Section 15 of the Banking Regulation Act, 1949: Restrictions as to Payment of Dividend
Section 15 of the Banking Regulation Act, 1949 places conditions on the payment of dividends by a banking company. In general, capitalised expenses and losses not represented by tangible assets must be completely written off before a dividend is paid, subject to the specific exceptions contained in sub-section (2).
What Section 15 means
The provision is intended to prevent a banking company from distributing profits to shareholders while certain capitalised expenses or losses remain unwritten. It therefore links dividend distribution to the proper recognition or provisioning of specified expenses, depreciation and bad debts.
- A banking company cannot pay a dividend until the capitalised expenses described in sub-section (1) have been completely written off.
- Sub-section (2) creates limited exceptions for specified depreciation and bad debts where the statutory conditions are satisfied.
- For investments other than approved securities, adequate provision for depreciation must be made to the satisfaction of the auditor.
- For bad debts, adequate provision must likewise be made to the satisfaction of the auditor.
Statutory text of Section 15
15. Restrictions as to payment of dividend.
(1) No banking company shall pay any dividend on its shares until all its capitalised expenses (including preliminary expenses, organisation expenses, share-selling commission, brokerage, amounts of losses incurred and any other item of expenditure not represented by tangible assets) have been completely written off.
(2) Notwithstanding anything to the contrary contained in sub-section (1) or in the Companies Act, 1956 (1 of 1956), a banking company may pay dividends on its shares without writing off-
(i) the depreciation, if any, in the value of its investments in approved securities in any case where such depreciation has not actually been capitalised or otherwise accounted for as a loss;
(ii) 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;
(iii) the bad debts, if any, in any case where adequate provision for such debts has been made to the satisfaction of the auditor of the banking company.
Important definitions
Banking company
Section 5(c) defines a banking company as a company which transacts the business of banking in India. The definition also contains an explanation excluding a manufacturing or trading company that accepts public deposits merely for financing its own manufacturing or trading business.
Approved securities
Section 5(a) defines approved securities as securities issued by the Central Government or any State Government, or such other securities as may be specified by the Reserve Bank from time to time.
How sub-section (2) operates
Sub-section (2) begins with a non-obstante clause. It permits dividend payment without first writing off the three specified categories, but only where the conditions written into clauses (i), (ii) and (iii) are met. This exception should therefore be read narrowly with the accounting and auditor-satisfaction requirements stated in the provision itself.
Legislative history noted in the Act
Section 15 was re-numbered as sub-section (1) by section 10 of the Banking Companies (Amendment) Act, 1959 with effect from 1 October 1959. Sub-section (2) was inserted by the same amending provision with effect from 1 October 1959.
Official source
For authoritative verification and the complete Act, consult the official India Code publication of the Banking Regulation Act, 1949.
This article is for general legal information. Readers should verify the latest statutory text, amendments, notifications and applicable regulatory directions before relying on it for a specific matter.