Monday, May 3, 2010

Core Investment Companies – Draft RBI Guidelines

(The following post has been contributed by Vijay Kumar, a lawyer and a company secretary by qualification, who is practising as an Advocate in the Chennai High Court with the law firm of Iyer and Thomas)
Non – Banking Finance Companies have been classified as

a. Asset Finance Company

b. Investment Company

c. Loan Company
The Reserve Bank of India (RBI) is now proposing to introduce a third category of companies called Systemically Important Non-Deposit Accepting Core Investment Companies within its fold. Traditionally investments in group companies are held through a special purpose vehicle (SPV) with a corporate structure. The business of these SPVs comprise acquiring shares/stocks and debentures and providing finance to the group companies. These companies are therefore covered within the definition of Non-Banking Finance Company in accordance with the Reserve Bank of India Act, 1934.

However these companies were not considered as carrying on the business of acquiring shares and stocks in the following circumstances:

- not less than 90% of their assets were in investments in shares for the purpose of holding stake in the investee companies;

- they were not trading in these shares except for block sale (to dilute or divest holding);

- they were not carrying on any other financial activities; and

- they were not holding / accepting public deposits.
As a result these, promoters and investment companies were not required to obtain certificate of registration from the RBI.

However RBI is now proposing to introduce non deposit accepting core investment companies (CIC) with an asset size of more than Rs. 100 crores within its fold. Such companies will be considered as Systemically Important Core Investment Companies (CICs-ND-SI). As a result, RBI is proposing compulsory registration of these NBFCs. The restrictions applicable to CICs are the following-:

a. 90 per cent of the total assets of CICs-ND-SI should be in investments in equity, debt, or loans in group companies, provided that the investment in equity shares of Group companies for the purpose of holding stake in these companies is not less than 60% of total assets;

b. CICs, including CICs-ND-SI, should not accept or hold public deposits;

c. Every CIC-ND-SI shall ensure that at all times it maintains a minimum Capital Ratio whereby its Adjusted Net Worth shall not be less than 30% of its aggregate risk weighted assets on balance sheet and risk adjusted value of off balance sheet items as on the date of the last audited balance sheet; and

d. Outside liabilities of a CIC-ND-SI shall not exceed 2.5 times of its Adjusted Net Worth calculated as on the date of the last audited balance sheet.
The strategic advantages that a CIC-ND-SI would enjoy is that it would be exempted from-

a. Maintenance of statutory minimum Net Owned fund requirement of Rs. 2 crores; and

b. Concentration and exposure norms.
Therefore, it shall be entitled to make investment without regard to concentration norms as otherwise applicable to other investment companies. Concentration norms prevent NBFCs from making investments or providing financial facilities beyond certain percentage of the net worth to a single entity or its group. These exposure and concentration norms are perceived by NBFCs as hindrance to the growth of their asset portfolio and business. Apart from the above, CICs-ND-SI would now be required to furnish certain returns, which were otherwise not applicable previously.

This would have tremendous impact in case of promoter companies having huge investments and financial asset portfolio. These companies would be required to get themselves registered with RBI and obtain Certificate of Registration. Since CICs –ND-SI would be required to submit monthly returns, financial information of these promoter companies would become public at regular intervals enabling stake holders to take an educated call on these companies.

- Vijay Kumar


yogesh baviskar said...

I believe there is one more type of NBFC which was introduced recently, namely, Infrastructure Finance Companies. see here -

Aarthi said...

How is this different from the "investing company" under Clause 4.6.4 consolidated FDI circular?

swetha prashant said...

Hi Aarthi,

In my opinion, the difference between investing companies and CICs is merely in terminology and not in the nature of their businesses (which is predominantly holding shares/securities in group companies). The DIPP under the FDI framework has classified holding companies based on the nature of their business operations for the purpose of regulating downstream investments by such holding companies and “investing companies” is one such classification. The RBI, on the other hand, has introduced a new classification of NBFCs– core investment companies (“CICs”) - for delineating such companies from other NBFCs (due to difference in the nature of business and investment philosophies of CICs and other NBFCs). The RBI now considers companies holding 90% or more of its total assets in the form of investment in equity shares, preference shares, debt or loans in group companies and having an asset size of Rs. 1,000,000,000 and above and accepting or holding public funds as (systemically important) CICs and such companies will have to register themselves with the RBI as such and comply with the relevant RBI guidelines. Having said that, all investing companies are not CICs (as such investing companies need to satisfy the parameters set out by the RBI for CICs) and all CICs are investing companies. It is, therefore, not only important to ensure if a holding company is an “investing company” under the FDI policy but also whether it is a CIC under the relevant RBI guidelines. Hope this clarifies yours query.

Would welcome your thoughts in this regard.