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RBI asks Kotak Mahindra Bank not to pay dividend on PNCPS

In March 2020, the bank had declared an interim dividend on these preference shares carrying a dividend rate of 8.10% (MINT_PRINT)Premium
In March 2020, the bank had declared an interim dividend on these preference shares carrying a dividend rate of 8.10% (MINT_PRINT)

  • In August 2018, the private sector lender had issued 1 billion of the preference shares to domestic institutional investors and companies
  • In case of PNCPS, investors are not entitled to receive past dividends in case the issuing company does not pay for a particular period

Mumbai: The Reserve Bank of India has restricted Kotak Mahindra Bank from paying dividend on perpetual non-cumulative preference shares (PNCPS) in accordance with its December 4 circular asking banks and certain category of Non banking Finance Companies (NBFCs) to not to make any dividend payment on equity shares from the profits pertaining to the financial year ended March 31, 2020.

Non-cumulative preference shares are those shares that provide the shareholder fixed dividend amount each year from the company’s net profit but in case the company fails to pay the dividend on such preference share to the shareholder in any year then such dividend cannot be claimed by the shareholder in future.

“It is clarified that the above restriction on dividend distribution also applies to PNCPS," the RBI said in its letter to Kotak Mahindra Bank. According to industry watchers, the RBIs clarification may come as a jolt to preference shareholders of banks and NBFCs, which is typically treated as quasi debt with a fixed dividend payout, which in some cases investors can choose to turn into the company's common stock. In case of PNCPS investors are not entitled to receive past dividends in case the issuing company does not pay for a particular period.

In August 2018, the private sector lender had issued 1 billion of the preference shares to domestic institutional investors and companies at the issue price of 5 a piece, aggregating to 500 crore pursuant to the issue. Kotak had issued these shares with the aim to reduce the stake to 19.7% from 30%, in order to comply with RBI’s promoter holding dilution requirement. This was however rejected by RBI as these shares don’t have voting rights and are not part of the common stock held by a bank, or equity capital, and hence won’t result in dilution of control.

As per the fiscal year 2020 annual report, Signet Chemical Corporation Pvt Ltd held 8%, Aditya Birla Finance held 7%, ICICI Lombard General Insurance Company Ltd held 6.6%, Bajaj Allianz General Insurance Company Ltd held 6% of preference shares. Mint could ascertain whether they continue to hold these shares.

In March 2020, the bank had declared an interim dividend on these preference shares carrying a dividend rate of 8.10%. This entailed a payout of 40.50 crore (previous year `26.86 crore), excluding dividend distribution tax.

Analysts say this directive is unlikely to have an impact on the bank’s earnings. However this could have an impact on the issuance of AT1 bonds in future.

“Institutional investors have generally been less enthusiastic about this instrument as they considered it to have higher risk. After RBI's consideration of this instrument closer to equity, the ask on risk premium is likely to go up for this. Coming on the heels of AT1 write down of Yes Bank, investors are likely to become more discerning in the differing risk which should reflect in yields," said Prakash Aggarwal, director and head of financial institutions, India Ratings & Research.

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