The Reserve Bank of India (RBI) has recently announced the creation of a working group to reassess the current regulatory guidelines applicable to Core Investment Companies (CIC). This move comes as part of a larger effort to strengthen the corporate governance framework of these institutions, especially in light of recent developments that have made corporate group structures more interconnected and complex.
Background on Core Investment Companies
Core Investment Companies (CICs) are a specific type of Non-Banking Financial Company (NBFC), characterized by an asset size of 100 crore or more. They primarily engage in the acquisition of shares and securities under specific conditions. For instance, they hold at least 90% of their net assets in investment forms such as equity shares, preference shares, bonds, debentures, and loans in group companies. Furthermore, their investments in equity shares in their group companies must constitute no less than 60% of their net assets.
CICs do not engage in trading with any investments other than through block sales for the purpose of disinvestment or dilution. Their only financial activities outside of investment are limited to involvement in bank deposits, government securities, money market instruments, loans to and investments in debt issuances of group companies or guarantees issued on behalf of group companies. Importantly, CICs do accept public funds.
Group Companies Explained
Group companies are associations of two or more entities related to each other through various relationships. These can include being a subsidiary, joint venture, associate, or promoter-promotee (for listed companies). Other possible relationships include being a related party, sharing a common brand name, or holding an investment in equity shares of 20% or more.
History of Core Investment Company Regulation
Regulation of Core Investment Companies by RBI began in August 2010, with the introduction of a standalone framework. The rationale for this approach was the distinct business model of a holding company compared to other non-banking financial companies. Over time, however, corporate group structures have become more convoluted, with increasing layers and leveraging leading to more significant interconnectedness with the financial system.
Current Regulatory Framework and Working Group Objectives
| Objective | Description |
|---|---|
| Examine Current Framework | Review the effectiveness, efficacy, and adequacy of the current framework. |
| Assess Registration Practice | Evaluate the current RBI approach towards CIC registration. |
| Strengthen Corporate Governance | Suggest measures to boost governance and disclosure requirements. |
| Supervisory Returns | Assess the adequacy of supervisory returns submitted by CICs. |
| Enhance Supervision | Recommend methods to improve RBI’s off-site surveillance and on-site supervision over CICs. |
The Working Group and Future Directions
Headed by Tapan Ray, the newly instituted working group is tasked to examine the current regulatory framework for CICs. It aims to evaluate and suggest changes to every element of it, assess the appropriateness of the current RBI registration approach for CICs, and propose methods to enhance corporate governance and disclosure necessities. The group will also evaluate the adequacy of supervisory returns submitted by CICs and suggest changes, if necessary. Finally, the team will propose appropriate measures to enhance RBI’s off-site surveillance and on-site supervision over CICs. The working group report is expected to be submitted by October 31, 2019.
