Kotak Mahindra Bank told not to pay dividend

The Reserve Bank of India (RBI) has barred Kotak Mahindra Bank from paying dividend on Rs 500 crore worth of perpetual non-cumulative preference shares (PNCPS) that it issued in 2018 to comply with a regulatory ceiling on promoter shareholding. The central bank  asked banks and certain categories of non-bank lenders not to make pay any dividends on equity shares from the profits in FY20.

“It is clarified that the above restriction on dividend distribution also applies to PNCPS,” the RBI said in its letter to Kotak Mahindra Bank. The clarification could come as a jolt to preference shareholders of banks and NBFCs which fetch a fixed dividend, and whose holdings are seen as a quasi-debt which can sometimes be turned into common stock. Non-cumulative preference shares promise fixed annual dividends from the company’s net profit, but in case the company fails to pay such dividend in any year, it cannot be claimed later.

In August 2018, Kotak Mahindra Bank had issued 1 billion PNCPS to domestic institutions and companies at Rs5 each, to comply with regulatory requirement of reducing promoter stake to 19.7% from 30%. However, RBI rejected this, since these shares don’t have voting rights and are not part of the common stock held by a bank, and hence won’t result in dilution of control. In March 2020, the bank had declared interim dividend of 8.10% on these shares, totalling Rs 40.50 crore (Rs 26.86 crore year ago), excluding dividend distribution tax.