Core Investment Company

Everything about Core Investment Companies (NBFC CIC)

The Reserve Bank of India classifies a Core Investment Management firm as a Non-Banking Financial Company. These businesses primarily invest in their own group firms’ shares for stake holding. However, they are not permitted to trade these instruments or engage in any other type of financial activity. In this blog, we will discuss everything about core investment companies, its requirement and the regulatory framework from the Reserve Bank of India.

RBI authority over NBFC – CIC

Because of the authority granted to the Reserve Bank of India under Chapter III B of the Reserve Bank of India Act, 1934^[1], Non-Banking Financial Companies are subject to regulation and oversight by the Reserve Bank of India. The regulatory and supervisory objectives are: 

1. To ensure the financial companies’ healthy growth.
2. To ensure that these companies operate within the policy framework as a part of the financial system in a way that prevents systemic aberrations and 
3. To ensure that the Bank’s surveillance and supervision of the NBFCs maintains its quality by keeping up with developments in this area of the economy.

Core Investment Companies (CICs), NBFC- Infrastructure Finance Companies (IFCs), Infrastructure Debt Funds- NBFCs, NBFC-MFIs, and NBFC-Factors are some of the more recent specialised NBFCs that RBI has created.

Core Investment Companies

A core investment company is a non-banking financial organisation that: 

(i) It has assets of at least Rs 100 crore.

(ii) Engages in the business of acquiring shares and securities and meets the requirements listed below as of the date of the most recent audited balance sheet:-

(iii) It holds at least 90% of its net assets in the form of equity shares, preference shares, bonds, debentures, debt, or loans in group companies.

(iv) Its investments in equity shares (including instruments compulsorily convertible into equity shares within a period of not more than ten years from the date of issue) in group companies account for at least 60% of its net assets, as mentioned.

(v) It does not engage in any other financial activity covered by Sections 45I(c) and 45I(f) of the RBI Act of 1934, with the exception of investing in bank deposits, money market instruments, government securities, loans to and investments in debt issuances of group companies, or issuing guarantees on behalf of group companies.

(vi) It does not trade in its investments in shares, bonds, debentures, debt, or loans in group companies except through block sale for the purpose of dilution

(vii) It accepts public funding

Requirements for Approval for Core Investment Company

The Reserve Bank of India treats Core Investment Companies as CIC-ND-SI (Systematically-Important-Core-Investment-Companies) when their assets total at least Rs. 100 crores or more. According to Section 45 IA of the RBI (Reserve Bank of India) Act, 1934, all such firms must register with the Reserve Bank of India in order to receive a Registration Certificate.

Regulatory Framework

1. Systemically Important CIC: A CIC that accesses public funds and has assets of more than 100 crore rupees is known as a systemically important CIC. According to the rules, such CICs must register with the RBI. It should be noted that when there are numerous CICs, the total asset amount of all CICs is taken into account.

2. Principal Business: CICs must hold at least 90% of their net assets in group companies, and 60% of their net assets must be invested in equity shares of group companies (not for trading, but only for the purpose of holding stakes over the long term). Total assets, excluding cash and bank balances, investments in money market instruments, money market mutual funds, advance tax payments, and deferred tax payments, are considered net assets.

Nonetheless, CICs are allowed to invest in bank deposits, money market instruments, government securities, and bonds or debentures issued by group firms. CICs are not allowed to conduct financial business activities. Also, they are permitted to guarantee debts owed by group firms and extend loans to them.

3. Capital Requirement: A CIC’s adjusted net worth must never fall below 30% of its total risk-weighted assets on the balance sheet and its risk-adjusted value of off-balance sheet items as of the latest audited balance sheet date as of the end of the financial year. 

4. Leverage Ratio: A company’s leverage ratio is the proportion of its debt to its net worth after adjustments. A CIC’s leverage ratio must not exceed 2.5:1 at all times. 

5. Asset Classification: Each CIC must categorise its lease/hire purchase assets, loans and advances, and any other forms of credit into Standard assets, sub-standard assets, doubtful assets, and loss assets after taking into account the degree of well-defined credit weaknesses and the extent of dependence on collateral security for realisation.

