Core Investment Company
Core Investment Companies, (CIC) are those non-banking financial companies which have their assets primarily as investments in shares of group companies but not for trading, and also do not carry on any other financial activity.
The RBI directions applicable to the Core Investment Companies are contained in the Master Direction – Core Investment Companies (Reserve Bank) Directions, 2016 dated August 25, 2016 (as updated on June 07, 2018).As per the above referred Master Direction, Core Investment Company (CIC) means:
Core Investment Company (CIC) is a non-banking financial company carrying on the business of acquisition of shares and securities and which satisfies the following conditions as on the date of the last audited balance sheet:-
i. 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;
ii. 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 and units of Infrastructure Investment Trust only as sponsor constitute not less than 60% of its net assets as mentioned in clause (i) above;
Provided that the exposure of such CICs towards InvITs shall be limited to their holdings as sponsors and shall not, at any point in time, exceed the minimum holding of units and tenor prescribed in this regard by SEBI (Infrastructure Investment Trusts) Regulations, 2014, as amended from time to time.
iii. 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;
iv. it does not carry on any other financial activity referred to in Section 45I(c) and 45I (f) of the Reserve Bank of India Act, 1934 except
(a) investment in
(i) bank deposits,
(ii) money market instruments, including money market mutual funds and liquid mutual funds
(iii) government securities, and
(iv) bonds or debentures issued by group companies,
(b) granting of loans to group companies and
(c) issuing guarantees on behalf of group companies.
As per the above referred Master Direction:
- Core Investment Companies (CIC) with an asset size of less than Rs. 100 Crore will not be required to register themselves with Reserve Bank of India.
- Core Investment Companies (CIC) having total asset size of 100 Crore or more either individually or in aggregate along with other CICs in the Group and which raises or hold public funds will be regarded as Systemically Important Core Investment Companies (CICs-ND-SI) and shall be required to get themselves registered with Reserve Bank of India .
Besides registration, there are also certain other provisions which are only applicable on Systematically Important Core Investment Companies (CICs-ND-SI).
One such provision applicable only to CICs-ND-SI is contained in Paragraph 27 of the above Master Directions which provides that a systemically important CIC shall require prior written permission of the Reserve Bank of India for any change in the management of the CICs which results in change in more than 30 per cent of the directors, excluding independent directors. There is some ambiguity regarding the calculation of the percentage prescribed by the Reserve Bank of India in the above direction. For example, a CIC was having three directors. A new director had to join the CIC. The management of the CIC did not seek prior approval of Reserve Bank of India, because as per their understanding, addition on one director to the existing three directors in the company would amount to 25% change and therefore did not require prior approval of the Reserve Bank of India. But when the company subsequently intimated the Bank regarding the change in their directors, Reserve Bank of India advised them the addition of fourth director amounted to change in more than 30 per cent of the directors of the company and as such they should have taken prior written permission of the Reserve Bank of India for that change.
In this connection, paragraph 46 of the above Regulations provides that ‘the interpretation of any provision of these Directions given by the Bank shall be final and binding on all the parties’.
Thus, the company was required to explain to the RBI the reason for their not seeking prior permission of the RBI for the change in the number of directors of the company, as also to seek post facto approval of the Reserve Bank of India for change their number of directors from three to four.
Another point that baffles the NBFCs relates to the compliance and reporting requirements.It is pertinent to mention here that though the directions applicable to Core Investment Companies are contained in Master Direction – Core Investment Companies (Reserve Bank) Directions, 2016 dated August 25, 2016 (as updated on June 07, 2018). In addition to these directions, there are certain other directions which are applicable to Core Investment Companies as are mentioned in other Master Directions issued by Reserve Bank of India from time to time which are equally important and should be adhered to.Further, sometimes the NBFCs are asked to comply with the directions and report to RBI which as per their understanding, are not related to their NBFC. The NBFCs are however obliged to comply with the RBI directions, as per the provisions of Section 45M of the Reserve Bank of India Act, 1934, they are duty-bound to follow RBI comply with the directions given to them by RBI.
Section 45M is reproduced below for perusal:
45M. Duty of non-banking institutions to furnish statements, etc., required by Bank.
It shall be the duty of every non-banking institution to furnish the statements, information or particulars called for, and to comply with any direction given to it, under the provisions of this Chapter.
Accordingly, Core investment companies should not only comply with the directions contained in the Master Direction – Core Investment Companies (Reserve Bank) Directions, 2016 dated August 25, 2016 (as updated on June 07, 2018), they should not miss out on other relevant directions as applicable to them contained in other NBFC Directions issued by Reserve Bank of India from time to time.