India - RBI Tightens Rules For Core Investment Companies.
Legal News & Analysis - Asia Pacific - India - Regulatory & Compliance
5 October 2020
The Reserve Bank of India has modified the regulatory regime for core investment companies on August 13, 2020 to increase supervision and compliance requirements. Some of the key changes introduced are set out below:
Capital Knock for CIC Investments
The Reserve Bank of India (RBI) has introduced a requirement for core investment companies (CICs) to make a deduction of the amount representing any direct or indirect capital contribution made by one CIC in another CIC, to the extent such amount exceeds 10% of owned funds of the investing CIC from its owned funds for computation of its adjusted net worth. This deduction will automatically have a knock on effect on computation of the capital requirement and leverage ratio for a CIC.
RBI has offered a glide path until March 31, 2023 for pre-existing investments.
Number of Layers of CIC within the Group
RBI has restricted the number of layers of CICs within a group (including the parent CIC) to 2, irrespective of the extent of direct or indirect holding/ control exercised by a CIC in the other CIC. If a CIC makes any direct or indirect equity investment in another CIC, it is deemed as a layer for the investing CIC.
RBI has offered a glide path until March 31, 2023 for the existing entities to reorganise their group structures to adhere to the aforesaid cap on layers.
Introduction of Risk Monitoring Requirements
RBI has stipulated a requirement for the parent CIC in the group or the CIC with the largest asset size, in case there is no identifiable parent CIC in the group, to constitute a group risk management committee (GRMC). The GRMC is to be chaired by an independent director and to have atleast 2 independent directors as members. The GRMC has been primarily tasked with undertaking risk management at the group level and is required to report to the board.
In addition, all CICs with asset size of more than INR 5,000 crore are required to appoint chief risk officers.
CICs are also now required to submit to the board, a quarterly statement of deviation certified by the CEO or CFO, indicating deviations in the use of proceeds of any funding obtained by the CIC from creditors and investors from the purpose stated at the time of obtaining such funding.
Corporate Governance and Disclosure Requirements
CICs are now subject to the requirements relating to ensuring the ‘fit and proper’ status of its directors, as are presently applicable to systemically-important NBFCs. RBI has also introduced a host of additional disclosures to be made by CICs on their website and in their annual financial statements.
Consolidated Financial Statements
CICs are now required, when preparing their consolidated financial statements, to include certain prescribed disclosures in respect of entities that meet the definition of group as per RBI guidelines even where they are not otherwise required to be consolidated. In light of the broad definition of ‘companies in the group’ under the existing directions which also includes categories such a companies having a common brand name, this may require certain CICs to obtain and include information about various entities which were not as of now covered by its consolidated financial statements.
RBI has permitted CICs to invest in money market instruments, including mutual funds which make investments in money market instruments or debt instruments with a maturity of up to 1 year.
RBI has stated that a ‘systemically-important’ CIC will henceforth be termed as a ‘CIC’ and an ‘exempted’ CIC will now be referred to as ‘unregistered CIC’.
CICs are now required to adhere to the guidelines on submission of data to credit information companies as are applicable to systemically-important NBFCs and RBI’s circular dated March 13, 2020 on implementation of IndAS.
The circular issued by RBI, as presently worded, does not fully articulate the method of arriving at the ‘indirect’ investment by one CIC into another and this remains an area on which further clarity from the regulator would be helpful. The new framework will significantly increase the compliance burden for CICs but will aid in fostering an environment of transparency and better corporate governance, monitoring and risk management for CICs. This is part of a larger trend of RBI increasing its scrutiny of CICs.
For further information, please contact:
Zia Mody, Partner, AZB & Partners