Nepal Rastra Bank (NRB) has tightened rules on dividend distribution for institutions licensed to conduct payment-related activities, excluding banks and financial institutions (BFIs).

Issuing the "Guidance on Dividend Distribution for Institutions Licensed to Conduct Payment-Related Activities (Excluding Banks and Financial Institutions), 2082" on Sunday, July 20, the central bank said the move aimed to make profit-sharing more transparent and systematic.

According to the new rules, institutions must obtain NRB’s prior approval before distributing dividends. Approval is also required to publish financial statements for dividend purposes, and this must be accompanied by the dividend proposal itself.

Institutions must submit several documents, including the board’s decision on dividend distribution, audited financial statements, tax clearance certificates, proof of a clean credit history, a self-declaration stating there are no overdue loans or unpaid taxes.

The guidance sets out stringent financial and compliance conditions. Institutions must be in sound financial health at the time of distribution. Retained earnings must not be negative, and dividends can only be declared based on audited financials from a profitable fiscal year.

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Cash dividends may not be paid from share premiums or gains from bargain purchases. Stock dividends can only be issued if the institution’s net worth is positive. Institutions must also ensure they hold adequate cash reserves and that no loan covenants prohibit dividend distribution.

Dividends will not be allowed if NRB has made serious compliance observations during recent on-site or off-site inspections that indicate financial risks.

The guidance also requires institutions to formulate a dividend distribution policy, subject to approval by their board of directors. The policy must address regulatory capital priorities, provisions for both cash and stock dividends, and the allocation of profits to various reserves.

Institutions must create specific reserves, including a Risk Bearing Reserve–to cover losses from unforeseen events, with mandatory transparent reporting to NRB; a General Reserve–funded by a fixed percentage of profits; an Infrastructure Development Reserve–to finance physical expansion; and other reserves as required by the central bank.

NRB said the objectives of the new guidance are to provide a clear framework for dividend decisions, ensure adequate regulatory capital, promote long-term financial sustainability, support business continuity planning, and build public confidence in the payment system.