It does not carry on any other financial activity referred to under the Act, such as financing, borrowing or lending, acceptance of public deposits, hire purchase, leasing, etc.
It can carry on the following activities:
a) investment in bank deposits, money market instruments, including money market mutual funds government securities, and bonds or debentures issued by group companies.
b) granting of loans to group companies, and
c) issuing guarantees on behalf of group companies.
Group companies:
For the above definition, two or more companies are treated as group companies if they are related to each other through any one or more of the following relationships:
- they are Subsidiary and Parent as defined in Accounting Standard 21;
- they are Joint Venture partners as defined in Accounting Standard 27;
- they are Associates as defined in Accounting Standard 23;
- if they are listed companies, they are Pro-moter-Promotee as defined in the SEBI (Sub-stantial Acquisition of Shares and Takeover) Regulations, 1997;
- they are Related Parties as defined in Accounting Standard 18;
- they share a common Brand Name. What is meant by common brand name has not been defined, for instance, if two or more companies have the same first name but since they have different lines of businesses they have different brands/logos, would it be considered that they share a common brand name? E.g., Apex Finance Ltd. and Apex Chemicals Ltd. are two companies within a group. Would they be considered as sharing a common brand name?;
- one company has made an investment of 20% or more in the equity shares of another company.
The definition of group companies was not given in the earlier Guidelines and hence, was the subject matter of great debate. Now the Directions have defined this term. This is a very wide definition encompassing several relationships within its ambit.
Registration of CICs:
Depending upon whether or not the CIC is a Systemically Important Non-Deposit (‘SIND’) taking company it needs to register with the RBI. A systemically important non-deposit taking core investment company means a Core Investment Company which fulfils all the following three conditions:
- it has total assets of Rs.100 crore or more either individually or in aggregate along with other Core Investment Companies in the group. The RBI has clarified that if a single group has four to five prospective CICs with an aggregate asset size of more than Rs.100 crore, then all the companies in the group that are CICs would be regarded as CICs-ND-SI and would be required to obtain a Certificate of Registration from the RBI.
- it raises or holds public funds. Public funds have been defined to include funds raised either directly or indirectly through public deposits, commercial papers, debentures, inter-corporate deposits and bank finance, but excludes funds raised by issue of instruments compulsorily convertible into equity shares within a period not exceeding 10 years from the date of issue. The RBI has clarified that if in a single group there are various prospective CICs with an aggregate asset size of more than Rs.100 crore and only one of the companies has raised/holds public funds, then only the specific entity which has raised/holds public funds would be regarded as CIC-ND-SI, and thus would be required to seek registration as CIC-ND-SI with the Bank. For example : HoldCo is the parent group CIC holding 100% equity capital of A, B and C, all of which are also CICs. In such a case only C has to be registered as a CIC, provided C is not being funded by any of the other CICs either directly or indirectly;
- it does not accept public deposits.
This definition of SIND is different from the definition contained in the Non-Banking Financial (Non-Deposit Accepting or Holding) Companies Prudential Norms (Reserve Bank) Directions, 2007. According to those Directions, a SIND is one which individually has total assets in excess of Rs.100 crores and which is not accepting public deposits. There is no additional criteria of holding these assets in excess of Rs.100 crores in aggregate along with other CICs in the Group. Further, there is no condition of raising or holding public funds under those Directions. Thus, one has to consider the definition of a SIND differently under differ-ent Directions. The additional criteria added by these Directions is a departure from the earlier Guidelines issued on CICs.
Every Systemically Important Core Investment Company (‘CIC-ND-SI’) shall latest by 5th July 2011, apply to the Reserve Bank of India for grant of Certificate of Registration, irrespective of any contrary guidelines issued in the past by the Reserve Bank of India. The application form for CICs- ND- SI is available on the RBI’s website and is to be submitted to the Regional Office of the Department of Non-Banking Supervision (DNBS) in whose jurisdiction the Company is registered along with necessary supporting documents mentioned in the application form.
According to the RBI, a holding company not meeting the criteria for a CIC would require to register as an NBFC. However, if such company wishes to register as CIC-ND-SI/be exempted as CIC, then it would have to apply to RBI with an action plan achievable within the specific period to reorganise its business as CIC. If it is not able to do so, it would need to comply with NBFC requirements and prudential norms.
A CIC-ND-SI which applies for grant of Certificate of Registration to the Reserve Bank of India by the above period shall be entitled to continue to carry on its existing businesses as a Core Invest-ment Company, till the RBI disposes its application. This is a beneficial provision.
