NBFC at an AGM.
    • (c) Once the resolution is approved, the NBFC can declare the dividend to its shareholders.
    • (d) All of the above
  3. Which of the following is true about the dividend payout ratio for NBFCs?
    • (a) NBFCs are allowed to distribute a maximum of 50% of their profits as dividends.
    • (b) NBFCs are allowed to distribute a maximum of 60% of their profits as dividends.
    • (c) NBFCs are allowed to distribute a maximum of 75% of their profits as dividends.
    • (d) None of the above

Answers

  1. (d) None of the above
  2. (d) All of the above
  3. (a) NBFCs are allowed to distribute a maximum of 50% of their profits as dividends.