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With a view to bringing in better regulation of core investment companies, a working group set up by the Reserve Bank of India has suggested that the number of layers of such firms in a group should be restricted to two.
“As such, any CIC within a group shall not make an investment through more than a total of two layers of CICs, including itself,” the Working Group to review the regulatory and supervisory framework for CICs in its report has said as this would facilitate simplification and transparency of group structures.
For complying with this recommendation, RBI may give an adequate time of say, two years, to the existing groups having CICs at multiple levels, it has suggested.
The group, which was set up in July this year and was chaired by former Corporate Affairs Secretary Tapan Ray, submitted its report to RBI Governor Shaktikanta Das on Wednesday.
To address problems of over leverage, the report has also recommended that capital contribution by a CIC in a step-down CIC, over and above 10 per cent of its owned funds, should be deducted from its adjusted networth, as applicable to other NBFCs.
“Further, step-down CICs may not be permitted to invest in any other CIC, while allowing them to invest freely in other group companies,” it said.
CIC is an NBFC which carries on the business of acquisition of shares and securities and holds not less than 90 per cent of its net assets in the form of investment in equity shares, preference shares, bonds, debentures, debt or loans in group companies. Further, investments in equity shares in group companies constitute not less than 60 per cent of its net assets.
In all, the group has identified six major issues that are required to be addressed to mitigate related risks for the CICs.
It has also suggested that every group having a CIC should have a Group Risk Management Committee. Constitution of the Board level committees - Audit Committee and Nomination and Remuneration Committee should be mandated, it has further said.
Amongst other recommendations, it has suggested that offsite returns may be designed by the RBI and may be prescribed for the CICs on the lines of other NBFCs ,annual submission of Statutory Auditors Certificates may also be mandated; and onsite inspection of CICs maybe conducted periodically.
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