What changed
RBI revised paragraphs 1.7(b) and (c) of Annex I (PNCPS) and 1.8.1(d), (e), and 1.8.2 of Annex II (PCPS/RNCPS/RCPS) from the October 29, 2007 circular. For PNCPS, it clarified that missed dividends are permanently forfeited even if profits and CRAR later improve. For cumulative instruments (PCPS/RCPS), unpaid coupons become liabilities and can be paid later; for RNCPS, deferred coupons are forfeited but a lower rate may be paid if conditions allow.
What it means for you
Banks issuing preference shares as regulatory capital must strictly adhere to non-cumulative dividend rules for Tier 1 PNCPS—any skipped dividend is gone forever. For Upper Tier 2 instruments, the treatment differs: cumulative instruments allow deferred coupon payments as liabilities, while non-cumulative ones do not. This ensures capital instruments maintain their loss-absorbing character and aligns with Basel norms. Banks need to update their dividend/coupon policies and reporting processes accordingly.
What you must do
- Review and update your bank's preference share issuance terms to comply with the modified dividend/coupon payment rules.
- Ensure that for PNCPS, any missed dividend is not paid in future years, even if profits and CRAR improve.
- For PCPS/RCPS, treat unpaid coupons as liabilities and allow deferred payment only when conditions are met.
- Report all instances of non-payment or reduced payment of dividends/coupons to RBI's DBOD and DBS central office.
- Train treasury and compliance teams on the distinction between cumulative and non-cumulative instruments.
Who it affects
Commercial banks (excluding foreign banks, RRBs, and LABs) issuing preference shares as regulatory capital, Treasury departments managing capital instruments, Compliance and risk management teams, Auditors reviewing capital adequacy
Can we pay a missed dividend on PNCPS in a later year if profits are high?
No. For Perpetual Non-Cumulative Preference Shares (PNCPS), any dividend missed or paid at a lesser rate cannot be paid in future years, even if the bank has adequate profit and meets the minimum CRAR.
What happens to unpaid coupons on cumulative preference shares (PCPS/RCPS)?
For PCPS and RCPS, unpaid or partly unpaid coupons become a liability. The bank may pay the due amount in later years, provided it meets the regulatory conditions at that time.
Do we need to report non-payment of dividends/coupons to RBI?
Yes. All instances of non-payment or payment at a lesser rate than prescribed must be reported to the Chief General Managers-in-Charge of DBOD and DBS at RBI's Central Office in Mumbai.