Strictness in Dividend Distribution of Insurance Companies, Regulation of New Rules Regarding Dividend Declaration

Kathmandu : Nepal Insurance Authority has issued directive 2080 B.S regarding the financial statements of insurers. In which the authority that has encouraged decentralization of investment has restricted the profit distribution through the financial statement guidelines.If the investment in shares of a public limited company is not listed in the stock market for three years, the provision to deduct the amount equal to the investment from the distributable profit will put pressure on the insurer.

In the directive number 16 of the directive, there is a provision that if the investment in the public company’s shares is not listed in the stock market for three years from the date of investment, the insurer should deduct the investment amount accounted in the financial statement from the distributable profit.Also, if the insurance company’s investment in shares or mutual funds is removed from the list of the securities market in accordance with the prevailing law, the amount of the investment accounted in the financial statement should be reduced while calculating the distributable profit.

If the total sum of the funds created after adjustment in the statement of other income is negative, then the amount equal to that will have to be deducted while calculating the distributable profit of the insurance company. Otherwise, the dividend cannot be distributed under the new system.

The Net Income or Loss and “Share of Net Profit of Associates Accounted Using the Equity Method” including ‘Accumulated Income from Fair Value Changes’ and ‘Share of Net Profit of Associates Accounted Using Equity Method’ accumulated in the retained earnings account after adjustment in the profit and loss statement of the insurance company .The new provision mentions that the total amount should be deducted while calculating the distributable profit of the insurance company.

If there is a loss even in the loan provided by the insurer, there is a provision to reduce it while calculating the distributable profit. In sub-section 1 of 17, if the amount of any loan provided by the insurer is exceeded, an amount equal to the loan amount has been added to be deducted while calculating the distributable profit.Similarly, if the amount to be deducted according to sub-section (1) is more than the amount accounted for by the loss in the financial statement, the excess amount must be deducted while calculating the distributable profit.

The insurance company will also have to reduce the old accounts receivable for distribution of distributable profits.Before declaring dividends from distributable profits, the insurance company must submit an application to the authority for the approval of the documents and matters prescribed by the authority under section 43 of the Insurance Act, 2022A.D.

According to Section 101 of the Insurance Act, the insurance company has not been declared in trouble, the condition of subsection (1) of Section 43 of the Act does not exist, the authority has not partially or completely stopped the business of the insurance company, the provisions of Sections 36, 38, 39, 40, 41 and 42 of the Act Documents such as fully complied with, financial statements certified by the management, preliminary report of the external auditor and the answer submitted by the board of directors of the insurance company in this regard must be submitted to the authority.

If it is necessary to discuss the documents submitted by the insurer, the insurance authority may call the top management auditor of the insurance company or any related person and the insurer’s financial statement must be present at the time of the summons.

It is seen that if something is unclear in the application submitted by the insurance companies to the authority, the benefit distribution will be restricted.