Mumbai, June 4: Primary dealers (PDs) can now declare a maximum dividend of 50 per cent. However, dealers with a capital-to-risk weighted assets ratio (CRAR) below the regulatory minimum of 15 per cent in all four quarters of the previous fiscal cannot declare a dividend at all.

This is the outcome of a review of primary dealers’ dividend policy by the central bank and the Standing Technical Advisory Committee on Financial Regulation (STACFR).

The central bank has been advising PDs from time to time to formulate a prudent dividend policy so as to build sufficient reserves against adverse price movements.

Under the revised set of guidelines, for PDs having CRAR of 15 per cent but lower than 20 per cent, the ratio should not exceed 33.3 per cent. The payout has been capped at 50 per cent for those with a CRAR above 20 per cent.

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

The revised guidelines are applicable to the dividend declared for 2003-04 onwards.

“Any violation of the guidelines would be viewed seriously and could even attract penal action, including the withdrawal of authorisation for carrying on the business as a primary dealer,” the RBI warned.

The proposed dividend will be payable out of the current year’s profit.

According to the RBI, the primary dealer will have to comply with the regulations on transfer of profits to statutory reserves and regulatory guidelines relating to provisioning and valuation of securities.

Moreover, the statements pertaining to the financial year for which the primary dealer is declaring a dividend should be free of any qualifications by the statutory auditors, which have an adverse bearing on the profit during that year.

In case of any qualification to that effect, the net profit should be suitably adjusted downward while computing the payout ratio.

The RBI said if there were special reasons for any primary dealer in strictly adhering to the guidelines, the central bank may be approached in advance for an appropriate ad hoc dispensation.

Dividend payout ratio should be calculated as a percentage of dividend payable in a year (excluding dividend tax) to net profit during the year.

The system of primary dealers was introduced in 1996 to strengthen the institutional infrastructure in the government securities market. The objective was to develop such capabilities outside the central bank. The RBI had then granted licences to six entities. Thereafter, many more names were added to this list.

The role of PDs includes bidding and underwriting in auctions of government securities and market making by offering two-way quotes. Some of the PDs include STCI, SBI Gilts, PNB Gilts among others.

It may be recalled that in April this year, the RBI had revised guidelines on dividends payable by banks.

According to these guidelines, only banks that have a capital adequacy of 11 per cent and bad loans (NPAs) less than 3 per cent of their assets can declare dividends without prior Reserve Bank approval.