The Reserve Bank of India (RBI) has restrained Kotak Mahindra Bank from paying dividend on perpetual non-cumulative preference shares (PNCPS).
The regulator has barred the private sector lender in compliance with its December 4 circular barring banks and certain categories of non-banks or NBFCs (Non-Banking Finance Companies) from making any dividend payments on equity shares from profits with respect to the financial year ended March 31, 2020 (FY20).
This was done to further strengthen the banks' balance sheets, while supporting lending to the real economy, the regulator said in its order.
The RBI's restriction on dividend distribution also applies to PNCPs, it informed the Kotak Mahindra Bank in a communication. PNCPs is a type of financial instrument that promises a fixed dividend amount to the shareholder each year from the company's net profit as long as the entity is in business. But if the company fails to pay such dividend in any year, it cannot be claimed by the investor in the future.
The clarificatory order to the lender (Kotak Mahindra Bank) comes as a blow to preference shareholders of banks as the PNCPs fetch a fixed dividend and are seen as quasi-debt.
Kotak Mahindra Bank had in 2018 sold 1 billion PNCPs to domestic institutions and companies at Rs 5 each, to adhere to a statutory obligation of bringing the promoter stake down to 19.7% from 30%.
But the RBI dismissed it, saying these shares don't have any voting rights and hence won't result in dilution of control. In March, the bank announced an interim dividend of 8.1% on PNCPs, amounting to Rs 40.50 crore, excluding dividend distribution tax (DDT).