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Money & Banking - Financial Policy


New dividend norms for primary dealers

Our Bureau

Mumbai , June 4

AFTER tightening the norms for declaration of dividends by banks, the Reserve Bank of India has now done the same for primary dealers. Primary dealers or bond houses cannot declare dividend if their capital to risk weighted assets ratio (CRAR) has fallen below the regulatory minimum of 15 per cent in any of the previous four quarters.

The new norms will be applicable to the dividend declaration from 2003-04 onwards and any violation of the same could even result in a withdrawal of authorisation for carrying on business as a primary dealer (PD).

Said Mr R.V. Joshi, Managing Director, Securities Trading Corporation of India Ltd, "In a rising rate scenario primary dealers are required to be careful. Ploughing back profits is always good to maintain the strength of the organisation."

Some small players such as PNB Gilts and I-Caps had declared very high dividends of about 75 per cent over the last two years.

The need for a prudent dividend policy has been reviewed in consultation with the Standing Technical Advisory Committee on Financial Regulation and the central bank has been decided to adopt a regulatory approach for declaration of dividend with focus on the `dividend payout ratio'.

According to the RBI circular, the PD should have complied with the regulations on transfer of profits to statutory reserves and the regulatory guidelines relating to provisioning and valuation of securities, etc.

For PDs having CRAR between the regulatory minimum of 15 per cent and 20 per cent during all the four quarters of the previous year the dividend payout ratio should not exceed 33.3 per cent. For PDs having CRAR above 20 per cent during all the four quarters of the previous year, the dividend payout ratio is not to exceed 50 per cent.

The proposed dividend should be payable out of the current year's profits and dividend payout ratio should be calculated as a percentage of dividend payable in a year (excluding dividend tax) to net profit during the year.

In case the profit for the relevant period includes any extraordinary profit income, the payout ratio should be computed after excluding such extraordinary items for compliance with the payout ratio ceilings.

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