Reserve Bank tightens norms for core investment companies

The Reserve Bank of India (RBI), on Thursday, said the number of layers of Core Investment Companies (CICs) within a group (including the parent CIC) should be restricted to two. This move is aimed at addressing the complexity in group structures and existence of multiple CICs within a group.

The aforementioned norm is applicable irrespective of the extent of direct or indirect holding/ control exercised by a CIC in the other CIC.

The RBI, through a circular, asked existing entities to reorganise their business structure accordingly and adhere to this guideline latest by March 31, 2023.

A CIC is a Non-Banking Financial Company (NBFC) that 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 should constitute not less than 60 per cent of its net assets.

Existing CICs

Currently, there are 64 CICsregistered with the RBI, including Aditya Birla Capital, Ambadi Investments Ltd, Bandhan Financial Services, Bharati Telecom, Cholamandalam Financial Holdings, Equitas Holdings, Fortis Healthcare Holdings, GMR Airports, IL&FS, L&T Finance Holdings, Reliance Capital, Tata Capital, Tata Industries, Tata Sons Pvt Ltd, Shriram Capital, and Ujjivan Financial Services.

The central bank said that if a CIC makes any direct/ indirect equity investment in another CIC, it will be deemed as a layer for the investing CIC.

Adjusted net worth

While computing the Adjusted Net Worth (ANW), the RBI emphasised that the amount representing any direct or indirect capital contribution made by one CIC in another CIC, to the extent such amount exceeds 10 per cent of Owned Funds of the investing CIC, needs to be deducted.

The central bank said the deduction requirement will take immediate effect for any investment made by a CIC in another CIC after the date of issue of its circular.

In cases where the investment by a CIC in another CIC is currently in excess of 10 per cent, the CIC need not deduct the excess investment as on the date of the circular from owned funds for computation of its ANW till March 31, 2023.

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, needs to constitute a Group Risk Management Committee (GRMC). All CICs with asset size of more than ₹5,000 crore have to appoint a CRO with clearly specified roles and responsibilities.

The GRMC has to analyse the material risks to which the group, its businesses, and subsidiaries are exposed. It must discuss all risk strategies, both at an aggregated level and by type of risk, and make recommendations to the board, in accordance with the group’s overall risk appetite.

Further, the committee needs to identify potential intra-group conflicts of interest and assess whether there are effective systems in place to facilitate exchange of information for effective risk oversight of the group.

CICs have to 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.

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