RBI Notification: Revised Guidelines for Core Investment Companies

Ashish M. Shaji

13 Sep, 2022

The Reserve Bank of India announced revised guidelines for Core Investment Companies mandating more disclosures, better management of risk, and a simpler group structure.

What are the Core Investment Companies (CICs)?

Core Investment Companies are non-bank lenders holding not less than 90 percent of their net assets as investments in equity shares, preference shares, debentures, bonds, debt, or loans in group companies. 

CICs are Non-Banking Financial Companies (NBFCs) with an asset size of 100 crore rupees and above. They carry on the business of acquisition of shares and securities subject to certain conditions.

What are the key highlights of the guidelines issued by the Reserve Bank of India for Core Investment Companies?

The brief of the guidelines issued are as follows:

• Change in the definition of Adjusted Net Worth

Adjusted Net Worth is calculated on the basis of the amount representing any direct or indirect capital contribution made by one CIC in another CIC to an extent such amount exceeds 10 percent of owned funds of the investing CIC, shall be deducted. All the other terms and conditions for computing Adjusted Net Worth remain the same.

The deduction requirement will take immediate effect for any investment made by CIC in another after the date of issuance of this circular. If the investment by a CIC in another CIC is already in excess of 10 percent as on the date of the circular, the CIC is not required to deduct the excess investment as on the date of the circular from owned funds for computation of its Adjusted Net Worth till 31^st March 2023. 

• Group Structure

With a view to addressing the complexity in group structure and existence of multiple CICs within a group, it was announced that the number of layers of CICs within a group (including parent CIC) should be restricted to two, regardless of the extent of direct or indirect holding or control exercised by a CIC in other CIC. Further, the Reserve Bank advised existing entities to reorganize their business structure and adhere to this guideline by 31^st March 2023.

• Risk Management

The Reserve Bank stated that the parent CIC in the group or the CIC with the largest asset size would be required to form a Group Risk Management Committee. It will report to the board of the CIC that constitute it and should meet at least once in a quarter.

The constitution of the Group Risk Management Committee shall be as under:

1. Minimum of five members including executive members;
2. Minimum Two members will be independent directors, one of whom shall be the chairperson; and
3. Members will have adequate and commensurate experience in risk management practices.

        The Committee’s responsibilities are as under:

1. To analyze the material risk to which the group, its businesses, and subsidiaries are exposed.
2. To discuss all risk strategies and make recommendations to the Board in accordance with the groups’ overall risk appetite.
3. To identify potential intra group conflicts of interest.
4. To assess whether there is an effective system in place to facilitate the exchange of information for effective risk oversight of the group.
5. To assess if the corporate governance framework addresses risk management across the group.
6. To carry out a periodic independent formal review of the group structure and internal controls.
7. Articulate the leverage of the group and monitor it.

Based on the analysis and the recommendations of the Group Risk Management Committee, CICs shall initiate corrective action, where necessary. The Chief Risk Officers shall initiate such corrective action.

CICs with assets of more than 5000 crore rupees shall appoint a Chief Risk Officer with clearly specified roles and responsibilities.

• Corporate Governance and Disclosure Requirements

The RBI notification stated that disclosure requirements should be applicable to NBFC-CICs according to the guidelines contained in the Annex. The guideline indicates basic minimum requirements, and CICs shall strive to achieve high standards of governance and disclosure.

The RBI stated that the CICs must ensure that a policy is put in place with the board approval for ascertaining the fit and proper status of directors not just at the time of the appointment but also on a continuous basis. 

• Consolidation of Financial Statement

Core investment firms are required to prepare a Consolidated Financial Statement (CFS) according to the provision of the Companies Act, 2013^[1], in order to provide a clear view of the financials of the group as a whole. However, it may be possible that the entities that meet the definition of the group according to the extant regulations are not covered under consolidation due to exemptions provided as per statutory provisions/applicable accounting standards. For such entities that are not included in the consolidation, disclosures will be made in the indicative format mentioned in para 2 of the Annex.

• Exceptions to carrying out other financial activity

CICs are allowed to invest in the money market instruments, including mutual funds that make investments in money market instruments/debt instruments with a maturity of up to one year.

• Registration

Core Investment Companies (CICs) with an asset size of less than 100 crore rupees, irrespective of whether accessing public funds or not and with an assets size of 100 crore rupees and above and not accessing public funds are not needed to register with the bank under 45IA section of the RBI Act, 1934 in terms of the notification no. DNBS. PD. 221/CGM (US) 2011.

• Change in Nomenclature

A systematically important core investment company, as mentioned in sub-para (xxv) of the para 3 of the Core Investment Companies (Reserve Bank) Directions, 2016 shall be henceforth termed as a Core Investment Company (CIC). A CIC which is not required to be registered as per the above para will henceforth be termed as ‘Unregistered CIC’ instead of ‘Exempted CIC.’ 

• Others

CICs implementing Indian Accounting Standards are required to adhere to the circular DOR (NBFC) .CC.PD No. 109/22.10.106/ 2019/20 dated 13^th March 2020 on implementation of Indian Accounting Standards.

All Core Investment Companies are required to adhere to the guidelines on submission of data to Credit Information Companies according to the para 100 and 101 of the master direction Non-Banking Financial Company- systematically important non-deposit taking company and Deposit taking Company (Reserve Bank) Directions 2016. 

Conclusion

Read our article:Core Investment Company Registration Procedures