Wednesday, 28 October 2020

Revised Framework for Core Investment Companies

 The Reserve Bank of India (‘RBI’) vide its circular dated August 13, 2020 has revised the regulatory framework applicable to core investment companies (‘CICs’)  in order to ensure stability of the financial system and address systemic risks posed by CICs and their group companies.

CICs are non-banking financial company holding not less than 90% of their net assets as investments in equity shares, preference shares, bonds, debentures, debt or loans in group companies. Its investments in equity shares in group companies constitute a minimum of 60% of its net assets.

RBI had constituted a Working Group (WG) to Review Regulatory and Supervisory Framework for CICs, on July 03, 2019, with Shri Tapan Ray, former Secretary, Ministry of Corporate Affairs, GoI as the Chairperson. Based on the key recommendations provided by the WG, the revised framework has now been issued by RBI.

The key takeaways from the revised guidelines are as follows:

  • Restriction on the number of layers in group structure: RBI has directed CICs to restrict the number of layers in their group structure to just two as it seeks to clean up the structure of complex financial groups. Existing CICs have been given until the end of March 2023 to comply with this simplified structure.
  • Adjusted Net Worth (ANW) : While computing ANW, the amount representing any direct or indirect capital contribution made by one CIC in another CIC, to the extent such amount exceeds ten per cent of owned funds of the investing CIC, will be deducted. The deduction will take place immediately for any investment made by one CIC in another CIC from now on. If an investment by a CIC in another CIC is already in excess of 10% as of August 13, 2020, the entity need not deduct the amount till March 31, 2023.
  • Constitution of a Group Risk Management Committee (GRMC): The parent CIC in the group or the CIC with the largest asset size, in case there is no identifiable parent CIC in the group, will constitute a Group Risk Management Committee (GRMC), to analyse the material risks to which the group, its businesses and subsidiaries are exposed. The GRMC shall report to the board of the CIC that constitutes it and shall meet at least once in a quarter. The GRMC shall consist of a minimum of five members, including executive members. At least two members shall be independent directors, one of whom shall be the chairperson of the GRMC. Members will be required to have adequate and commensurate experience in risk management practices.
  • Corporate Governance and Disclosure Requirements: CICs are required to develop and maintain a functional website revealing the basic information about the entity and the group, annual report, corporate governance report, management discussion and analysis.
  • CICs shall ensure that a policy is put in place with the approval of the Board for ascertaining the ‘fit and proper’ status of directors not only at the time of appointment, but also on a continuous basis.
  • The RBI has mandated strict disclosure formats which require details of leverage, guarantees and investments. A detailed disclosure of the maturity pattern of assets and liabilities has also been prescribed.
  • Exceptions to carrying other financial activity: RBI has now permitted CICs to invest in money market instruments, including mutual funds which make investments in money market instruments/debt instruments with a maturity of up to 1 year.
  • Consolidation of Financial Statement (CFS): It has been directed that CICs shall prepare CFS as per provisions of Companies Act, 2013, so as to provide a clear view of the financials of the group as a whole. However, it is possible that entities that meet the definition of group as per extant regulations are not covered under consolidation due to exemptions granted as per statutory provisions/ applicable accounting standards. For such entities which are not included in the consolidation, disclosures shall be made in the indicative format.
  • Change in nomenclature and Registration: Besides the above, the revised framework has also modified the nomenclature of Systemically Important CIC to “Core Investment Company” and exempts CICs to "Unregistered CICs". The exempt CICs are the CICs with an asset size of (a) less than INR 100 Crore; or (b) with an asset size of INR 100 Crore and above and not accessing public funds.

This Article has been Compiled by Charu Jhamtani (Associate)

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The contents of this article should not be construed as legal opinion. This article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. We expressly disclaim any financial or other responsibility arising due to any action taken by any person on the basis of this article.


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