The Reserve Bank of India (RBI) on Thursday announced stricter guidelines for core investment companies (CICs), mandating more disclosures, better risk management and a simpler group structure.
These are based on recommendations of the Working Group to Review Regulatory and Supervisory Framework for Core Investment Companies, headed by Tapan Ray, former secretary of the corporate affairs ministry. The group’s report was released by RBI on 6 November 2019.
Core investment companies are non-banking financial companies (NBFCs) holding not less than 90% of their net assets in the form of investment in equity shares, preference shares, bonds, debentures, debt or loans in group companies. Experts have been seeking a review of CIC guidelines ever since defaults by Infrastructure Leasing and Financial Services Ltd (IL&FS), a large systemically important core investment company.
The central bank on Thursday said that the parent CIC in the group or the CIC with the largest asset size, will have to form a group risk management committee (GRMC). This committee will report to the board of the CIC that constitutes it and shall meet at least once in a quarter. It will comprise at least five members, with a minimum of two independent directors.
According to the revised guidelines, the GRMC will have to analyse 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,” RBI said.
Moreover, all core investment companies with assets of more than ₹5,000 crore have to appoint a chief risk officer (CRO) with clearly-specified roles and responsibilities.
To address the complexity in group structures, the central bank also decided to limit the number of layers of CICs within a group, including the parent, to two. If a CIC makes any direct or indirect equity investment in another CIC, it will be deemed as a layer for the investing company, RBI said. While the regulation will be applicable from the date of the circular, existing entities have been given time till 31 March 2023 to reorganise their business structure and adhere to the guidelines.
RBI has also directed CICs to maintain a functional website containing basic information about itself and about its group. The website should also have annual reports, corporate governance report, management discussion and analysis, among other information. The core investment companies have been now mandated to prepare a consolidated financial statement (CFS) as per provisions of Companies Act, 2013, to provide a clear view of the financials of the group as a whole.
If entities that meet the definition of group as per extant regulations are not covered under consolidation due to exemptions granted, then disclosures will have to be made in another format.
That apart, RBI also said that the capital contribution by a CIC in another one, over and above 10% of its owned funds, will be deducted from its adjusted networth.
The working group had said in November 2019 that the lack of restriction on the number of CICs that can exist in a group and non-deduction of capital of CICs for their exposures in group companies created scope for excessive leveraging.
According to the report of the working group, there were 63 CICs registered with RBI as of August 2019. As on 31 March 2019, the total asset size of the CICs was ₹2.63 trillion and they had approximately ₹87,048 crore in borrowings. The top five CICs consisted of around 60% of the asset size and 69% borrowings of all the CICs taken together.
