RBI cites rules relating to full provisioning of losses.
The board of directors of Indian Bank has decided to withdraw its May 10 resolution recommending declaration of dividend at ₹ 6 per equity share (60%).
In a filing with the BSE, the bank said the decision was taken at a board meeting held on June 28.
Indian Bank moved the RBI seeking clarification on Section 15 (1) of Banking Regulation Act. According to this section, banks are not allowed to pay any dividend on its shares until all its capitalised expenses (including preliminary expenses, organisation expenses, shares-selling commission, brokerage, amount of losses incurred and any ‘other item of expenditure not represented by tangible assets) have been completely written off.
Notwithstanding anything contained in Section (1), as per Section 15 (2) (ii) of the Act, a banking company can, however, pay dividend on its shares without writing off the depreciation, if any, in the value of its investments in shares, debentures or bonds (other than approved securities) in any case where adequate provision for such depreciation has been made to the satisfaction of the auditor of the banking company. Indian Bank chose to rely on this section to declare dividend.
The RBI, it may be recalled, has given a few options in respect of MTM losses and additional liability on gratuity.
Banks are allowed to spread ‘mark-to-market’ loss on AFS & HFT investments for quarter ended December 31, 2017 and March 31, 2018, equally over the four quarters commencing with the quarter in which the loss is incurred. Also, they are permitted to spread additional liability on account of the enhancement in gratuity limit from ₹ 10 lakhs to ₹ 20 lakhs from March 29, 2018 under Payment of Gratuity Act, 1972, over four quarters beginning with the quarter ended March 31, 2018.
Indian Bank exercised the options during the quarter ended March, 2018 and deferred the gratuity expenditure of ₹ 24.33 crore to subsequent three quarters and also spread the MTM losses of ₹ 547.01 crore to subsequent quarters (after providing for December 2017 and March 2018).
With the RBI clarification, the board of Indian Bank has decided to withdraw its dividend announcement.