Improved Governance

• Independent directors must be appointed, internal audits must be performed, and consolidated financial statements must be prepared.
• It is necessary to ring-fencing CIC boards by barring group firm employees and executive directors from serving on them.
• The Audit Committee, Nomination and Remuneration Committee, and Group Risk Management Committee should be board-level committees that CICs should establish.

Classification of Core Investment Company/CIC

Two categories can be used to classify Core Investment Companies: Non-Systemically Important (NSI) and Systemically Important (SI) CIC-ND (SI).

1. Non-Systemically Important CIC (NSI): According to the most recent audited balance statement, this CIC does not accept deposits and has assets worth less than Rs. 100 crore.
2. A CIC (SI) of Systemically Importance: According to the most recent audited balance statement, it qualifies as a CIC if it holds or raises public funds and its total assets, whether separately or together with other CICs in the Group, holding total assets of Rs. 100 crore or more.

Such a business must register as an NBFC with the RBI in order to operate. If they do not have a Certificate of Registration from the central bank, they are in violation of the 2016 Core Investment Companies (Reserve Bank) Guidelines.

In general, even if public funds include public deposits, it is essential to emphasise that CICs cannot accept public deposits and that no NBFC is allowed to accept public deposits without a special waiver from the RBI, even after NBFC registration.

What are Group companies?

Group firms are any two or more businesses that are tied to one another by joint ventures, subsidiaries, associates, etc. and have equity stake investments of at least 20%. There should not be more than two subsidiaries of the group company when a Core Investment Company invests in or transacts with it. Layers are the name of these affiliated companies.

To facilitate regulation, the RBI has mandated that this number of layers be limited to two. The RBI has additionally recommended the creation of Group Risk Management Committees for improved CIC management and operation.

Exemption from Registration

• According to the Act, CICs with assets under Rs. 100 crore are excluded from registration. By adding up the individual asset sizes of each CIC in a given group, one can determine the total asset size of a Core Investment Company. Whenever the total value of the assets exceeds Rs. 100 crores, the Core Investment Company is required to register.
• CICs with a value of Rs. 100 crore or more, but access to public funding is not exempted.
• It is crucial to keep in mind that if such CICs seek to make investments in the overseas financial industry and their asset size is below Rs. 100 crore, they must register with the RBI. Additionally, they must adhere to all rules and requirements that apply to registered CIC-ND-SI. However, the specific Core Investment Company does not need to be registered with the RBI if it is investing abroad in non-financial sectors.
• According to the Act, all Core Investment Companies have assets under Rs. 100 crore must apply for the certificate of registration within three months of the day their balance sheets reach Rs. 100 crore.

RBI Rules for CIC-ND-SI

The Core Investment Companies should follow the necessary guidelines mentioned by RBI, and they are as follows:

• Mandatory registration with the RBI.
• Maintaining the minimum capital ratio.
• Keeping records of the board’s investment policies.
• Investments should be spread out among current and long-term securities.
• Each investment the CIC quotes will be compared to its cost or market value, whichever is lower.
• The ICAI Accounting Standards will be followed for any long-term investments.
• The value of overseas assets is limited to 400% of CIC-owned money.
• For investments made overseas, a statutory auditor’s annual certification must be obtained and submitted to DNBS.

Conclusion

When the RBI first launched CIC, business houses embraced it since it gave them the freedom to control operating companies through a single holding company without registering as an NBFC, saving them money on compliance fees and a vicious cycle of regulation. But, over time, corporate houses have benefited from less regulated CICs. 

The investing public, including all sorts of stakeholders, is eagerly awaiting a strengthening of these companies with guidelines, and the RBI’s recent norms tightening core investment companies is a welcome move, which will ensure that investment capital is used for the intended goals and will increase the value of investors’ initial contributions.

Also Read:
Core Investment Company Registration Procedures
RBI Notification: Revised Guidelines for Core Investment Companies