Process of dividend declaration by NBFC
Dividend can be declared to both equity and preference shareholders and they are classified into three categories and is distributed as per the provision of Companies act and RBI
What is dividend declaration by NBFC?
In case of NBFC, it is important to maintain sufficient resources and financial flexibility to meet the requirement of finance and operations.SoCompany has its own discretion to take decision either to retain the profit in business or to used it for the purpose of acquisitions, expansions or diversifications or to distribute it to the shareholders. The payment received by the shareholders in the form of distribution of its profits is termed as dividend.
Dividend can be declared to both equity and preference shareholders and they are classified into three categories and is distributed as per the provision of Companies act and RBI. Interim dividend is declared by the board within a financial year normally after finalization of quarterly financial accounts and based on the profits of the company as and when consider fit. In case of final dividend as percompanies act if Article of Association does not provide any contrary provision then dividend will be distributed in proposition of the paid up capital of the company with the recommendation of theboard after the preparation of the final accounts to the members for their approval in general meeting by the way of passing Ordinary Resolution. Once it get approved by shareholders it become debt against the company to distribute it in the year of declaration so for complying it is the responsibility of the board to declare the dividend and to transfer the amount in the reserve. Board is fully responsible to deposit the dividend in separate account which is opened with schedule bank for dividend purpose only within 5 days from the date of declaration and paid off within 30 days from the date of declaration and if some amount of dividend remain unpaid then within seven days after the expiry of 30 days from declaration it must be transferred to special account and if remain unpaid till seven years it must be transferred to Investor protection Fund. Interest is levied on late payment and penalty on non- payment of dividend.
As per RBI requirement for declaration of dividend every NBFC has to meet the following criteria i.e to create reserve fund in which they have to transfer a sum which is not less than 20% of its net profit in every year and it should also be disclosed in the profit and loss account before any declaration.They also required to maintain a minimum capital ratio consisting of Tier I and Tier II capital shall not be less than 15 percent of the aggregate of its on-balance sheet risk-weighted assets and the risk-adjusted value of its off-balance sheet items. In respect of applicable NBFCs (other than NBFC-MFI and IDF-NBFC), Tier I capital at any point of time, shall not be less than 10% by March 31, 2017.
It is mandatory that it must be paid out of profits of current year or profit of the previous years but after providing depreciation for current or previous years or out of the money given by the central or state government in pursuance of guarantee given by that if any.
There are certain circumstances in which NBFCs are not required to pay dividend like because of operation of any law, direction of shareholder regarding dividend payment if could not compiled ,company has lawfully adjusted dividend against any sum due from shareholders or where it could not be paid on default on the part of the company.
In order to conclude it is the most important duty of the director to distribute the dividend after getting approved from shareholder as per the provision of companies act, 2013 on time .If you are currently working as NBFC need any assistance in taking any decision regarding the distribution of dividend then we Enterslice feel happy to help you in assisting in this regard.