Every company which becomes a CIC shall apply to the Reserve Bank of India for grant of Certificate of Registration within a period of three months from the date of becoming a CIC-ND-SI.
CIC which is a CIC-ND-SI is not required to maintain net owned funds of Rs.2 crore, subject to the condition that it meets with the capital requirements and leverage ratio as specified in the said directions. NBFCs already registered with the RBI as Category ‘B’ Companies whose asset size is below Rs.100 crore, and fulfil the crite-ria for exemption as a CIC, can seek voluntary deregistration (as such companies are not otherwise required to get registered with the Bank under the new norms). Audited balance sheet and auditors’ certificate are required to be submitted for the purpose.
The CIC registration requirements can be sum-marised in as given Table 1.
The Directions require a company to own 90% of its total assets in group companies, whereas according to the RBI any activity of owning shares in compa-nies is a non-banking business. Hence, the question which arises is that how can a company shore up its assets to include group company shares without first obtaining registration with the RBI as an NBFC ? It is a perennial chicken-and-egg problem ! According to the RBI, such a company would have to apply for a Certificate of Registration to the RBI, giving a business plan within a prescribed time period of one year in which it would achieve CIC-ND-SI status. In case the company is unable to do so, then the exemptions would not apply and the company would be regarded as an NBFC and it would have to comply with NBFC capital adequacy and exposure norms.
Capital Adequacy Norms:
The Adjusted Net Worth of a CIC-ND-SI shall always be greater than or equal to 30% of its aggregate risk weighted assets on balance sheet and risk adjusted value of off-balance sheet items as on the date of the last audited balance sheet as at the end of the financial year.
The adjusted net worth is computed as given in Table 2.
Thus, CICs would now have to factor in losses made in the quoted investments.
The method for computing the on-balance sheet items and the off-balance sheet items are laid down in the Directions.
The outside liabilities of a CIC-ND-SI must not ex-ceed 2.5 times its Adjusted Net Worth as on the date of the last audited balance sheet as at the end of the financial year. Thus, such companies would now have to limit their borrowings and access to outside funds and in order to increase their borrowings by CICs, the promoters would have to increase the proportion of owned funds. Outside liabilities have been defined to mean the total liabilities appearing in the balance sheet excluding ‘paid up capital’ and ‘reserves and surplus’, instruments compulsorily convertible into equity shares within a period not exceeding ten years from the date of issue, but including all forms of debt and obligations having the characteristics of debt, whether created by issue of hybrid instruments or otherwise, and value of guarantees issued, whether appearing on the balance sheet or not. Current liabilities, deferred tax liability, advance tax due and provision for income tax will also form part of outside liabilities.
Every CIC-ND-SI must submit an annual certificate from its statutory auditors regarding compliance with the requirements of these directions within a period of one month from the date of finalisation of the balance sheet.
Applicability of other provisions:
The Non-Banking Financial (Non-Deposit Accepting or Holding) Companies Prudential Norms (Reserve Bank) Directions, 2007 will not apply to an NBFC which is a CIC but which is not a CIC-ND-SI.
The provisions of Paragraphs 15, 16 and 18 of the Non-Banking Financial (Non-Deposit Accepting or Holding) Companies Prudential Norms (Reserve Bank) Directions, 2007 will not apply to a CIC-ND-SI. However, it must submit the Annual Auditors Certificate and meet with the capital requirements and leverage ratio, as specified above. These paragraphs relate to the Capital Adequacy Norms and the Limits on Investments/Loans by a SIND. Thus, the other parts of these Directions would apply to a CIC-ND-SI. These relate to accounting norms, provisioning requirements, constitution of an audit committee, disclosure requirements, etc.
A CIC which is not a CIC-ND-SI is not required to get registered with the RBI or maintain net owned funds of Rs.2 crores.
CIC-ND-SI would require a clearance from the RBI in case it wants to invest abroad in terms of Regulation 7 of the FEMA (Transfer or Issue of Any Foreign Security) Regulations, 2004.
Epilogue:
While the intent behind the Directions is good, in the sense that it seeks to free up investment companies from the onerous regime associated with pure NBFCs, the general presumption that ‘all investment companies are NBFCs requires a rethink. Further, the RBI has imposed several stiff norms on CICs. The RBI may have opened up a few Pandora’s boxes and plugged a few leaks by creating a few new ones. One hopes that the RBI would address these leaks soon by taking a cue from Aristotle :
‘Even when laws have been written down, they ought not always to remain unaltered!’
