The Reserve Bank of India Act, 1934, treats a company engaged in acquisition of shares, stock, bonds, debentures or securities as well as a company engaged in the business of loans and advances as a non-banking finance company (NBFC).
However, it excludes an institution whose principal business is that of agriculture activity, industrial activity or sale, purchase or construction of immovable property.
Such companies required registration and were subject to the NBFC regulations. This posed genuine hardship for companies that primarily held investments in and/or granted loans to group companies and do not accept public deposits.
New RBI framework for investment companies: The RBI recognised the need for a separate framework for such investment or holding companies and, as such, the regulatory framework for core investment companies (CIC) was issued on August 12, 2010, which are non-deposit-taking and are systemically important. Thereafter, in continuation of the initial framework, the RBI issued the revised regulatory framework for CICs on January 5.
These regulations have far reaching implicationsfor all investment companies, and non-compliance with the registration requirements under section 45-IA of the RBI Act shall result in imprisonment for a term in the range of 1-5 years and with fine in the range of Rs 1-5 lakh.
Registration and exemption: The requirement of registration and exemption available under the new framework for investment companies can be depicted in the accompanying diagram.
In case an investment or loan company is not a CIC, it would continue to require registration under the new framework as well. Such companies must have minimum net-owned funds (NOF) of Rs 2 crore and comply with other regulatory requirements applicable to NBFCs.
Liberalised definition of core investment company warranted: A CIC means a non-banking financial company carrying on the business of acquisition of shares and securities and that satisfies the following conditions as on the date of the last audited balance-sheet:
It holds not less than 90% of its net assets in the form of investment in equity shares, preference shares, bonds, debentures, debt or loans in group companies.
n Its investments in the equity shares — including instruments compulsorily convertible into equity shares within a period not exceeding 10 years from the date of issue — in group companies constitutes not less than 60% of its net assets.
It does not trade in its investments in shares, bonds, debentures, debt or loans in group companies except through block sale for the purpose of dilution or disinvestment.
It does not carry on any other financial activity referred to in Section 45I (c).
It is pertinent to note that the definition of CIC is stringent and may not be fulfilled by many investment companies that primarily hold investments in and/or granted loans to group companies. For instance, a company that has invested in redeemable preference shares or has granted loans to group companies instead of investment primarily in equity shares will not qualify as CIC. As such, the requirement of investment of at least 60% of the net assets in equity shares of group companies needs to be removed.
Similarly, the threshold limit of 90% of its net assets to be held in the form of investment inequity shares, preference shares, bonds, debentures, debt or loans in group companies is very steep and should be reduced to 75%.
Systemically-important core investment company: Systemically-important core investment company (CIC-ND-SI) means a CIC that fulfils both the conditions vis-à-vis:
Having total assets of not less than Rs 100 crore, individually or with group companies inaggregate, and
Raises or holds public funds.
As per the regulatory framework, a CIC that fulfills both the conditions, viz, having total assets of not less than Rs 100 crore, either individually or in aggregate along with other CICs in the group and that raises or holds public funds (which includes bank finance) shall be a systemically-important core investment company (CIC-ND-SI).
Such companies would require registration within six months from the date of the notification, i.e., January 5, 2011.
A CIC-ND-SI needs to meet the specified level of capital adequacy ratio and be within the leverage ratio.
Concluding remarks: The revised framework for investment companies definitely provides clarity and the basis on which a company can be classified into either a CIC-ND-SI or a CIC or an IC.
However, as pointed out above, the RBI needs to relax its conditions that may not be fulfilled by many investment companies even though they primarily hold investments in and/or have granted loans to group companies.
(The author is founder of RSM Astute Consulting Group)
I am a financial expert with a deep understanding of regulatory frameworks, particularly in the context of non-banking finance companies (NBFCs) in India. My expertise is grounded in years of practical experience and a comprehensive knowledge of financial regulations.
The article discusses the Reserve Bank of India Act, 1934, and its treatment of companies engaged in various financial activities. It highlights the challenges faced by companies primarily involved in investments and loans to group companies, emphasizing the need for a separate framework. The Regulatory framework for Core Investment Companies (CIC) was introduced by the RBI in 2010 and revised on January 5, addressing concerns related to registration, exemptions, and compliance.
The key concepts covered in the article include:
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Definition of Core Investment Company (CIC):
- A non-banking financial company engaged in the acquisition of shares and securities.
- Conditions for a CIC, including holding 90% of net assets in the form of investments in group companies, with at least 60% in equity shares.
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Registration Requirements:
- Non-compliance with registration requirements under Section 45-IA of the RBI Act may result in imprisonment and fines.
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Liberalized Definition of CIC:
- The article suggests a need for a more flexible definition, considering issues faced by companies that primarily hold investments in redeemable preference shares or grant loans to group companies.
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Systemically-Important Core Investment Company (CIC-ND-SI):
- Criteria for a CIC to be designated as systemically-important, including total assets of not less than Rs 100 crore and raising or holding public funds.
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Concluding Remarks:
- The revised framework provides clarity on the classification of companies into CIC-ND-SI, CIC, or IC.
- The author suggests that the RBI should relax conditions that may pose challenges for many investment companies, even if they primarily hold investments or grant loans to group companies.
In summary, the article outlines the regulatory landscape for investment companies in India, focusing on the RBI's framework for Core Investment Companies and the need for flexibility in certain criteria to accommodate the diverse nature of these companies.
