Core Investment Companies

Hello Every Body,

Just goint through provisions for core companies, found interesting to share.

Regards

Jaideep Pandya

1.  Regulatory Framework for Core Investment Companies (CICs)

The Bank had announced in the Annual Policy 2010-2011 that companies which have their assets predominantly as investments in shares for holding stake in group companies but not for trading, and also do not carry on any other financial activity, i.e., Core Investment Companies, (CICs), justifiably deserve a differential treatment in the regulatory prescripttion applicable to Non-Banking Financial Companies which are non deposit taking and systemically important. In order to rationalize the policy approach for CICs, such companies having an asset size of Rs.100 crore and above would be treated as systemically important core investment companies. They would require registration with the Reserve Bank and would be given exemption from maintenance of net owned fund and exposure norms subject to certain conditions. Consequent to the announcement, draft guidelines had been placed on the RBI website on April 21, 2010. The feedback received from the market participants have been considered and it has been decided to bring into effect the following regulatory framework for Core Investment Companies.

2. Core Investment Companies (CICs) were not considered as carrying on the business of acquisition of shares and securities in the following circumstances, namely,

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

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

iii) they were not carrying on any other financial activities; and

iv) they were not holding / accepting public deposits.

As such, companies fulfilling the above criteria were not required to obtain Certificate of Registration (COR) from RBI under Section 45 IA of the RBI Act 1934. It has been found in practice, that it is very difficult to determine whether a company has invested in the shares of another company for the purpose of holding stake or for the purpose of  trade. Even where initially investments had been made in some cases for holding stake in the investee company, for various reasons these shares were sold or additional shares were purchased. Such absence of clarity is not in the interest of the system. It was therefore decided that investing in shares of other companies, even for the purpose of holding stake should also be regarded as carrying on the business of acquisition of shares in terms of Section 45I(c) (ii) of RBI Act.

3. Systemically Important NBFCs

In 2006, in view of the systemic risk arising from access to public funds such as bank borrowings, CPs, etc, by NBFCs, and their interconnectedness with the financial system, the focus of regulatory concern widened to include non deposit taking NBFCs also. Accordingly, non deposit taking NBFCs with an asset size of Rs. 100 crore and more as per the last audited balance sheet were defined as systemically important, (NBFCs-ND-SI) and a regulatory framework was put in place for them vide Circular No 86 dated December 12, 2006.

4. Systemic Importance of Core Investment Companies

For the reasons stated in para 1 above, investing in shares of other companies, even for the purpose of holding stake should be regarded as carrying on the business of NBFI. In view of this, CICs will be required to obtain certificate of registration under Section 45-IA of the Reserve Bank of India Act, 1934. However, CICs with an asset size of less than Rs.100 crore would be granted exemption from the applicability of Section 45-IA of the Reserve Bank of India Act, 1934. In view of the systemic implications of access to public funds such as funds raised through Commercial Paper, debentures, inter-corporate deposits and other borrowings by CICs having asset size of 100 crore or above, such systemically important CIC will be required to obtain CoR under Section 45-IA of the Reserve Bank of India Act and be governed by the provisions of the Reserve Bank of India Act, 1934 and the directions issued by the Reserve Bank from time to time.

5. Constraints faced by Core Investment Companies

In view of the specificities of the business model of CICs, viz, holding stake in group companies and funding group concerns, CICs find it difficult to comply with the extant NOF requirements and exposure norms for NBFCs specified by the Reserve Bank. These issues have been considered while formulating the regulatory framework for CICs.

6. Regulatory Framework for Core Investment Companies

i) It is proposed to exempt Core Investment Companies (CIC) with an asset size of less than Rs.100 crores from the requirements of registration with RBI. For this purpose all CICs belonging to a Group will be aggregated.

ii) CICs with an asset size of Rs 100 crores or more will be considered as Systemically Important Core Investment Companies (CICs-ND-SI) and would be required to obtain Certificate of Registration (COR) from RBI under Section 45-IA of the Reserve Bank of India Act, 1934 even if they have been advised in the past that registration was not required.

iii) Capital Requirements: 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 an the date of the last audited balance sheet as at the end of the financial year.

iv) Leverage Ratio: Every CIC-ND-SI shall ensure that its outside liabilities at all times shall not exceed 2.5 times its Adjusted Net Worth as on the date of the last audited balance sheet as at the end of the financial year.

v) Exemptions: A CIC-ND-SI which adheres to the requirements regarding capital requirements and leverage ratio as specified at (iii) and (iv) above, may to the extent necessary, be exempted from compliance with:-

i) maintenance of statutory minimum Net Owned Fund (NoF) and

ii) requirements of "Non-Banking Financial (Non-Deposit Accepting or holding) Companies Prudential Norms (Reserve Bank) Directions, 2007" including requirements of capital adequacy and exposure norms.