Money & Banking

Working group submits report to RBI chief for better regulation of core investment companies

Our Bureau Mumbai | Updated on November 06, 2019 Published on November 06, 2019

In a bid to bring in better regulation of core investment companies (CICs), a working group set up by the Reserve Bank of India, has identified six main issues, including excessive leverage and corporate governance, and has suggested restricting the number of layers in such firms in a group to two.

“As such, any CIC within a group shall not make investment through more than a total of two layers of CICs, including itself,” said the working group to review the regulatory and supervisory framework for CICs in its report, as this would facilitate simplification and transparency of group structures.

For complying with this recommendation, the RBI may give about two years’ time 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.

Over leverage

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 that owns 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 September last year, IL&FS, which was a CIC with a large number of subsidiaries, defaulted on payments and the event brought the spotlight on the functioning of this model.

The panel also highlighted the need for corporate governance norms at such firms, as they are not explicitly applicable to them at present. To this end, it 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 and advocated the need to for inducting Independent Directors.

Among 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.

Published on November 06, 2019
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